Why Regulation Will Save The Industry
By Tom Rodgers (UK)
Crypto has a serious image problem, and it’s one that can only be solved by better regulation. Around the world every government has its own interpretation. Take China, for example. The country’s de facto reserve bank, the People’s Bank of China, has outright banned cryptoexchanges and ICO websites, and yet blockchain is booming with a $1.5bn fund< available in the eastern city of Nanjing.
In the UK, the head of the Bank of England Mark Carney has consistently criticised, cryptocurrencies as “unsafe money”. In the US, the Securities and Exchange Commission tends to rule on a case-by-case basis. But far from outright bans, the regulator has already allowed< one venture capital firm to buy stock in a publicly traded company using only the RChain cryptocurrency.
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Fuelling fears over crypto are a continual drip feed of stories about scam ICOs, founders with wild claims, excessive price volatility and the stunning fact that less than half< of all ICOs released in 2018 had any kind of business plan. A market report< for Q1 2018 by the ICO Rating agency notes that: “Funds are ready to invest...but they are often deterred by teams’ negligence regarding organisation of KYC [Know Your Customer] and AML [Anti-Money Laundering]. The procedures need to be in place, and organised to a high standard, to reduce legal risks.”
Mainstream banks and financial institutions have entire departments dedicated to making sure their businesses comply with the exacting standards required for KYC and AML. The costs of getting it wrong are far from trivial. International market analysts Quinlan and Associates suggest< that blockchain-based processes could save the banking industry 32% of their annual costs - some $4.6bn - from lower technology spending, reducing the number of people working on compliance, and fewer fines from regulators. They report that industry-wide adoption will give banks the ability to move from KYC to KYT - without having to Know Your Customer, you can instead Know Your Transaction.
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When banks have to offload potentially risky customers for fear of the $16bn in fines handed out by banking regulators in the past decade, it creates a real problem. Banks themselves are very keen on trials with private, permissioned blockchains set up by outside firms. R&D is expensive, after all. The Bank of England completed its first pilot with Ripple in 2017. And although Ripple’s Senior VP of Customer Success Marcus Treacher made the Ratner-esque admission to Reuters< that “the feedback from banks is that you can’t put the whole world on a blockchain”, perhaps the conclusion we should be drawing is that banks don’t want to put ‘the whole world’ on Ripple’s blockchain. Ripple does not have KYC/KYT/AML data points baked into its design.
A proof-of-concept trial is underway< between, Barclays Bank and Citigroup to offer decentralised apps on IBM’s HyperLedger Fabric-based secured distributed ledger - LedgerConnect. It’s effectively providing off-the-peg software around popular requests for market data and KYC processes. This is blockchain software-as-a-service.
Another interesting piece of tech is Ivy<, whose token claims to allow banks to transact, exchange and deposit payments with a much higher level of security compared to the likes of current SWIFT method, as well as including up to 74 KYC and 120 KYT data points as part of its core design.
As mentioned above, financial institutions need this level of validation to meet stringent compliance rules. Current payment messaging systems like SWIFT are also sorely in need of an update, given that information can be changed, incorrect at point of entry, or simply missing.
Recent attacks< on Bitcoin from leading economists Joseph Stiglitz and Nouriel Roubini suggesting that cryptocurrencies themselves will be “regulated into obscurity” - wilfully ignore the point that regulation in itself is a marker of a maturing industry, and one which enables expansion
Regulation will kickstart mass-adoption
Photo by Samuel Zeller on Unsplash
Much criticism stems from the idea that blockchain-based firms want to avoid regulation, rather than integrate with it. But recent reports show considerable evidence to the contrary. When the likes of London’s $10trn-rated exchange LMAX Digital says< it is launching cryptotrading in Bitcoin, Ethereum and Litecoin for hedge funds and pension funds “to meet customer demand”, we cannot gloss over the actuality that LMAX is fully regulated by the UK’s Financial Conduct Authority. Institutional-level clients and banks want certainty, and protection against regulatory faux pas.
A report released by Lithuanian crypto payments firm Mistertango in July 2018 found< that nearly 90% of cryptoexchanges surveyed were desperate for tighter regulation. Furthermore, over half of the $100m+ 24-hour volume exchanges surveyed said crypto users should be subject to KYC and AML checks, just as those using traditional financial services are.
“The industry is crying out for regulation and the response from partners has shown this. Uncertainty is the biggest fear, and regulation is critical to provide the stability we need... regulation will be a catalyst, not an inhibitor to the crypto market’s development,” notes Business Manager Gabrielius Bilkštys.
Proper market regulation equals maturity and stability. This is key. Without regulation, we can not have maturity. Without maturity, we cannot have true integration.
Tom Rodgers is a tech journalist with over 10 year experience writing for some of the most trusted news sources in the UK. Tom's current areas of interest include the international regulation of, and new laws around, cryptocurrency, blockchain, ICO's, money laundering, and KYC/KYT.