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Cryptocurrencies Regulation: It’s Getting a Bit Philosophical

The world of crypto, like the world of politics, can create curious bedfellows. This is now becoming clear in the move by some jurisdictions to create a regulatory and supervisory regime around distributed ledger technologies (DLT) and the opposition by others to do so. Similarly some industry players, such as the Gibraltar Stock Exchange, are vociferous in their call for a regulatory regime whilst others consider it an attempt to stifle innovation.  Yet both camps contain groups who are pursuing the same ends with completely different objectives.

Let me start with the anti-regulation brigade. This is comprised of those who see any state interference as an affront to their anarcho goals for a non-state, non-fiat currency.  Part of the purpose of DLT and crypto, in their view, is to build a system that defies attempts to bring it into the mainstream financial world which they regard as flawed, inefficient and dominated by non-competitive forces.  Yet this group is joined by those very forces who consider that any attempt to regulate simply legitimizes the crypto world, so giving it a false veneer of respectability. Better to keep it outside mainstream financial services, marginalize it and hopefully let it wither before it can cause any systemic risk to the financial world as a whole.  

In the other corner sit those in the industry who believe that their only chance of genuine disruption is to place the industry within a supervisory regime which will make currently reticent consumers more inclined to participate. To them independent regulation and oversight will overcome the lack of trust that is restricting growth. Alongside this group sit jurisdictions who share a belief in the future of the sector but consider that this future is only worthwhile if consumers are protected, the system is made resilient to money laundering and other financial crimes and no systemic risk is created.  To this corner a further group can be added. This is the group of jurisdictions which feel the best way to deal with the whole thing is to treat it like any other financial product or service and apply the same regime as already exists for others engaged in financial services. The principle of the last group appears to be based on the “if it walks like a duck and quacks like a duck, might as well treat it as a duck”.

So, what happens next?  One thing is becoming clear namely if a long term regulatory regime is going to emerge, it is likely to emerge internationally rather than on a jurisdiction by jurisdiction basis. Whilst current activity is on a national rather than broader basis there is a total lack of cohesion or even agreement on what such regimes should cover. Some focus on the currencies/tokens, some on the issuing mechanism, some on anyone who is in the DLT space.  

This cannot succeed long term. It will encourage arbitrage and utterly confuse the consumer who has neither the time nor the capacity to understand what protections are provided on an individual jurisdiction basis. Firms, many of whom operate in multiple jurisdictions will be unwilling to support the cost of applying different requirements in different places.  Jurisdictions which pitch their regimes too high in terms of standards will simply become unattractive, as New York did a couple of years ago.

In short the industry is not going to able to benefit from the legitimacy a supervisory regime brings until a common, international set of standards are agreed and applied. Waiting for this to emerge may end up a bit like waiting for Godot. It will be long, tedious and may well result in nothing at the end.

However the industry can take the initiative by creating its own set of voluntary obligations. Those who agree to submit to such standards can have their compliance verified, perhaps as part of an extension to their audit. Such an approach can be flexible, amending itself as the sector continues to evolve. There could even be a dispute resolution mechanism to which all participants subscribe.

Those who choose to stay outside the regime can do so but those with whom they conduct business will know the additional risks they run.  

Such a voluntary regime is neither ideal, nor likely to persist as anything other than a trade body in the long term but it can sow the seeds of future practical international standards.

Disclaimer: This feature was contributed by Marcus Killick, and is published in its original form without any major editing. The views expressed by the author are his own, and do not necessarily reflect those of the editorial board.

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