Saturday 16 February 2019

Legacy institutions cannot regulate cryptos




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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