Regulators and Cryptocurrencies : A lost cause?

Since the introduction of the first cryptocurrency on the Blockchain, namely Bitcoin in 2009 Governments, Central Banks, commercial banks and regulators have started to wake up and respond to the perceived threat of a new form or type of money.

The fear is these Cryptocurrencies based on a permission less Blockchain will reduce state influence and control of the money supply and alter the way individuals use money, in a digital form. This is expected to result in ordinary citizens buying just about everything they need with a Cryptocurrency, from a cup of tea or coffee to a car or land. It is already happening but on a smaller scale.

The growing use of Bitcoin and other Cryptocurrencies could eventually mean commercial banking as we know it today will change, the controls Governments and Central Banks have on the money supply and how people use money will decline.

Citizens who do not trust Governments and financial institutions with their personal information would feel more relieved with it on a secure Blockchain.

They would be relieved from the high cost of banking services because they would essentially become their own banks. Their financial costs, including the cost of transactions would be reduced. They would derive more personal wealth.

So Cryptocurrencies and the Blockchain are becoming a big deal for the individual.

When Facebook announced its intention to launch the Libra coin between May and June 18 this year regulators jumped out of their beds. Individual regulators and a few U.S Senators including Maxine Walters called for the project, due to start in 2020, to be halted.

This has coincided with the Financial Action Task Force (FATF), at the time headed by an American, serving notice that Exchanges, those which trade Cryptocurrencies, will be required to be regulated as if they are banks and share personal information and personal financial information among themselves.

The FATF is a 35-member inter-Governmental body which sets standards to combat money laundering and terrorism activities, where payments are concerned. It has the ability and has grey listed and blacklisted non compliant countries, such as Pakistan.

Developing countries such as Barbados, fearful negative listing will influence the attractiveness of their domiciles to foreign investors, are scurrying to change their laws including the Banking Act to demonstrate their compliance with the FATF ruling.

The FATF ruling has challenges.

It has no legal or sovereign authority to impose sanctions on countries.

It faces geo-political realities of powerful states such as China ignoring its decisions.

There is a lack of practicality in implementing its standards.

Exchanges and online Cryptocurrency wallets require and hold considerable personal information on their customers. They are as secure as Governments or commercial banks and their levels of security are increasing.

These may include any of the following which may be used to trace transactions back to the sender or receiver : Artificial Intelligence in the form of retinal tests, usernames, passwords, email addresses, I.P address information, Google 2FA, additional codes and detailed transaction records.

The focus on regulating Exchanges is ill-directed as these companies are not police agencies. They have no powers of seizure or arrest.  Their officers carry no badges or weapons to break into the homes of suspected cybercriminals.

Further, the amounts of money traditionally laundered for illegal drugs or other nefarious purposes tend to be large sums which who tend to raise alarms, given the technology and movement of currency capabilities of the same Exchanges.

Faced with unnecessarily burdensome regulations leading Exchanges have been attracted to domiciles such as Malta, Bermuda, the British Virgin islands and Switzerland where the rules are clear and hence they have a measured amount of comfort to get on with the business of helping people create wealth.

For states such as New York where regulations are regarded as unpredictable or burdensome some Exchanges are opting not to set up operations there or in the cases of Bitfinex, Bitmex and Binance, the global retail trading leader in crypto currency, to ban Americans from trading on their platforms.

I and others in this space are concerned Caribbean countries such as Barbados have or continue to be by-passed.

Some Blockchain companies such as AION, Polymath and Shyft have operations or headquarters in Barbados but are fledgling and employ few people, some of whom are non-nationals.

I and others in this space are aware of potential investors having been discouraged from operating in Barbados. We are unaware, however, how large the numbers are.   

Initial Coin Offerings (ICOs), Security Token Offerings (STOs), Exchanges geared to international trading in Cryptocurrencies and Initial Exchange Offerings (IEOs) present a basket of investment opportunity. The first tends to be un-regulated, whereas STOs and IEOs tend to be regulated.

A country desirous of attracting foreign investment in these segments needs to understand that all Virtual Assets cannot be lumped together as Securities. They are not by design.

To understand how foreign investment is attracted in terms of Virtual Assets, Caribbean governments need a firm grasp and education of the differences between Decentralisation, the new driver of individual and national wealth creation and Centralisation : the old process of individual enslavement and financial exploitation.

Reference :

Bettina Warburg : How the Blockchain will radically transform the economy. TED Talks, YouTube. In this talk Warburg associates Decentralisation with work of the late Nobel Prize winner in Economics, Douglas North, on Institutional Economics.

Hallam Hope is a veteran regional journalist.