The UK based Financial Conduct Authority (FCA) recently
released a consultation paper --Guidance on Cryptoassets— which has implications that
may go beyond the UK market. Consequently, contents therein should concern all stakeholders.
On one hand, the paper makes an important admission that ‘technological
aspect of crypto-currencies/assets could potentially create equality and
diversity considerations for (certain) consumers. In other words, crypto-currencies
or cryptoasssets as FCA prefers to call them, offer something that mainstream
financial institutions do not.
On the other, the consultation document is replete with an unremitting
list of harms and threats to consumers, something which compels the FCA to take
preventative action.
With such a lopsided approach, some could conclude that
the FCA has already made up its mind even as it seeks for feedback from all concerned
parties.
Nevertheless the FCA, which is located in London, deserves
credit for taking this different approach, an invitation by a regulatory body
for feedback or comments from crypto market stakeholders. This goes against the
common practice in Africa where regulators simply issue decrees without
entertaining questions or feedback.
London, the globe’s financial hub, is at the heart of the
world’s largest foreign exchange market and is a top location for OTC interest
rate derivatives. The London Stock Exchange is the world’s leading
international exchange with more than 600 international listings, while 70% of
global Eurobond turnover is traded in the city.
FCA’s call
It really counts for something that a regulator from this background is inviting stakeholders to help shape the regulatory structure
of crypto-currency markets. The FCA really is
setting a good precedent, one that hopefully other regulators will follow.
In fact, there is a good chance that many regulators, particularly
those on the African continent without a clear plan of dealing with cryptos
other than just banning or issuing decrees, will simply copy and paste FCA’s
findings and recommendations. Therefore,
this might just be the opportunity for crypto developers from the continent to
voice their opinion about the way this market needs to evolve.
On paper, FCA’s approach acknowledges that this nascent
market should be allowed to grow and that no one, not even the innovators, entrepreneurs,
consumers or regulators can claim to have a perfect understanding of crypto
markets and how they should be handled.
Listening to all key stakeholders will help regulators to
get a better direction and understanding of this market, something which the FCA
guidance acknowledges.
Part of the guidance reads, “Reliable and comprehensive data
on the crypto-currency/asset market are not yet available, given the market is
still in its early stages and developing rapidly.”
Size of UK crypto
market
In spite of this challenge, the UK Cryptoassets Taskforce, to
which FCA is part, concluded in an October 2018 report that the UK is not a
major market for crypto-currencies as its findings show a fewer than 15 crypto spot
exchanges with headquarters in the UK, out of a global market of 231.
In addition, they appear to have a combined daily trading
volume of close to $200 million, which accounts for close to 1% of the daily
global trade in crypto-currencies/assets. Only 4 of these 15 spot exchanges
regularly post daily individual trading volumes above $30 million, which
represents a low volume relative to the wider global market. In a nutshell, UK is
a small player in this market or at least as according captured
data.
Therefore one may be compelled to ask, ‘Why is the UK
interested in regulating a market that is so insignificant?’ As one goes
through the rest of the document, a sense of de-javu quickly sets in! The
initial enthusiasm is doused by a charge list of potential harm to consumers
posed by cryptoassets as the FCA prefers to call them.
Unfair
characterization of cryptos
FCA’s claim of neutrality is offset by its identification of
15 ‘harms’ posed by cryptos against just the two potential benefits it observed
on a small scale in the Sandbox. This Sandbox allows businesses to test
innovative products, services, business models and delivery mechanisms in the
real market, with real consumers in a controlled environment.
As expected, the increased speed and a reduction in cost of
cross border money remittance with crypto-currencies as a vehicle for the exchange
are the identified advantages from the sandbox. Surely there are must more advantages
than just the two to justify the rapid growth that all regulators acknowledge!
Unfortunately, such sleazy attempts to characterize cryptos
as more harmful than beneficial also reinforces the perception within the
crypto community that regulators are out to stop this market from growing
further.
To illustrate, a recent Financial Action Task Force (FATF)
report to the G20 noted that suspicious transaction reporting linked to cryptos
is rising globally. Europol estimates that £3-4 billion is laundered using
crypto-currencies each year in Europe. However, this remains a relatively small
proportion of total funds estimated to be laundered in Europe, however, which
stands at £100 billion.
So this means most money launderers still prefer using fiat
currency or the centralized financial system for their activities yet there is
no alarm at this revelation by those claiming to be protecting the integrity of
markets.
Backdoor control and
centralization
In the meantime, the FCA
says it intends to mitigate identified harms by, among other things,
encouraging ‘responsible development of legitimate Blockchain or Distributed Ledger
Technology (DLT) and crypto-related activity in the UK’. This goes to the core
of the matter, control and centralization, the very antithesis of decentralized
public ledgers like the Bitcoin Blockchain.
The use of words such a ‘responsible’ and ‘legitimate’ here seem
to imply that some within this FCA want to control DLTs, including the
pioneering Bitcoin Blockchain. Again, this belies the pledge to neutrality and
shows a sinister motive behind the desire to sideline permissionless cryptos.
The FCA’s consultation paper seems to suggest it knows what
constitute a legitimate Blockchain and what does not. Again there is the usual attempt to divorce crypto-currencies from Blockchain, a technology which most regulators
agree has many potential benefits.
‘Bitcoin has no track record but Blockchain has potential benefits
that go beyond digital currencies’ are some of the common phrases.
This
cherry picking of parts of a good solution will only discourage further
innovation or worse, create animosity between innovators and regulators.
Why cryptos in the
first place
Regulators should always remember why cryptos emerged in the
first place, it was and it still is the quest to create an efficient alternative
system or generating competition for the flawed fiat currency system. The story
is not just about the complexity of the innovation, it is equally about addressing
the wrongs of an outdated system.
Understating the many benefits cryptos will neither
translate into the popularity of central banks nor improve financial inclusion.
According to a World Bank Global Findex survey, about a fifth of the 1.7
billion unbanked people say they do not trust financial institutions and
perhaps that is why some crypto creators are attempting to offer transparent solutions
that are not found in a central bank controlled system.
As highlighted earlier, FCA’s regulatory reach goes beyond
the UK national borders hence this body has to be careful of adopting
recommendations that may repress growth of cryptos where they are needed most.
There are many start-ups on the African continent offering
truly unique solutions that address unique problems.The invitation by FCA
should be seen as an opportunity for crypto stakeholders to directly explain or
even educate regulators with facts. An organized response might just prove to
be key in influencing drafting of regulation.
Readers who wish to add their voice to the process can
forward their questions or comments directly to the FCA at fcacrypto@fca.org.uk or http://www.fca.org.uk/cp19-03-response-form
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