Monday 1 July 2019

Fear of competition behind central bank and regulator hostility towards cryptos



Terence Zimwara

Regulators in some emerging markets have taken a particularly hard-line stance against cryptos just as they have done with other disruptive technologies. The much vaunted mobile money initially faced similar difficulties as officials were unsure of the best way of reacting to this fintech.

In small economies like Zimbabwe, banks in particular were irked by the growth of the Ecocash mobile money platform partly because Econet, the mobile network operator (MNO) operated outside the regulatory purview. At some point soon after the coming on board of Ecocash, banks faced pressure from government over the high bank service charges and fees.

In return, banks argued Econet’s mobile money service had to be subjected to the same pressure since the company had now entered the financial services space. Econet is the biggest MNO in Zimbabwe with over 8 million active subscribers in a country with a population of 13 million. Such numbers potentially made Econet one of the biggest, if not the biggest player in the financial services industry in the country. The fear was that the MNO would use this advantage to elbow out competitors.

To show the seriousness of their fears, banks refused to allow the seamless transfer of funds from banking platforms to the mobile money platform. Conventional bank customers thus could not move funds from their regular accounts to the popular Ecocash platform.

At the time it was not clear who had the mandate to regulate Ecocash, the central bank or the telecoms regulator, Postal and Telecommunications Regulatory Authority of Zimbabwe (POTRAZ). 
Both institutions seemed eager to regulate the MNO. Eventually the RBZ would have its way, mobile money is now regulated by the central bank and commercial banks have since relented as well.

Understanding that MNOs actually complement and do not threat the financial system caused the changed of stance by banks. And as Reserve Bank of Zimbabwe found out, it is easy to impose monetary policies on MNOs because they do not employ decentralized systems like Bitcoin. So instead of fighting mobile money service providers, regulators now encourage use of mobile money platforms.

It is also helpful to remember that the internet itself faced resistance and hostility from players as well as regulators of the industries that felt threatened. However as usage of the internet grew, it became clear to all that the World Wide Web actually enhanced efficiency of the very industries that initially felt threatened. Not only that, the internet brought to life many other services that were not possible before. In fact, the internet has become so integral to our everyday lives such that when its shutdown, life becomes unbearable and chaos will ensue.

Similarly, the extraordinary fear mongering of all things to do with privately issued cryptos will dissipate once a critical mass of users is attained. Change has never been something that is easily embraced, often those agitating for new ways must fight for acceptance. It is now ten years since Bitcoin was launched and we are entering a critical phase, global companies are now joining the movement. JP Morgan, Oracle, Facebook and even central banks have now accepted the concept of crypto-currencies and are working on their own crypto projects.

Many are predicting that the Facebook coin, Libra will be a giant step towards in achieving that elusive mass adoption goal.

Of course some central banks are not happy that the world is moving the direction of cryptos despite their spirited warnings against the embrace of such fintechs.

For less progressive institutions, there are fears that crypto-currencies will ‘infringe upon central banks’ exclusive right to issue money’ as the South Africa Reserve Bank (SARB) put it in a consultation paper. SARB has since proposed measures that may be viewed as circuit breakers in case crypto-currencies become very popular. In other words, SARB does not want crypto-currencies to be successful!

Fear appears to be the general motivation for this hostility and this fear is widespread.
In Kenya, regulators continue to warn citizens about the dangers of crypto-currencies, which are mostly not regulated. Nigeria and Uganda, are both contemplating tough regulation for cryptos, which authorities are repeatedly attempting to link with the growing problem of Ponzi and Pyramid schemes. Regrettably, some ignorant lawmakers associate cryptos with such scams hence they support this hostility.

These central banks are trying to kill an innovation before it has been given a chance to prove itself. In a departure from established norms, regulators are crafting legislation for an innovation before they fully understand it.

However, in other jurisdictions, central banks are embracing crypto-currencies but only on the condition that they alone should be the issuing entities.

For example, a few years ago, the Bank of England was widely reported to be involved in the development of what is called the RSCoin, a crypto currencies which it hopes will eclipse the US dollar as the world’s reserve currency. According to the researchers working on it, this crypto will combine the benefits of Blockchain technology as well as those of a centrally managed currency.

Iran is reportedly working on its own crypto-currency even as it has discouraged the use of other cryptos like Bitcoin. The Venezuelan government has already launched its own crypto but the results have been disastrous so far.

Whichever way we look at it, fear of competition appears to be the prime motivation for the hostility. Central banks do not want to lose their monopoly of issuing money. Unfortunately the world has moved on and its time central banks accept this.

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