Global Interest In Cryptocurrency Regulation Gaining Traction

The pace of cryptocurrency regulation—or at least discussion about regulation—has been gaining traction globally, albeit at different speeds for different regions. Nonetheless, as the popularity of Bitcoin, Ethereum, Ripple, Litecoin and 'sister' alt-currencies grows and the digital currency asset class becomes more mainstream, it seems 2018 could become the year of regulatory reckoning.

Last week the Bank of England Governor Mark Carney warned that cryptocurrencies could be a risk to financial stability and stressed that it's time to hold the crypto-asset ecosystem to the same standards as the financial system. He described the giant price swings and extreme volatility seen in cryptocurrency markets as a "speculative mania."

In a speech entitled "The Future of Money," delivered on March 2 at the inaugural Scottish Economics Conference sponsored by Edinburgh University but which took place at Bloomberg's London headquarters because of inclement weather, Carney said:

“A better path would be to regulate elements of the crypto-asset ecosystem to combat illicit activities, promote market integrity, and protect the safety and soundness of the financial system,”

Here's the full presentation:

Governmental scrutiny of the cryptocurrency environment varies by level of severity and region, recent notable developments by country include:

United States

Although no solid policy exists yet, the US's Securities and Exchange Commission (SEC) has stepped in to stop several problematic ICOs and has urged caution when investing in cryptocurrencies. The U.S. Department of the Treasury, via a response to Senator Ron Wyden of Oregon, makes the point that those who invest in ICOs will be subject to existing rules aimed at fighting money laundering and terrorist financing.

Venezuela

Not all countries are crypto-skeptic. Some, such as Venezuela, believe there's sovereign revenue potential from alt-currencies, though it remains to be seen whether that's realistic or not. The South American nation's recent controversial move to launch its own digital currency, the oil-backed Petro, has garnered plenty of headlines. Nicholas Maduro, Venezuela's president, recently claimed that his government has received more than 171,000 purchase orders for the still-to-be issued Petro.

However, on Tuesday, the country's Asamblea Nacional announced that it believes the Petro is unconstitutional, denouncing the project as a fraud and potential threat to investors. Can the blockchain save Venezuela from its deep economic troubles? Markets remain doubtful.

Cambodia

Using the Petro as an example, Cambodia appears to be considering the launch of their own cryptocurrency project, dubbed Entapay, according to a press release issued this past Friday, ahead of the opening of today's 2018 ASEAN BlockChain Summit in Phnom Penh, Camboida's capital city. Though the press handout stresses that Cambodia's economy is "booming," the release explains that with this initiative, Cambodia is seizing the opportunity for participation in the global economy and scientific and technical revolutions to become "a country root[ed to the] blockchain."

China

It's fair to say that China has been at the forefront of actively attempting to clamp down on cryptocurrencies—whether initial offerings or trading. The government's most recent move involves regulators reportedly blocking social media accounts held by cryptocurrency exchanges that still offer services in the country.

Japan

To date, Japan has been more supportive of cryptocurrencies than its Asian neighbors. Recently, sixteen licensed cryptocurrency exchanges in Japan formed a new, self-regulatory organization, an effort that comes in the wake of a hack that resulted in the theft of $500 million worth of NEM tokens this past January.

Israel

Cryptocurrencies made headlines globally after the Israel Court of Appeal ruled that country’s biggest banks could not close a digital currency broker’s bank accounts until a regulatory review was completed. Regulatory talks in this Middle Eastern country are ongoing, as lawmakers look for a way to protect investors from the high volatility that characterizes much of crypto trading without also disrupting local blockchain innovation.

Russia

During a Russian Federation meeting that took place on February 27, officials in Russia considered a number of amendments to the country's “On Digital Financial Assets” draft law during a meeting of the Ministry of Economic Development. Among the proposals: Tax breaks for profits from crypto related transactions for both corporate and private earnings.

Oleg Seydak, CEO of Blackmoon, an asset management platform, notes that Japan has already recognized Bitcoin as a legitimate payment method:

“According to the Japanese Financial Services Agency the bitcoin is recognized by the Japanese Government as a method of payment, but not as currency. In addition, the local government has decided to accept bitcoin donations to promote tourism in the city of Hirosaki. Many cryptocurrency exchanges are government-registered, and according to Reuters, 16 of them will establish a self-regulation body to prevent fraud in the industry. Such action will prevent cases like the recent $500M Coincheck robbery. Overall, Japan can, in my eyes, definitely be a considered crypto-friendly country in comparison to other neighbouring countries in the region.”

He also offers additional details on the Russian Ministry of Finance initiative:

“The bill is set to be approved in May-June 2018. [The] Russian Central Bank and Ministry of Finance still have not agreed on cryptocurrency exchange and monetary use; the Central Bank thinks that coins may be exchanged only for [alternative] tokens, while the Ministry of Finance suggests to use cryptocurrencies as a payment and make it legal to change coins for ruble. Russia is also the leading country in number of ICOs (team members with Russian origin appear really often in any blockchain startup).”

Many crypto market commentators are encouraging crypto regulation and a significant number have applauded Carney’s recent speech. Dr. Jeppe Stokholm a partner and general counsel at Black Swan, a VC firm based in Zürich, Switzerland, agrees with Carney:

“The time has come to hold the crypto ecosystem to the same standards as the rest of the financial system. I do not fear financial regulation on cryptocurrencies. Instead, I hope it will be implemented as soon as possible in order to get fair competition and a safe marketplace.”

Angela Walch, an associate professor at St. Mary's University School of Law in Texas and a research fellow at the Center for Blockchain Technologies at University College London, says: “I find the speech encouraging, as it shows that the Bank of England is alert to the financial stability risks that cryptocurrencies may pose to the main financial system.”

Walch explains that while Carney doesn't view alt-currencies as a financial stability risk at the moment, due to their relatively small size, he acknowledges that they could pose such a risk in future if they are more widely used or invested in, or if they develop additional linkages to the financial system. Walch continues by saying: this also signals that the party is over for crypto exchanges—they are going to have to grow up and follow the rules other financial exchanges have been following, or they'll be shut down.

Central Banks in Reaction Mode

Eddy Travia, CEO of Coinsilium, a firm that finances and manages the development of early-stage blockchain technology companies, notes:

"I think most central banks are in 'reaction mode' and should take a pro-active stance to understand this new major asset class.”

Travia explains that most crypto exchanges already have strict rules in place, though some jurisdictions will miss out on the economic benefits of this new asset class if they lean towards restrictive regulations instead of a more balanced approach that aims to regulate appropriately while fostering a conducive business environment.

Evgeny Ponomarev, co-founder and CEO of Fluence, has been Involved in crypto-space since 2011 when he mined his first Bitcoins on CPU. As an 'elder statesman' he sees the macro environment growing friendlier to the asset even as individual governments struggle to better understand it:

“As you can see, each country is trying to fit crypto into its own current state of affairs (economy, regime, foreign policy). The explanation is simple: there is still no definition of cryptocurrency upon which everyone can agree. Each crypto coin has its own unique purpose and regulators fail to find a "one [size] fits all" solution. In such conditions, they naturally attempt to find temporary "how it fits our current political and economic agenda" fixes.”

The best way for governments to act at this point, says Ponomarev, is to develop a taxonomy for crypto assets based on their role and intended purpose. This takes time and has to come from the community because we are on the edge of real-life applications for crypto coins. He adds:

“While the most widespread use case for crypto coins right now is speculation trading, no surprise most regulations focus on this aspect only. Before taking action governments should wait for more diverse and viable real-life applications for the crypto, not just value storage (Bitcoin) or smart contracts (Ethereum). So the best way for any country to figure out how to treat crypto is by taking part in the market development and by supporting new projects in the field.”

Encourage Creative Destruction

Dr. Stockhom references Austrian-American political economist Joseph Schumpeter who, close to 100-years ago, elucidated the notion of creative destruction, the phenomenon of changing business cycles and the rise and fall of economic players. Schumpeter's point: entrepreneurial innovation and new developments may destroy the weakest links in the market, but it also helps new economic players grow and thrive, making free markets stronger and less fragile.

Crypto investors needn't fear financial regulation. Rather, Stockhom adds, "I hope it will be implemented as soon as possible in order to get fair competition and a safe marketplace."