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Category: Soap Box

Soapbox: Taming the ‘Wild West’

"Today we put order in the Wild West of crypto assets and set clear rules for a harmonised market... The recent fall in the value of digital currencie...

26 July 2022

Gary Mead

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“Today we put order in the Wild West of crypto assets and set clear rules for a harmonised market… The recent fall in the value of digital currencies shows us how highly risky and speculative they are and that it is fundamental to act”, said Stefan Berger, a German centre-right lawmaker. Just a few days later the Financial Stability Board (FSB), established in 2009 by the G20 group of economies, to try to prevent the kind of financial black hole that threatened in 2008 to suck into itself the world’s banking system from happening again, said it will draw up “robust” global rules in October for cryptocurrencies. Russia is still represented at the FSB, and the Russian financial monitoring agency, Rosfinmonitoring, is now using software to track cryptocurrency transactions. The blockchain technology, on which cryptocurrencies are based, records transactions, but not the identity of wallet-owners. Anatoly Aksakov, head of the financial committee in Russia’s lower house of parliament, has said draft legislation on regulating cryptocurrencies would be considered in the fall. “Obviously there will be strict regulation”, Aksakov said, comparing what he called “cryptomania” to gambling addiction. Apart from periodic collapses in the value of various cryptocurrencies, governments are alarmed that cryptocurrencies facilitate the eluding of scrutiny and evasion of sanctions; the world’s biggest cryptocurrency exchange, Binance, has been used by traders evading sanctions re-imposed on Iran by the US. Binance dominates the $950 billion crypto industry, offering its 120 million users a wide range of digital coins, derivatives and non-fungible tokens, processing trades worth hundreds of billions of dollars a month.

The meltdown in the value of cryptocurrencies – the so-called “crypto winter” – has seen around 70% wiped off the value of the most dominant, Bitcoin, and it has also seen the collapse in value of some of the biggest cryptocurrency exchanges, such as the US-based Coinbase, whose share price has lost more than 84%. Some people who ploughed all their investments into cryptocurrency have lost everything, tempted in by the adrenalin-fuelled rise in prices only to see it all tumble. Various exchanges – including CoinLoan, an Estonian-based exchange, and the Singapore-based Vauld – have started to restrict transactions and limit withdrawals. Jason Stones, a former employee of another platform, Celsius, is now suing Celsius; among his allegations is that the company was running a Ponzi scheme.

The mathematical statistician Nicholas Taleb, a long-standing sceptic of cryptocurrencies, told The Guardian newspaper recently “this is the first time we’ve seen a financial bubble coupled with religious, cult‑like behaviour and an investment strategy not seen before in history… I would tell people who are still holding Bitcoin: ask your grandmother if the idea makes sense. And if it doesn’t make sense to her, it doesn’t make sense… if you buy gold and store it in your basement or wear it on your neck, there is no chance of that gold turning to lead over any foreseeable horizon… Metals don’t need maintenance. Bitcoin requires continuous maintenance”.

What about the US?

The US has many different, overlapping regulations at the federal level; and many states have their own practices. Federally, probably the most important watchdog is the Financial Crimes Enforcement Network (FinCen). FinCEN’s task “is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities”. FinCEN, the Inland Revenue Service does not consider cryptocurrencies to be legal tender but accept that they can substitute for money. Cryptocurrency exchanges fall under the Bank Secrecy Act, administered by FinCEN and designed to prevent money-laundering and terrorist financing. Money laundering activities carried out by HSBC bank saw it pay a record $1.9 billion in settlement in 2012, under the Act.

In December, 2020 FinCEN proposed new cryptocurrency regulations that will impose data collection requirements on cryptocurrency exchanges and wallets. By the fall of this year, if the proposal has no hold-ups, exchanges will be required to submit suspicious activity reports for transactions over $10,000 and require wallet owners to identify themselves when sending more than $3,000 in a single transaction.

In March this year, President Biden signed an Executive Order – meaning Congressional approval was not necessary – on ‘ensuring responsible development of digital assets’, a very broad document that talks about the need to protect consumers, businesses and investors, and mitigate the risks of illicit finance, and calls for various agencies to get their acts together, but which swiftly pivoted to the contentious topic of Central Bank Digital Currencies, linking it to “sovereign money”, i.e. money under the control of the government – which is precisely what cryptocurrencies are designed to avoid, and partly explains their rapid growth. Cryptocurrency’s creators have taken note of the decline of fiat money (the Dollar has lost more than 80% of its value since 1970, while Pound Sterling has been even worse, down by 94% over the same time), and built something that they hope will not be a plaything of the markets or governments, but whose value will be stable. The wild west has yet to be tamed – cryptocurrencies’ wild volatility has not only ruined the hopes of many small investors, it may also lay to rest the idea that digital tokens – at least, those invented by private hands – might one day become ‘money’. They should be re-named and referred to as ‘crypto-assets’. One of the inherent characteristics of money is stability, not stasis but small movements in purchasing power, such as with gold. There’s too much illegality, too much at risk to society for crypto-assets to claim the status of money. No-one is safe – the British Army’s Twitter and YouTube accounts were taken over a few days ago, the fake Twitter feed used to promote crypto schemes and non-fungible tokens, while the YouTube account aired clips of Elon Musk and directed users to crypto scam websites. This truly is a wild west, and it will be tamed by governments. As Sir Jon Cunliffe, deputy governor of the Bank of England with responsibility for financial stability, said in a recent speech- “people don’t fly for long in unsafe aeroplanes”.

Here come CBDCs!

In classic Western movies, the Marshal may be lonely and slow to gun down the bandits; but eventually he gathers supporters and the bandits are destroyed. This scenario is being played out in cryptocurrencies – order will slowly, but surely, be imposed on the Wild West. It doesn’t mean that cryptocurrencies will die out – there are always fresh bandits challenging the Marshal but their apparent power will be circumscribed. But the Marshal has learned a few valuable lessons from the bandits – cryptocurrencies’ underlying technology (the blockchain) is being adopted and utilised as this is written by 105 countries, representing 95% of global gross domestic product.

CBDCs give governments the chance to issue “programmable money” relying on “smart contracts”, programs stored on a blockchain that run when pre-determined conditions are met. This has advantages of speed and cost, but it could leave an individual CBDC vulnerable to attack. There are some very serious and important questions around ‘Big Brother’ style intrusions into individual privacy or the exclusion of people who either don’t have or don’t want the kind of digital connectivity required, let’s face it, the issue of data security is an enormous and untested issue. Nevertheless, like it or not – and there are many who rightly have some serious concerns… the Marshal, armed with his CBDC, is coming to town.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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