Andy Meehan says greater collaboration is needed between industry players and regulators to advance ‘sensible’ regulation and ensure the public is properly educated.
It is no secret that the past twelve months have seen an unprecedented acceleration of interest in and adoption of cryptocurrencies. While it can be difficult to estimate the total number of crypto users, let alone within any particular jurisdiction, there is little disagreement that many of the countries experiencing the highest growth in crypto adoption are in Asia, and that the vast majority of that growth to date has been from retail users.
The forces driving adoption across Asia also represent a cross-section of the various rationales for cryptocurrency’s place in the financial industry – from an inflationary hedge to a payment method for the unbanked or underbanked to a financial asset (relatively) free from governmental control to an alternative investment. Similarly, the regulatory responses to cryptocurrencies throughout the region also represent the spectrum of potential approaches – from laissez-faire to fully regulated regimes to outright prohibitions.
None of this should be surprising given the challenges of regulating financial products based on a completely new technology and the lack of consensus as to what that financial product even represents: is it a currency? a payment instrument? a commodity? a security? Unfortunately, these differing approaches have led to considerable FUD (Fear, Uncertainty, and Doubt) for the cryptocurrency industry, users, and regulators alike.
They have also created an environment where regulatory arbitrage is possible, and even rewarded in the short term, sometimes at the expense of unsophisticated users seeking yield but lacking an understanding of the risks associated with cryptocurrency and the products into which they might be investing. But this regulatory landscape is rapidly shifting.
The rapid adoption of cryptocurrencies and crypto-backed products by retail investors has undoubtedly been met with a marked increase in interest in the space from regulators. During the next twelve months, the industry will also see a marked increase in participation by institutions, including traditional financial institutions who are accustomed to operating in a highly regulated environment.
Such institutional adoption would seem to be a further motivation for regulators to accelerate the establishment of the types of regulatory frameworks with which these institutions are familiar, in order to attract, or retain, these institutions and their potentially-sizeable cryptocurrency-related businesses.
To be sure, not everyone associated with the cryptocurrency industry will welcome these developments. There are some legitimate concerns over whether regulators’ approaches will stifle innovation or erode the privacy or decentralized nature of cryptocurrencies. And, of course, at least some segment of the industry will resist any facet of governmental oversight or control.
But many industry leaders recognize that sensible regulation is a necessary component to increasing cryptocurrency’s adoption and perception of legitimacy, and ultimately to accomplishing one of crypto’s holistic goals of providing a universally-accepted alternative to traditional banking.
Similarly, many regulators concede that given the decentralized nature of the blockchain, and the level of adoption that crypto has already achieved, at least peer-to-peer cryptocurrency transactions are likely to remain outside of the dominion of regulators. But to date, most regulatory responses have been to lump crypto into the same regulatory framework as that which applies to other financial instruments, even when doing so leaves the industry with no practical way to comply.
It seems then, that regulation and cryptocurrencies must not just learn to co-exist but also to collaborate to bridge the gap between their respective positions. Recent exchanges between some of the most influential cryptocurrency exchanges in the industry and regulators, however, have suggested that this crevice may be more of a crevasse.
Building a bridge
So how do we begin to build that bridge? While there will certainly be those on both sides who take the extreme position, there is much common ground to be shared by the 80% of us in the middle. We should start there, with two key policy goals that the majority of us should be able to agree upon.
First, the public should have confidence that cryptocurrencies are not conduits for money laundering, terrorism financing and other forms of criminal activity, or at least no more so than fiat currency. To be sure, the early days of Bitcoin did see an outsized percentage of transactions being used for illegal activities, as is often the case with new products and technologies when the speed of development outpaces the speed of regulation.
But since cryptocurrency has become more widely adopted, illicit transactions now comprise less than 1% of Bitcoin’s total transactions. And unlike cash, the immutable nature of the blockchain and the increased sophistication of monitoring technology means that crypto transactions, despite their pseudonymity, are far more transparent and traceable than cash.
But exactly what controls are best suited to identify, mitigate, prevent, and report potential criminal activity is still up for debate. While it is tempting to apply the same toolkit that has been used in the traditional banking world for decades, everyone’s interests would benefit greatly from an open and honest discussion between industry players and regulators as to whether cryptocurrency and the blockchain technology that underlies it warrants a fresh approach to anti-money laundering regulation.
Second, the public must have confidence in the integrity of cryptocurrency products and markets. While transparency is an inherent feature of cryptocurrency, there is an educational divide between a minority of crypto enthusiasts with extensive industry knowledge and significant influence in the market, and a growing population of investors who may not fully understand the products being offered or the potential risks they present.
The result can fuel perceptions that cryptocurrency is rife with fraud, or the markets are manipulated for the benefit of “whales” at the expense of retail investors. Together, the industry and regulators can work to make sure the public is properly educated on cryptocurrencies and crypto-backed products, and that both are traded on well-functioning markets where users have trust that they are on a level playing field.
Cryptocurrency adoption by a broad swathe of the public is upon us. As a result, widespread crypto regulation is inevitable. Whether that regulation will be tailored to the unique characteristics of cryptocurrency, and whether the cryptocurrency industry will cast aside any predisposition to take an antagonistic position to regulation, remains to be seen. But for the benefit of all involved, it is worth the investment of time and resources, and a dose of humility – by both the industry and regulators alike – to get it right.
Andy Meehan is the Chief Compliance Officer for Gemini’s Asia-Pacific business, based in Singapore.