Are cryptocurrency and regulation compatible?

As a corporate services provider that has technology at its core, the evolution of the world of cryptocurrency trades has been of great interest, particularly from a regulatory standpoint. Cliff Pearce, Global Head of Capital Markets, discusses whether cryptocurrency and regulation are a good fit in an increasingly regulatory environment.

The lack of regulation in this sector has proved to be a double-edged sword. On the one hand, it has opened up the possibility of using cryptocurrency as a valid method of exchange, reward or consideration to market players that wouldn’t have been possible in a more regulated market. This has in turn spurred its development. But, on the other hand, it has kept some of the larger, regulated players on the side lines, as they develop their stance on their level of engagement.

It’s a commonly held view that cryptocurrency and blockchain, in one of their many guises, will underpin significant developments in the market, but it’s certainly not happening at the pace which many commentators might have suspected a couple of years ago. New innovative structures and transactions are announced on a regular and frequent basis, yet it hasn’t moved the market, either from an origination, distribution or cost of production basis.

A handful of ABS initial coin offerings does not quantify as a market. It could be argued that global standardised regulation of this sector will put this sector on to a common footing and then tempt the bigger players to add momentum. It can be argued that not all cryptocurrencies are securities, and should not be regulated, particularly when looking at tokens in their purest form; however regulation will eliminate many of the risks that potential participants would have concerns over.

The lack of standardised regulation should not prevent market players from conducting themselves in manner as if it were regulated. Many basic legal and regulatory provisions should still apply such as KYC, and it should not come as a great surprise if any new regulation applied looks retrospectively at past conduct to ensure that any current issuances and transactions are compliant.

The European Central Bank (ECB) recently stated that cryptocurrencies are not a threat to financial stability in the Eurozone, reflecting the relatively small scale of this sector and limited linkage to the mainstream financial sector. However, the United Arab Emirates, which is actively promoting development of blockchain technology, has a target to process 50% of all federal government transactions over blockchain platforms within three years. This is expected to generate savings of AED 11bn, 398 million printed documents, 1.6 billion kilometres of driving and 77 million work hours annually.

With efficiencies like these in view, global standardised regulation looks like an attractive prospect to spur the sector on, potentially reduce the volatility of the underlying currencies and remove some of the concerns players have about the abuse of cryptocurrencies. No doubt the central banks will be keen to progress this and we look forward to seeing what falls within their scope of regulation.