The taming of the Wild West — Part II
There has been a huge amount of comment from governments and other observers about the regulation of the Crypto World. The scope for confusion is enormous. What are the questions that operators of crypto-exchanges and crypto-VC entrepreneurs need to ask?
1. It is obvious what the government or agency in question really trying to achieve, right? Much confusion arises because the governments and their agencies are looking for various things when they consider how to gain control of the Crypto World. Virtually all are worried about the potential for the Crypto World to be used for money laundering and the finance of terrorism. Some are fretting about the potential for theft of crypto-coins by hackers. Others are concerned about front running, insider trading and other practices that have long been illegal in conventional stockmarkets.
2. One hand knows what the other is doing, right? Some countries — such as Singapore — have just one financial regulator. However, the norm is for the financial system of any one country to be overseen by several regulators. This can give rise to confusion if different regulators say apparently inconsistent things — which is what happened in South Korea in January 2018, for instance.
3. As its very name suggests, the Crypto World is global, right? Communiqués from high level multi-national meetings, such as the recent conference of G20 finance ministers and central bank presidents in Buenos Aires, often recognise that the Crypto World knows no national boundaries. If governments want to introduce effective regulations, they need to do so in conjunction with other governments — even if this slows the process down. Sometimes, though, regulatory decisions appear to forget the global aspect of the Crypto World. The decisions in early April 2018 by the central banks of India and Pakistan to clamp down on dealings in virtual currencies by banks and financial services companies in their respective countries are examples.
4. Not all crypto-coins are the same, right? Crypto-coins are sometimes called crypto-currencies, which implies they perform the functions of money. While most crypto-coins have some capacity to store value, virtually none are also conceived as units of account and mediums of exchange. In fact, crypto-coins can be used to incentivise communities, make cross-border payments, provide privacy, facilitate the funding of new enterprises and businesses and do a lot of other things. Some crypto-coins have so many of the characteristics of conventional securities that it makes sense to regulate them as securities. However, a lot of crypto-coins are very different to securities. Good regulation recognises the likely function(s) of the crypto-coins that will be included in the scope of the regulation.
5. Not all crypto-exchanges are the same, right? Crypto-exchanges vary markedly from each other in terms of the numbers and variety of crypto-coins that they handle. They also vary markedly from each other in terms of the crypto buyers/traders that they cater to. Some exchanges hold assets for the crypto buyers/traders and serve a similar function to custodian banks in conventional financial markets: however, many just match buyers and sellers of crypto-coins.
6. No exchange is an island, right? Financial regulators understand that conventional stock exchanges do not exist in isolation. They are a part of a much larger eco-system which includes brokers, custodians, crypto buyers/traders, issuers of securities and the organisations that advise the issuers. What is true of stock exchanges also holds true for crypto-exchanges. They exist in an eco-system which includes crypto buyers/traders, Crypto-VC entrepreneurs and crypto-exchanges. Any regulatory regime is only as good as its weakest part — which often only concerns one part of the eco-system.
7. Self-regulation works, right? Entrepreneurs and the financial institutions that they work with can often identify potential problems and reliable solutions faster than regulators. For instance, the Fintech Association of Hong Kong published a paper entitled ‘Best Practices for Token Sales’ in December 2017. However, questions 1–6 apply just as much to private sector-led initiatives as they do to actions and statements by governments and government agencies.
Read — The taming of the Wild West — Part III
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