Cryptocurrencies are growing and regulators around the world are taking decidedly different stances. To some it’s a threat, to others it’s an opportunity. The truth lies in between.
When Bitcoin was first launched a decade ago the sniggering from the financial establishment was almost deafening. Now, after a year in which Bitcoin’s value surged and the number of cryptocurrencies multiplied they are starting to change their tune. Even long time crypto-critic Mark Carney was starting to make favourable noises. The question is: how do regulators approach it – do they open their arms to the opportunities or do they crack down on the risks?
China, South Korea and Russia have fallen very definitely into the latter camp. China has placed a halt on the trading of cryptocurrencies on exchanges and have banned initial coin offerings. The focus is to stamp out anything that could present a risk to China’s rapidly growing economy. Russia, meanwhile, has blocked access to many cryptocurrency exchanges. South Korea also sought to calm the frenzied speculation on cryptocurrencies by forcing people to trade under their real names.
Augustin Carstens, head of the Bank for International Settlements (BIS) described the crypto craze as a Ponzi scheme and an environmental disaster. Speaking at the Goethe University he said: “To date, many judge that, given cryptocurrencies’ small size and limited interconnectedness, concerns about them do not rise to a systemic level,” he said. “But if authorities do not act pre-emptively, cryptocurrencies could become more interconnected with the main financial system and become a threat to financial stability.”
Here in the UK the attitude is a little more positive. The Government is investigating both the benefits and the risks of cryptocurrencies through the Cryptocurrency Taskforce and intends to publish guidelines in July.
The Governor of the Bank of England, meanwhile, has been backtracking on his assertion at the beginning of the year that digital currencies such as Bitcoin were incapable of functioning as money. Now he claims to be open to the idea of a central bank issued rival to Bitcoin which he dubbed somewhat unimaginatively as Britcoin.
The difficulty comes in striking the right approach. Cryptocurrencies bring plenty of risk. They are extremely volatile and are open to fraud. Critics in the past have described them as being good for nobody except drug dealers.
The booming market also creates enormous opportunity for harm to unwary investors. Eager to capitalise on the crypto boom, people are trading assets they do not fully understand with little or no protection.
On the other hand, this is a sector of immense promise. While some see it purely as a tool for trading, it has enormous value locked within the blockchain technology which underpins it. This opens the way for faster, cheaper international transfers and a host of innovative financial products.
Regulators therefore will look to find the middle ground – a place where they can protect investors and the financial system without stifling innovation at its source.
We wait to see the outcomes of the various reviews taking place into cryptocurrencies, but one thing is certain. If people were laughing ten years ago, they’ve definitely changed their tune today.