There is no perfect solution and approach to regulating the cryptocurrencies market; however, Japan is setting a strong example to the world according to two executives.
Over the past 18 months cryptocurrencies has risen to prominence among investors looking for quick cash. According to data by FinTech Global, the increase in popularity of the Blockchain & Cryptocurrencies sector last year resulted in total investment skyrocketing to reach $2.8bn. The $820.1m invested in Q1 equates to 29.2% of last year’s total, meaning funding is on track to beat record levels. However, the price of bitcoin has rapidly declined in recent months.
Despite the future of the asset remaining unclear, there is a notion that cryptocurrency will replace traditional money, will be adjusted to be a supplement for it, or simply appear to be just a useful experience according to the head of Transaction Monitoring at a leading cryptocurrency exchange.
“There are some facts one can’t deny: in a modern world, time is money. Cryptocurrencies are faster, more flexible, robust and better suited for payments than traditional financial instruments and payment methods,” he added. “Bitcoin, as well as most other cryptos, is designed to beat inflation, so it is a good alternative to savings and individual retirement accounts.”
An AML Investigator at the exchange added: “Blockchain technology can be used for fast cross-border payments, high volume transactions with low fees, for trade finance, settlement, clearing, for syndicated loans. There are blockchain-based identity management solutions and smart-contract technology. Cryptocurrencies have an energy of the youth. Add some experience of the wise and you will get an almost perfect economic tool.”
Cryptocurrencies has been defined as transformative for finance and many more industries. Still, even after a few years since, regulation still remains unclear.
However, just like any other financial instrument, either cash instruments or derivative instruments, there are a number of risks of using cryptocurrency in money laundering operations, criminal activities, financing of terrorism and tax avoidance.
The risks are especially prominent taking into account the rapidness and simplicity of cryptocurrency transactions, absence of centralized issue and p2p nature of cryptocurrency.
“Nevertheless, only up to 0.61% of all financial crimes are somehow connected to cryptocurrencies according to Elliptic and FDD’s Center on Sanctions and Illicit Finance (CSIF),” the transaction monitoring added. “All the valuable and reputable participants of the market reach the high demands of the AML legislation and responsibilities stipulated in EU and USA in order to establish relations with the banks and payment partners.”
Another risk associated with the usage and development of cryptocurrency is using technology and information hype with the purpose of taking possession of investors’ funds using ICO’ and ITO’s.
“Such a situation is not a novel, even modern history knows similar examples (dot.com crisis) and will be solved by regulators and the market participants,” he told RegTech Analyst.
However, the biggest risk highlighted in the sector is the absence of the regulation of cryptocurrencies market, especially in part of market conditions of trade, insider trading, pump-and-dump and other non-market and unfair speculations.
This is a problem of all young markets, and the problem will be solved in the nearest time using the experience of regulation of stock markets and similar financial instruments. In addition, there is a big perspective of using consensus among market participants regarding the rules of trade and the market conditions.
World
Cryptocurrencies and ICO’s rose to the forefront of the market in 2017 and have continued to be a mainstay in in 2018. However, with the risks associated, regulators from around the world have struggled to get to grips with the asset class’ regulation. Different countries have taken different approaches, some have outrighted banned the asset classes, others have begun discussing how best to regulate them.
The United States Securities and Exchange Commission (SEC) has begun a number of cryptocurrency investigations, resulting in fines and lawsuits. However, despite industry leaders participating in a roundtable discussion in the US Congress, earlier his week, the country is yet to formalise a plan.
Across the pond, a group of MPs in the UK have called for crypto-assets to be regulated to protect consumers from volatile prices and hacking, however, the government is yet to introduce new laws to crack down on digital currencies.
China and South Korea have seen government bans on ICOs as were seen as illegal methods of fundraising.
“There is no perfect solution and approach to regulating cryptocurrencies market,” one of the sources said. “There are too many possible ways of the development of technology, ways of possible usage and ways to regulate it.”
The crypto executive used the example of ‘the best possible way’ is being applied in Japan. The country’s primary financial regulator has dramatically increased its screening process of applicants registering to open cryptocurrency exchanges, according to a local report.
“The combination of official means of payment together with strict licensing regulation of cryptocurrency exchanges, AML/CTF, financial status and management allows the country to achieve widespread of usage of cryptocurrency in everyday life,” one of the experts added.
“The second interesting regulation approach we would highlight is Canton Zug in Switzerland, where the regulatory sandbox was established, allowing entrepreneurs and enthusiasts to develop their DLT and cryptocurrency related projects in tight connection and dialogue with the regulator, so regulation would arise from best practice and understanding of the market.”
The role of regulators and governments
With cryptocurrencies being around for a number of a years, and as there still little regulation in place, there have been calls from certain industry experts for regulators and the government to do more.
However, to promote cryptocurrency progress, regulators and governments should not overburden the cryptocurrency field with regulatory requirements according to both of the executives.
“For sure, regulations must be in place, however, they should be reasonable and adequate. The case of the State of New York and its BitLicense (which forced a part of cryptocurrency-related businesses to move from the state) is an example of such overburden regulations.”
They argue that there are several measures that might be undertaken by regulators and governments to support the role of cryptocurrency.
“For instance, the establishment of regulatory sandboxes, special safe spaces for cryptocurrency-related businesses to implement, test and spread the technology. Notably, this measure would be beneficial for an industry as a business will be able to operate in a controlled environment without a fear of being punished for regulatory failures.”
Governments will also be able to deepen the knowledge of cryptocurrency; control operations of industry participants; and further adopt regulations driven from practice.
“Loyal taxation regime (means, clarity on issues regarding taxation of cryptocurrencies; preferential tax rates, etc.) would definitely benefit the industry by making the market attractive for business and consequently for cryptocurrency popularization. Finally, governments can stimulate and support the usage of cryptocurrencies in daily life, by allowing to pay bills in cryptocurrency or allowing banks to work with cryptocurrency.”
Despite a need to regulate crypto-assets, both of crypto executives expressed the importance of not stifling innovation.
“In case regulation is too strict, it will suppress all possible progress, drive off the enthusiasts and the public, create immense and unnecessary barriers to overcome.
“On the other hand, lack of regulation and near complete freedom of action will surely result in unhealthy market development, enhanced risks, and the most important, it will make adoption by the traditional financial institutions almost impossible.”
In both case scenarios, stagnation of the technology and the market seems to be the most probable outcome. “That is why believe that only well-though, balanced and reasonable regulation could help to move cryptocurrencies to a whole new level, support its progress and further development.”
Copyright © 2018 RegTech Analyst
Copyright © 2018 RegTech Analyst
