The year 2019 appears to be an ominous one for cryptos as
institutions charged with regulation of financial and payment systems gear up
in their efforts to control the nascent industry.
Already, the Financial Conduct Authority (FCA), a British regulator
has taken the initial steps after releasing a consultation paper in January, a
step that can only be seen as a prelude for the expected stringent regulation.
Similarly, the fragmented regulatory bodies in the United States are also stepping
up their own efforts to bring cryptos under their ambits.
There is no doubt, other regulating bodies around the world
will follow United States and Britain’s lead by setting tough operating
conditions for crypto players. While institutions like the FCA are not directly
threatened by cryptos, the same cannot be said of central banks, whose time as
sole issuers of currency seems to be coming to an end.
Central banks often double as regulators in many
jurisdictions, and this gives them such overwhelming influence and power to
dictate activities in the financial services industry. Over the years, national
laws have been enacted to ensure that central banks enjoy total domination when
it comes to issuing currency.
Central banks are virtual monopolies in most countries, only
they can issue currency without running the risk of legal troubles or jail time.
Only central bank issued currency is recognized as legal tender by governments.
The monopoly question
For decades, this dominant position has been abused and
often with governments being complicit. However, consequences of such abuses often
manifest in the form of collapsed currencies, hyper-inflation and loss of
savings among many other problems. The ordinary folks are hurt the most.
Indeed this monopolistic position has been challenged before
with some individuals even approaching courts. The legal precedent in many
jurisdictions shows that courts of law are usually disdainful of such powerful entities.
Sadly however, it would appear that when it comes to central
bank monopoly, such courts or anti-trust watchdogs often look the other way. Instead
of empathizing with the masses, fuzzy reasons are often proffered for justifying
the existence of central bank monopoly.
It is the resultant oppression—which has a zero possibility
of escape—that encourages the oppressed to devise out of the box solutions.
The nonexistence of a legal recourse that can remedy this
longstanding irregularity only serves to encourage innovation. Indeed, some
innovative entrepreneurs have created financial technologies that attempt to
break the dominance of financial systems by these legacy institutions.
So far, only crypto-currencies have been demonstrated to be
the most efficient at this. These currencies are clearly proving to be a viable
alternative to fiat currencies issued by central banks despite the history of
hostility towards them. The year 2019 marks the tenth anniversary of Bitcoin,
the pioneering crypto-currency whose popularity and resilience helped to
encourage the creation of many more digital currencies and tokens.
Central banks adamant
cryptos not currency
After originally showing nothing but derision towards
crypto-currencies a few years ago, central banks and fellow regulators are now
pursuing what can only be seen as a coordinated attack against cryptos.
It is a fact that many regulators and central banks dismiss
the assertion that crypto-currencies like Bitcoin are a medium of exchange or
an equivalent of money. Such an innovation is only currency if issued by a
central bank. For instance, South Africa Reserve Bank (SARB), which released
its own consultation paper on cryptos at about the same time as FCA released
its own, concludes that privately issued crypto-currencies are not a medium of
exchange or legal tender.
SARB, seemingly commenting on behalf of its peers said, “central
banks, in particular, have been reluctant to refer to the phenomenon (of
crypto-currencies) as ‘currencies’ for concern of giving it unwarranted
legitimacy as a form of legal tender.”
Apparently giving such legitimacy has the effect of
infringing on SARB’s right as the sole producer of South Africa’s Rand currency!
There is no economic rationale whatsoever behind the refusal to endorse
crypto-currencies as a medium of exchange or legal tender but rather a selfish
desire to maintain the status quo.
Amazingly, in the same consultation paper, the SARB does
admit that cryptos can function as a medium of exchange, albeit in certain
communities. Says the consultation paper;
“Crypto assets have the ability to function as a medium of
exchange, and/or unit of account and/or store of value within a community of
crypto asset users.”
The SARB just does not want this community to grow it seems.
The unbanked problem
Meanwhile, SARB’s admission that cryptos are actually
currency in certain communities, essentially underscores why central banks
cannot and should not regulate cryptos. These institutions (deliberately) fail
to understand that the growth and popularity of these alternatives points to failures
of the global financial system.
As an illustration, the World Bank Group Global Findex
Database of 2017,which measured financial inclusion and fintech revolution,
revealed that as many as 1.7 billion of the world’s population remains
unbanked. So instead of trying to reduce this huge number through provision of
low cost financial services, central banks appear more worried about stopping a
financial technology that is attempting to do exactly that.
After years of trying but with little headway in solving the
unbanked crisis, it tooks efforts by non-financial institutions like mobile
phone companies, to reduce the number excluded from the banking system. As a
result, the grumblings
similar to those we hear today about cryptos were also heard then.
Only this time the ‘outcry’ seems louder and sustained. We
see central banks from across the various backgrounds coordinating efforts towards
making life difficult for privately issued cryptos.
In spite of this, studies and pilot projects still show that
cryptos can potentially bring financial services to the unbanked or those who
do not trust or are excluded by the banking system. In other words, cryptos
should not be seen as a threat to the present global financial players as many
opponents of crypto-currencies like to point out. Cryptos are attacking a space
that is often neglected by the conventional financial system.
In fact, crypto-currencies can potentially compliment fiat
currency financial systems instead of harming them but this is only possible if
regulators adopt a more embracing approach. This is something that is already underway
in countries like Japan and Singapore where authorities have taken the unusual
approach of embracing cryptos, by designating some as legal tender. The jury is still out but this approach yet we
can be certain these will bring advantages to these pioneering countries over the
course of time.
It should be noted that monopolies everywhere are always on
the lookout for any emerging competition and accordingly plans or strategies to
eliminate such competition/threats are often adopted. What central banks are
attempting to do with respect to cryptos fits very well with this pattern,
stifle their growth or suffocate them in order to stop further adoption.
Height of hypocrisy
SARB, which is essentially a leader on the African
continent, says it will be on the lookout for all indications that show an additional
growth in the cryptos market as a signal for tightening the regulatory noose. Therefore,
if total market capitalization of cryptos drops, then we can be assured of no additional
action by SARB. However, if the opposite happens then more stringent regulation
will apply.
The message is clear, this market should not grow beyond its
current levels. Such is the hypocrisy and worse, it’s not even disguised. One
cannot be a player and a referee at the same time.
Ideally, central banks should only regulate communities or
players that use fiat currency and leave those using decentralized crypto-currencies
to be regulated by stakeholders in that particular market.
Also, it is now time for governments to dispense with the
notion that central banks must be shielded from any competition.
The fact that some central banks are
contemplating issuing their own crypto-currencies is ample proof that
competition is indeed a good thing. Without Bitcoin, central banks would never
consider changing the way currency is produced or issued.
In addition, cryptos are forcing central banks to seriously
consider concerns as espoused by the whitepaper that gave birth to Bitcoin.
Doing this is one sure way that central banks can at least retain their share of
the market even as the movement towards cryptos continues to grow.
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