Regulation of the crypto-currency industry seems to be gathering pace in many countries just as the embrace of the innovation is growing. The fintech has proven its resilience and it’s only natural that authorities now see it fit to have rules governing the conduct of participants.
At the nexus of this regulation drive are concerns about the flow of information or lack thereof. How and when such information is disseminated are some of the legitimate questions prompting this push for the establishment of rules. Reports of ignorant investors getting burnt courtesy of their ill advised investment choices as well as misleading advertisements further motivates authorities to respond.
So in order to curb or correct this, some traditional financial regulators have taken on the role of formulating the appropriate regulatory response. Still, in other jurisdictions, it is those directly involved in the crypto industry i.e. the tech or Blockchain pioneers who have taken the lead in proposing rules for the industry with governments following their lead by endorsing such proposals.
Predictably, the different approaches have resulted in a rather disjointed global regulatory response seen today. Asian countries’ regulations are seen as more permissive and nurturing while those in Africa remain essentially hostile. Western countries’ response has been mixture of the two extremes. Naturally this ignites the debate, who should be taking the lead in crafting regulations that govern the crypto industry; the central bankers or the tech experts?
Crypto-currencies are essentially competing with fiat currencies and as such, central banks—the sole issuers of fiat currency— will naturally, not countenance anything that threatens their long established monopolistic position. Therefore any effort to regulate privately issued crypto-currencies that is led by a central bank will inevitably be unbalanced and only engenders resistance by crypto-currency creators.
In fact, that has been the case pretty much, central banks particularly those in Africa, have flatly refused to give even a modicum of recognition to privately issued crypto-currencies. This is in spite of evidence or statistics showing that African citizens are using these increasingly for international remittances as well as cross border payments. African central bankers believe they are the foreordained money creators and as such they must safeguard this monopoly position.
To illustrate, in South Africa, the central bank has essentially accused creators of crypto-currencies of ‘infringing’ on its mandate as that country’s sole issuer of currency. While it acknowledges the use of cryptos in settling transactions in a consultation paper, the South African Reserve Bank (SARB) has stubbornly refused to grant them due recognition while insisting that such borderless currencies must register with it for them to be permissible. It is difficult to see how creators of crypto-currencies like Bitcoin or Ethereum will accede to such demands and how the SARB itself will enforce this requirement.
Meanwhile in Zimbabwe, which many laud as classic case of a country in need of an alternative currency, the central bank has worked hard to stop adoption of crypto-currencies by the public. It has issued advisories warning the public about the risks of using crypto-currencies and has even banned banks from using their platforms to support crypto trading. In addition, a crypto exchange Golix, was forced to shut operations and had a crypto automated teller machine seized.
In both these cases, central bank intentions or actions seem aimed at stalling the growth of crypto-currency trading instead of regulating this. This is the kind of approach that then raises concerns about the suitability of central banks as the right candidates to regulate the crypto-currency industry.
Perhaps an ideal scenario would be a joint regulating effort involving crypto experts and central bankers. Central banks will gain access to direct and immediate expertise on this fintech while crypto creators will be able to influence the direction of the regulation.
It is fair to assume however, that most creators of crypto-currencies are based outside Africa so any joint effort will not be possible. For a continent that still has problems with its colonial past, the partial ceding of monetary control to ‘foreigners’ will not be entertained. In a continent where nationalistic phrases like sovereignty or national security are regularly thrown around, such a joint relationship might not work.
This African stance contrasts very much with that of some Asian countries where individuals with experience in the industry seem to be taking the lead in formulating regulations. Governments there seem to accept that crypto entrepreneurs are more knowledgeable hence they should be leading the effort of creating an orderly operating environment. For example, in Taiwan a prominent crypto specialist, Jason Hsu has since been elected to that country’s legislature and is now using his position to propose legislation that is seen as being supportive to the crypto industry. Hsu works closely with start-ups to ensure that industry views are taken on board.
The same approach is also observed in Japan where authorities have given crypto players the mandate to take the lead in creating the framework that governs the industry. The result has seen Japan taking the lead globally in embracing crypto-currencies—it has even given legal recognition to cryptos like Bitcoin! Apparently the leadership of these countries acknowledges the risks associated with the nascent technology but have still made the decision to embrace it hence the advancement of the industry.
Meanwhile in the UK, it is the financial markets watchdog, the Financial Conduct Authority (FCA) that has taken decisive steps towards crypto regulation. In a recently released policy statement, the FCA set parameters of its mandate when carrying out its mandate of protecting British consumers of financial products like Bitcoin. In a final guidance, the FCA also sought to make it clear for market participants to know whether they are carrying out regulated services or not.
However, perhaps to show it still has limited knowledge and information on this market, the FCA has proposed to leave what it terms ‘exchange tokens’ unregulated for now. Exchange tokens according to the UK watchdog, ‘are not issued or backed by any central authority and are intended and designed to be used as a means of exchange. They tend to be a decentralized tool for buying and selling goods and services without traditional intermediaries. These tokens are usually outside the perimeter.’
So for now Bitcoin, Ethereum, Monero Litecoin etc will remain outside the regulatory parameter as far as the FCA is concerned. This UK position seems to be in tandem with the general thinking in Asian countries, allow the industry to grow and regulate when you have adequate knowledge.
Unfortunately, this position seems to be at odds with another global financial leader, the United States. The US has been hamstrung by a combination of an ambivalent stance taken by its multiple regulators on one hand and a government intend on stopping further growth of cryptos on the other. So while there is a realization by some that this industry just like others must be allowed to grow, there is however, a loud opposition to the very idea of privately issued crypto-currencies.
Consequently, there has been no unison on the issue with the resultant uncertainty driving crypto entrepreneurs away from the US, the world’s biggest economy. Libra Association— creators of the controversial Libra token which is fronted by the US based Facebook—has said it will set base in Switzerland because of that country’s reputation for neutrality but this decision may have been motivated by the current hostility shown to crypto-currencies by US authorities generally.
Indeed hostile regulation will not kill crypto-currencies as long as there is a legitimate need for such currencies, the last few years have demonstrated that. Authorities must always think of the impact of legislation on innovation even as they try to protect consumers from sophisticated fraudsters and scammers. Roping in crypto-currency creators when formulating rules and regulations could help in getting their cooperation. When there is cooperation bad actors will not able to carry on as they have done.