Global crypto regulation approaches

The ramshackle regulatory oversight of cryptocurrency, with rival agencies between and even within countries vying for supreme authority, might get a bit more organised now that the International Organization of Securities Commissions (IOSCO) has stepped in. Last week IOSCO ushered in the first global approach to regulating cryptoasset and digital markets.The first cryptocurrency, Bitcoin, came onto the market in January 2009. It’s taken 14 years and lots of instances of fraud associated with crypto for IOSCO to try to get the crypto house in order; better late than never.

Mind you, the 68-page IOSCO document is only a “consultation report”; it calls for submissions (by 31 July) on the 18 policy recommendations it puts forward with the aim of finalizing the recommendations by the final quarter of 2023. Fraud on individuals isn’t the only problem; cryptocurrency is frequently used in organized crime too. The blockchain analytics firm Elliptic has just published a study that links cryptocurrencies with the spread of fentanyl, a potent synthetic opioid and the leading cause of death for 18- to 45-year-olds in the US.

According to Christy Goldsmith Romero, a commissioner with the US Commodity Futures Trading Commission (CFTC), there’s so much fraud in digital currencies “there's just no way we can police it all.”

Cryptocurrency’s pros and cons

Cryptocurrencies – there are now more than 22,000 of them, although only a few have much heft – have developed for good reasons. The original white paper that underpinned the leading cryptocurrency, Bitcoin, says it would be “a system for electronic transactions without relying on trust”. Trust is core to fiat currencies, to banking, and transactions generally. Any attempt to remove the uncertainty of a transaction, to de-risk it – will the party on the other end of a transaction keep their side of the bargain? – is to be welcomed. It’s no surprise therefore that Bitcoin emerged in 2009, after the collapse of banks and the massive taxpayer bail-out of ailing financial institutions and corporations, when trust was in short supply. Consumers wanted, indeed needed, a means of exchange that was not subject to the whimsicalities of governments – step forward crypto. Public confidence in governments and central banks’ ability to safeguard the stability of fiat currencies has recently been battered by high inflation, which destroys a currency’s purchasing power. Some digital currencies not only promise to keep its value by limiting the amount produced, it also offers the anonymity of cash, combined with the promise of seamless and simple transactions; highly appealing, not least to criminals who wanted to conduct their business unobserved by the law. The US Federal Trade Commission (FTC) said that in 2021 more than 46,000 people lost more than $1 billion to crypto-scams, or 25% of the Dollars lost to fraud; 2021’s crypto scams were almost 60 times bigger than they were in 2018. In the last decade more than $30 billion was lost due to crypto crime.

Cryptocurrencies gained a powerful toehold in the Covid-19 pandemic, thanks to several factors; the enforced lockdowns encouraged greater social media use; the various ‘stimulus’ multi-trillion give-ways provided many with an unexpected financial boost for which there was no obvious immediate home; and the explosive performance of leading digital currencies encouraged a herd-like surge into get-rich-quick schemes. A lucky few got rich; many others got fleeced.

Trust in cryptocurrencies generally collapsed in 2022, as the collapse of crypto exchanges and associated widespread fraud became obvious and the Dollar valuations of some of the leading cryptocurrencies collapsed. According to one survey trust in cryptocurrency last year “fell off a cliff. Across 17 major markets, net trust plummeted from minus 8 to minus 38 percentage points.” Rubbishing crypto has become a new sport – everything from a UK House of Commons committee judging that crypto-assets have “no intrinsic value and serve no useful purpose” to Warren Buffett’s “rat poison squared”.

The contradiction of greater oversight

Tighter regulatory oversight is no doubt welcome; it may help protect consumers from being fleeced. Yet it will also necessitate undermining one of cryptocurrency’s greatest attractions – anonymity. Greater supervision of digital currencies and the exchanges through which they are traded will paradoxically deliver more power to the very institutions that were intended to be removed from the financial system by the creation of digital currencies – the banks. Cryptocurrencies cannot be un-invented, which is why one of Buffett’s other remarks – “I wouldn’t be surprised if it’s not around in 10 or 20 years” – is wide of the mark.

Private digital currencies will become less of an attractive asset, as they fail to reproduce the kind of rapid valuation growth seen in previous years. But we need to prepare ourselves for a massive ‘after-shock’ of the digital revolution – the introduction and imposition of Central Bank Digital Currencies (CBDCs), which are steadily gaining ground everywhere. The kind of privacy provided by cash and private cryptocurrencies will disappear with CBDCs; it is regrettable that the early promise of Bitcoin to become an alternative currency was brought low by a combination of uncontrolled invention of competing tokens, and criminal greed. Bitcoin, like an earlier craze for tulips, will never disappear; it will always remain a hope for some.

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.