How international regulation could stifle cryptocurrencies

The future of cryp­tocur­ren­cy appears to be as cryp­to-assets – or at least that’s the hope of reg­u­la­tors. Cer­tain­ly, it’s what Inter­na­tion­al Mon­e­tary Fund (IMF) man­ag­ing direc­tor Chris­tine Lagarde calls them. This is not just seman­tic quib­bling. It pro­vides the key to how reg­u­la­tors are like­ly to approach cryp­to and what reg­u­la­tion might look like in the future.

While reg­u­la­tors can see the ben­e­fits of cryp­to-assets, they are pri­mar­i­ly con­cerned about their decen­tralised nature and the bypass­ing of cen­tral banks. This trans­ac­tion­al anonymi­ty makes them sim­i­lar to cash trans­ac­tions, and offers a poten­tial­ly new vehi­cle for mon­ey laun­der­ing and the financ­ing of ter­ror­ism.

How­ev­er, reg­u­la­tors are tak­ing a broad view that reg­u­la­tion needs to bal­ance the dynam­ics of con­sumer pro­tec­tion, anti-mon­ey laun­der­ing and finan­cial sta­bil­i­ty, while fos­ter­ing oppor­tu­ni­ty.

The lack of reg­u­la­to­ry clar­i­ty around cryp­tocur­ren­cies means some coun­tries ban them, oth­ers jump on the oppor­tu­ni­ty, but most have a wait-and-see approach to how reg­u­la­tions will work out before act­ing. For instance, in Chile banks have essen­tial­ly shut down their oper­a­tion, while Aus­tralia decreed cryp­tocur­ren­cy exchanges must abide by new anti-mon­ey laun­der­ing rules and Euro­pean Union coun­tries are study­ing the options.

The Unit­ed States presents a more con­fus­ing pic­ture. Var­i­ous reg­u­la­tors approach cryp­to as com­modi­ties, prop­er­ty and mon­ey, while the New York State Depart­ment of Finan­cial Ser­vices tried to issue sep­a­rate bit licences. Luke Sea­man, head of dig­i­tal pol­i­cy at Cicero Group in Lon­don, says: “Reg­u­la­tors are look­ing to put things into exist­ing buck­ets. So you have a sit­u­a­tion in the Unit­ed States where they are look­ing at cryp­to five ways from Sun­day.”

Dr Luka Müller-Stud­er, legal part­ner at Swiss law firm MME in Zurich, says: “Spe­cialised reg­u­la­to­ry units have a very pro­found knowl­edge of this sub­ject, but this is not nec­es­sar­i­ly shared in the upper lev­els of deci­sion-mak­ing and pol­i­tics. They talk using buzz­words, but lack the suf­fi­cient knowl­edge. There needs to be more legal cer­tain­ty.”

Since cryp­to-assets know no bor­ders, the frame­work to reg­u­late them must be glob­al and inter­na­tion­al co-oper­a­tion is indis­pens­able.

I would wor­ry about an ever-increas­ing desire to be seen to be clamp­ing down, as it will push the action fur­ther under­ground

The G20 is cur­rent­ly gath­er­ing data and will offer “very con­crete, very spe­cif­ic rec­om­men­da­tions” in July, ahead of their Novem­ber 2018 sum­mit in Argenti­na, accord­ing to Argenti­na’s cen­tral bank chief Fred­eri­co Sturzeneg­ger. How­ev­er, some of the most cryp­to-asso­ci­at­ed blockchain-friend­ly juris­dic­tions, such as Switzer­land, Sin­ga­pore, Gibral­tar and Bermu­da, are not G20 mem­bers, which may be a fac­tor lim­it­ing the impact of any co-oper­a­tion.

The Finan­cial Sta­bil­i­ty Board (FSB) and the Finan­cial Action Task Force (FATF) are lead­ing the reg­u­la­to­ry efforts. The FSB, under the chair­man­ship of Bank of Eng­land gov­er­nor Mark Car­ney, is look­ing at what new rules might be need­ed.

While the Paris-based FATF, a body set­ting stan­dards for the fight against mon­ey laun­der­ing and financ­ing ter­ror­ism, has pro­vid­ed guid­ance to coun­tries on how to deal with cryp­tocur­ren­cies and oth­er elec­tron­ic assets. Based on FATF stan­dards, the IMF has con­duct­ed 65 assess­ments of coun­tries’ reg­u­la­to­ry frame­works and pro­vid­ed capac­i­ty devel­op­ment assis­tance to 120 coun­tries.

Reg­u­la­tors do not seem to be in a hur­ry to put for­ward firm pro­pos­als or reg­u­la­tion and this may not be a bad thing. In March, FSB board chair­man Mr Car­ney wrote: “The FSB’s ini­tial assess­ment is that cryp­to-assets do not pose risks to glob­al finan­cial sta­bil­i­ty at this time.”

Simon Tay­lor, co-founder at 11:FS in Lon­don, says: “We are in a peri­od of calm. The next six to twelve months will be a con­sul­ta­tive peri­od and next year I think we will have poli­cies on the table to con­sid­er. How­ev­er, there is pres­sure and the reg­u­la­tors will want to point to some­thing they are doing by the close of the year.”

Dr Müller-Stud­er explains: “A prag­mat­ic approach is need­ed. We should be open, tech­nol­o­gy friend­ly, but close­ly mon­i­tor­ing devel­op­ments, learn­ing the process step by step and then look­ing at how we best set up a reg­u­la­to­ry frame­work. It need not be cen­tralised, but it should ensure a fair and trans­par­ent mar­ket.”

This means look­ing close­ly at how sec­ondary mar­kets are reg­u­lat­ed and defin­ing fun­da­men­tal legal con­cepts, includ­ing prop­er­ty, iden­ti­ty, title, per­son­al­i­ty and con­tract. It also means look­ing close­ly at the oth­er side of reg­u­la­tion, name­ly legal enforce­ment.

There are know-your-cus­tomer require­ments, but reg­u­la­to­ry and super­vi­so­ry tech­nol­o­gy can use the likes of dis­trib­uted ledger tech­nol­o­gy, bio­met­rics, arti­fi­cial intel­li­gence and cryp­tog­ra­phy. Mr Tay­lor says: “Reg­u­la­tors can­not be tech­nol­o­gy agnos­tics. While there are par­al­lels to past inno­va­tions, this is a sea-change and calls for a rethink.”

How­ev­er, some do sense the need for urgency. A recent Fleish­man Hillard report, Fin­tech in 2018: The Fads, the Fears and the Future, warned: “ICOs  [ini­tial coin offer­ings] rep­re­sent more risk than oppor­tu­ni­ty and reg­u­la­tors need to step in before dis­as­ter strikes.”

Cicero Group’s Mr Sea­man advis­es against any dystopic think­ing by reg­u­la­tors. He says: “I would wor­ry about an ever-increas­ing desire to be seen to be clamp­ing down, as it will push the action fur­ther under­ground. Peo­ple pre­fer legit­i­ma­cy, but they can go under­ground. We need engage­ment; it is a com­plex sub­ject and we need a 360-degree view. The urgency is the need to see the sit­u­a­tion in total­i­ty.”

Reg­u­la­tion of cryp­to-assets is cur­rent­ly being approached with patience and, if done cor­rect­ly, should end up bal­anc­ing the need for legal pro­tec­tion with the com­mer­cial oppor­tu­ni­ties this new mar­ket offers.