The new year will usher in regulatory arbitrage amongst companies that want to develop innovative solutions, as well as from states seeking to maximize tax receipts from cryptocurrency-related businesses.
While this may sound like a bold statement given what we saw in 2017, I believe the controversy brought by state approaches to cryptocurrency regulation this year far will exceed that of last year. In the regulatory world of financial services, the divergence of attitudes between state regulators is striking, ranging from the official recognition of bitcoin as a payment form in Japan to a shadow ban in China.
At the same time, a number of countries have decided to keep their powder dry whilst they explore how the industry unfolds prior to spelling out their thinking on the technologies.
Looking ahead, I believe it’s worth keeping in mind the diversity of approaches.
UK: Positioning for maximum market share
The UK has decided to play a clever game so far.
It appears to want to keep its reputation as an easy place to do business in tact whilst it seeks to understand the best way to move forward. This may be in part due to the spectre of a full blown banking meltdown if banks fall too far behind in the constructive destruction that accompanies the natural order of innovation.
Traditional banks have seen the writing on the wall, too. Take, for example, the ill-informed vitriol emanating from the likes of JP Morgan’s Jamie Dimon who calls bitcoin a scam whilst also being a founding member of the Enterprise Ethereum Alliance and forming a partnership with Zcash.
Not all bankers are cut from the same cloth, however. There is no better marketeer for the campaign to bring change within the banking sector than former Barclays CEO, Anthony Jenkins. He revealed his view during a CNBC interview that banks stand to experience their very own “Kodak moment” should they refuse to keep up with the progress that fintech represents.
To what extent bankers listen to Jenkins’ warning that “…we can imagine total transformation of the banking system, using blockchain for example, in a world where banks don’t really exist anymore,” remains to be seen. Jenkins was seen a classy operator in the UK banking sector and his views will have informed the UK government’s positioning on the matter.
In the UK, an official announcement was made by the regulator to “warn investors of risks” associated with bitcoin, whilst simultaneously veering sharply away from any rules to inhibit commerce. Such an approach suggests savvy thinking from a government that understands the need for high-growth companies to take up the slack in a post-Brexit environment.
According to recent data from the International Monetary Fund (IMF), the UK financial sector represents around 7 percent of GDP but accounts for 10 percent of tax revenues and 14 percent of exports. Any draconian crack down on cryptocurrencies could be taken as a red flag by global investors responsible for the UK’s soaring FDI, which grew to $253.7 billion (197 billion pounds) in 2016, up from £33 billion the previous year, according to OECD data.
China: Hiding away from financial freedoms
China, on the other hand, has gone for the “head in sand” option, placing a covert ban on exchanges and massively shooting itself in the foot. China’s citizens make up some of the most technologically able people in the world. Everyday Chinese people demonstrate on a daily basis how globalization and peoples’ need to control over their own financial futures act as a cosmopolitan impulse shared by the whole of humanity.
Whilst the country’s political class comes to terms with unstoppable changes, its citizens find ingenious ways to circumvent prohibitions and the state loses its chance to share in the spoils of progress.
China can bury its head in the sand for now but the tremendous losses it is stacking up in terms of opportunity costs will come home to roost in a relatively short period of time.
There is a good deal of complexity in how most other states communicate their intentions towards cryptocurrencies.
And, this reinforces a zero-sum game model as far as the cryptocurrency focussed businesses are concerned. Just as traditional banks move headquarters to jurisdictions with favorable regulatory regimes, so too will cryptocurrency related companies move to light touch or ‘wait and see’ countries.
Germany: A precise approach to cryptocurrencies
Germany’s Federal Financial Supervisory Authority, for example, views cryptocurrencies as financial instruments. However, their use as cash or deposits does not require authorisation from the regulator.
Importantly, it has ruled that service providers may take payments in cryptocurrencies without being seen as carrying out banking or financial services. Where transactions “are similar enough” to broking services, then regulations may apply.
One example of this is when a mining pool, for example, makes a distribution of proceeds or provides services that the German regulator believes constitute a market. Authorisation may be applied in such cases.
Singapore: A case-by-case study
In Singapore, the FCA, like the UK’s FCA, sent a warning note out to consumers about what is saw as potential risks relating to both ICOs and cryptocurrencies. The regulator said that some but not all ICOs will fall outside its scope for regulation, meaning it wants to look at individual cases and think how it should respond.
This isn’t a terrible strategy for cryptocurrency companies because it means there is room for creative thinking about how to navigate specific countries’ needs.
The Singaporean FCA points to factors that might mean regulations would apply. Such cases may include those where there is a good deal of similarity between the ICO and an IPO, or if the ICO looked very much like a shares placement as conducted by private companies. And, if the ICO appears to be similar to one of its regulated activities, then it’s rules would come into effect.
Policy divergences bring opportunity
Yet, all the approaches aside, blockchain technologies will most certainly continue to prosper in an environment where there is no one coordinated global policy to undermine its progress. Indeed, tremendous opportunities lie ahead for entrepreneurs willing to arbitrage out of countries which restrict development to more favorable regulatory environments.
And, politicians will be keenly aware that an overzealous regime will undermine their efforts to encourage investment while doing little to provide citizens with a competitive market.
Divergence on regulations surrounding cryptocurrencies may appear to some as simply a matter of differing stages of policy development by national regulators. Such a view entirely misses the enormous efforts currently being undertaken by most Western European states at least to vigorously market their high growth industries around the world.
At the beginning of 2017, Danish Foreign Minister Anders Samuelsen appointed an Ambassador to the global technology industry as part of the nation’s “techplomacy” initiative. In the UK, the Department of International Trade’s Venture Capital Unit helped UK companies raise over £750 million in international venture capital over the last three years and is highly visible at global FInTech events around the world.
Indeed, in December of 2017, the FCA issued feedback on its discussion paper on Distributed Ledger Technology (DLT) which it introduced earlier in the year. Cleverly, the paper was positioned as “not being about bitcoin” but rather about DLT’s in the general sense.
Any advances made in the field of DLT policy development cannot simply dismiss cryptocurrencies as something external to the debate. The political ‘optics’ at this stage, however, demands such a separation.
2018 will deepen the divide between countries’ different approaches as they simultaneously manoeuvre to capitalise in the long term on these high growth companies.
Reticence by certain countries to make the most of cryptocurrencies so far may yet bring the sound of screeching hand-brakes as policy U-turns ring out of government departments.