Regulating cryptocurrencies: walking the tightrope

| 01-03-2018 | Carlo de Meijer |

Long-time regulators world-wide took a wait-and-see attitude towards the non-regulated markets for Bitcoin and cryptocurrencies. But that is changing rapidly. With the growing popularity of the crypto market, the large number of unregulated cryptocurrencies (more than 1300, greater attention is now being paid by Governments and other stakeholders around the world.

Regulators across the world are looking at whether — and how — to regulate cryptocurrencies. As a reaction last week cryptocurrencies tumbled with the Bitcoin falling even below $6,000 after having reached a high of $20,000 on 17 December for fear of more regulation. The cryptomarket value also fell deeply from $674 billion in December to $315 billion. Also the hack of the Japanese crypto exchange Coincheck, where some hundreds of millions of dollars disappeared caused enough unrest. Up till now there is however no univocal direction in how cryptocurrencies are looked at and how to treat them.

Why intervene in the cryptocurrency market?

It is no surprise that governments and regulators are becoming more vocal and putting together tasks forces on how to deal with it. There are compelling reasons why cryptocurrencies should be under more scrutiny by regulators and supervisors. The threat of price volatility, speculative trading and hack attacks all call for stricter regulation. Main goal of regulators is to create long-term stability afforded by common policies and elimination of fraudulent actions and practices.

To protect the consumer

Firstly, there is the need of tighter oversight of crypto exchanges and trading platforms from the viewpoint of investor protection. These markets are however not transparent for private investors. There are clear risks for private investors associated to price volatility, operational and security failures at crypto exchanges, market manipulation and liability gaps. Many experts worry that the trade in Bitcoin futures, crypto funds and other highly speculative financial products will inflate a speculative bubble, while running the risk of losing all their money. In that case there is – unlike at normal currencies such as euro, dollar and yen – no public institution like governments or central banks behind it.

Fear of criminal activities

According to many, aside from the instability of cryptocurrency prices, these cryptocurrencies must have greater regulatory oversight in order to prevent illegal activity and illegitimate use. Aside from the instability of cryptocurrency prices, regulators are worrying about criminals who are increasingly using cryptocurrencies for activities (trading away from official channels) like fraud and manipulation, tax evasion, hacking, money laundering and funding for terrorist activities.

Systemic risk

There is also the systemic risk that is inherent to the crypto-economy. If it continues to grow uncontrolled there is the danger of destabilising the financial system worldwide. The overheating of the cryptocurrency market with speculative money and the wild price fluctuations have raised alarms and calls for tightening of regulations in many countries from the viewpoint of financial system stability. If the price bubble bursts, it can quickly endanger individual institutions and parts of the financial markets. If big losses would occur this could hurt the reputation of the whole market.

Regulators are stepping in

The advent and subsequent boom of cryptocurrencies on a global scale as well as the heavy fluctuations have left many governments scrambling to find ways to deal with this new phenomenon. Regulators and other official authorities worldwide are stepping in to define how they would oversee this cryptocurrency environment (what had been to date a legally “murky” environment). Governments around the world are now looking at how to regulate Bitcoin and other cryptocurrencies.

What could they actually do: the options

There are various options to deal with cryptocurrencies, ranging from a complete ban to the other extreme of creating an own state digital currency. The options are just warn and further do nothing, complete ban, categorise as financial asset, regulate the exchanges or create a state owned crypto currency.

Read the full article of our expert Carlo de Meijer on LinkedIn

 

Carlo de Meijer

Economist and researcher

 

 

IBM-Maersk Blockchain Platform: Breakthrough for Supply Chain?

| 09-02-2018 | Carlo de Meijer |

There are various signals that a number of corporates are moving their blockchain projects towards production. We recently have seen the announcement of the IBM – Maersk project, to create a blockchain based corporate. If accepted in a sufficient way by the various players in the shipping industry supply chain that could mean a real breakthrough for blockchain and other distributed ledger technologies. “The big thing that is missing from this industry to digitize and unleash the potential of the technology is really to create a form of utility that brings standards across the entire ecosystem,” Maersk’s Chief Commercial Officer Vincent Clerc.

Present challenges in the shipping industry

This announcement is an answer to the growing demand across the shipping industry for efficiency gains and opportunities coming from streamlining and standardising information flows using digital solutions.

The world’s shipping ecosystems with more than $4 trillion of goods shipped every year have grown in complexity. One major challenge with supply chain management in the shipping industry today involves record keeping. A lot of record keeping is still based on inefficient outdated systems. Along with paper legal documents, much of the international shipping industry’s information has been transmitted via very old technologies.

Presently, many shipping supply chains are still confronted with enormous bulk of paperwork and bureaucracy involving many intermediaries in cross-border trade. Especially the traditional cross-border shipping processes usually involve manually transporting and verifying paper documents for each shipment. Just as an example: “a shipment of refrigerated goods for instance from East Africa to Europe can go through nearly 30 people and organizations and involve more than 200 different communications”.

This means that today, a vast amount of resources are wasted due to inefficient and error-prone manual processes. This could lead to lost documentation or delays in delivering. goods. These costs of the required trade documentation to process and administer many of these goods are estimated to reach one fifth of the total costs of moving a container. By the way, the cost of global trade is estimated at $1.8 trillion annually.

Why blockchain?

The attributes of blockchain technology are said to be ideally suited to large networks of disparate partners like the shipping industry. This technology opens up an entirely new set of possibilities and an innovative opportunity to engage the entire global shipping ecosystem.

Blockchain technology addresses the many supply chain challenges as it establishes an immutable record shared of all the transactions among network participants that is updated in real time, enabling permissioned parties in a private blockchain environment access to trusted data in real time.

Read the full article of our expert Carlo de Meijer on Finextra

 

Carlo de Meijer

Economist and researcher

 

 

  

Blockchain and payments: further on the Gartner Hype cycle?

| 24-01-2018 | Carlo de Meijer |

Payments is increasingly seen as an area that is ripe for disruption, having the potential to enhance payment processing. To overcome the current structural weaknesses in the payments area including low speed, high expenses, financial institutions are increasingly adopting the idea of blockchain or distributed ledger technology (DLT). This in order to offer (near) instant cross-border payments at lower costs, higher security and more reliability. Up till recently most of these trials have been non-interoperable stand-alone solutions. But that may change!

Last month Blockchain bank consortium R3CEV and 22 of its partners announced that they were collaborating on the development of a cross border payments platform built using distributed ledger technology. This may be the first time a shared infrastructure has been developed that addresses the full payment workforce.

The question is: where are we now in the Gartner cycle, and will this R3 initiative be the breakthrough for a more massive adoption of this technology in the payments area?

Central banks: still see hurdles

Also central banks are actively investigating and in some cases even experimenting with blockchain including those of the United States, Canada, China, U.K., France, Germany, the Netherlands, Singapore, South Africa, and Sweden. Central banks’ interest in blockchain represents further recognition of the technology’s potential to transform many aspects of financial systems worldwide, including international payments. They are generally positive about the technology’s potential for applications such as international payment solutions.

On the other hand central banks also note technical obstacles such as scalability and other concerns such as privacy, security and legal issues. They generally emphasize that the technology is still at an early stage and may be years away from widespread use for such applications.

In a recent published research paper, the Deutsche Bundesbank offers up some encouragement for DLT acceptance. They are highlighting the technology’s ability to eliminate reconciliation processes, boost transparency and protect against cyber-attacks. The Bundesbank however dampened the blockchain enthusiasm, dismissing distributed ledger technology’s prospects in retail payments, at least in the Eurozone, which already boasts fast transfers and systems that require a minimum of reconciliation and can process millions of transactions with ease every day.

The authors concede that “it is still unclear whether DLT also has the edge over today’s technology in terms of security, efficiency, costs and speed”.

Read the full article of our expert Carlo de Meijer on Finextra

 

Carlo de Meijer

Economist and researcher

 

Bitcoin mania: what is it not?

| 20-12-2017 | Carlo de Meijer |

During our stay in South Africa I was reading an article in Die Burger (newspaper for Afrikaners) where a spokesman of Cape town-based PWC gave his ideas on the recent rise of Bitcoin and the future of Blokketting (Afrikaans for Blockchain). This inspired me to write this blog. Since I started writing about blockchain I categorically refused to use the term Bitcoin. But this time it is different. As Bitcoin nears the end of a record-breaking year, it seems an appropriate time to dive into this – by many traditional players said – over-hyped thing. Others describe this fascination for Bitcoins as a “speculative mania”. The broader public has discovered this phenomenon. I will not say it is (already) the end of the rise in Bitcoins or other crypto currencies. But let me be clear: Bitcoin is a lot not!

Bitcoin rate explodes

Since April this year the Bitcoin (but also crypto currencies like Ether and Bitcoin Cash) is showing a continuous rising trend and in the past few months it even exploded to unexpected levels. In one month time the rate of the Bitcoin almost doubled. In the meantime the Bitcoin rate increased further to reach almost 20.000 dollar, before falling back to 16.000 dollar. But now it is back at  19.000 dollar. At the beginning of this year the Bitcoin rate was not even 1000 dollar. The total market capitalisation of Bitcoin is now exceeding that of a company like Boeing and that of New Zeeland’s GDP.

Bitcoins traded on futures market

The recent firm rate rise of the Bitcoin has much to do with the launch of Bitcoin future contracts. Before that Bitcoins could only be sold or bought via internet platforms. Last week the trade of future contracts in Bitcoin started on the Chicago Options Exchange ( CBOE). These futures enable speculators (without having Bitcoins) to buy or sell Bitcoins by betting  via the leverage instrument on future increases of the Bitcoin or an eventual decrease thereby hedging against fluctuations. In total 500 contracts were traded on the first trading session. The rate of Bitcoins increased nearly 2.000 dollar to 18.700 dollar. On the American market place Coinbase the Bitcoin even reached 20.000 dollar, after having raised 40% in the two previous days. This indicates that investors do not (yet) expect a crash short term.

In the meantime also the Chicago CME, the world’s largest exchange,  started trading Bitcoin futures and the Nasdaq is also in the race to enable the trade in these future contracts. Many professional investors however did not yet enter this market because the difference between bid and offer rates is still much too large. This indicates there is too less liquidity in this market. There is also insufficient clarity of the required margins, trade limits, stress tests and clearing.

What is Bitcoin not?

Read the full article of our expert Carlo de Meijer on Finextra

 

Carlo de Meijer

Economist and researcher

 

 

R3CEV Corda Platform: the blockchain app store

| 04-12-2017 | Carlo de Meijer |

App Store In May this year, fintech start-up R3 raised $107 million from a consortium of the world’s top banks. The New York-based blockchain company that works in collaboration with more than 90 banks and other financial organizations world-wide, plans to use the money to invest in further developing the Corda platform (see my blog: Corda: distributed ledger ….. not blockchain! April 6, 2016) as well as “encouraging entrepreneurs to start building on the platform though training videos and hackathons”.  

Fundraising

R3 gained momentum when it achieved this record distributed ledger technology funding in its last funding round. This figure that was raised by 40 institutions from more than 15 countries across the world (including names like Barclays, SBI, UBS, Bank of America Merrill Lynch, HSBC, ING, and Wells Fargo), is known as the largest single investment in a blockchain company to date. This is also seen as a signal that R3, with their Corda Platform, is moving in a right direction, according to many in the banking industry. This notwithstanding some of the early members left.

“R3 will use the funding to: [A]ccelerate technology development and expand strategic partnerships for product deployment. The company’s efforts will be focused on Corda, R3’s DLT platform for regulated financial institutions, and its infrastructure network, which will support a vast range of partner-built financial applications that interoperate seamlessly with each other, existing systems and networks.” R3’s press release

New members

Notwithstanding a number of early partners left the R3 consortium including JP Morgan, Goldman Sachs and Santander, it still attracts new members showing their viability in the blockchain arena. Like the Bahrain based Bank ABC (Arab Banking Corporation), Abu Dhabi Global Market and the International Trade and Forfaiting Association (IFTA). The latter will be involved in the various trade finance projects. Recently also the Banco de la Republico Colombia, the Colombian central bank, joined the R3 consortium. The partnership with various central banks is part of R3’s plan to diversify its consortium membership by the addition of financial regulators and government agencies.

Read the full article of our expert Carlo de Meijer on LinkedIn

 

Carlo de Meijer

Economist and researcher

 

 

Accenture and blockchain: the accent on security issues

| 13-11-2017 | Carlo de Meijer |

My last blog was about IBM, triggered by a Juniper Research putting the company as the number one in the blockchain technology competition. One of the comments on this blog was that it looked like an IBM press release. But that is far beyond what is meant. I just looked at what the tech company was doing in the blockchain arena and why it could be adopted as the main blockchain model when blockchain adoption could become mainstream. In a previous blog I already talked about Microsoft’s CoCo platform, the number two in the Juniper Research asking myself if that could become a game changer (see my Blog: Microsoft CoCo Framework: blockchain game changer, August 29, 2017). Today I will go into some more detail in the blockchain activities of Accenture, number three according to the Juniper survey.

Accenture: where do they stand?

Looking at the various blockchain alliances or consortiums, of the top three in the Juniper Research, Accenture is the most broadly focused one. Being a member of both the Ethereum Enterprise Alliance and the Hyperledger Project as well as entered into alliance with Ripple and Digital Asset. Early this year Accenture also joined the Chamber of Digital Commerce (CDC), the world’s leading blockchain trade association. The CDC, aimed to “help educate, promote and accelerate the adoption of blockchain-enabled technologies” , is also the founder of the Smart Contracts Alliance, the Blockchain Alliance, the Global Blockchain Forum amongst others.

Compared to IBM (Hyperledger Project and Digital Asset) and Microsoft (Ethereum Enterprise Alliance and Ripple) that are more outspoken in their vision, the overall goal of Accenture is to leverage DLT innovations of all sorts to make the technology viable for enterprise IT use.

“Accenture strives to be at the forefront of blockchain innovation and its practical, real world application. We provide our clients with a complete view of the blockchain-based technology landscape and its potential business implications. Our global team of experts works with each client to help build smart strategies around effective use-cases, investment and implementation.”Accenture website

“Accenture is committed to supporting these efforts by leveraging our expertise across the company – from regulation to innovation – to make blockchain a reality for our clients.” David Treat, managing director of Accenture’s financial services industry blockchain

Accenture: focus on security issues

Accenture is especially focusing on security issues. These will be critical to the widespread adoption of blockchain technology. In February this year Accenture launched its new blockchain security hardware solution and recently the company has secured a patent related to its work on Editable Blockchain technology as of late September 2017.

Blockchain Hardware solution

Last February Accenture launched its new blockchain security hardware solution. In partnership with Thales e-Security and its hardware security modules (HSMs), Accenture has developed a Hyperledger Fabric-based patent-pending solution…..

Read the full article of our expert Carlo de Meijer on LinkedIn

 

Carlo de Meijer

Economist and researcher

 

IBM: International Blockchain Model of the future?

| 16-10-2017 | Carlo de Meijer |

According to a recent Juniper Research study “Blockchain Enterprise Survey”, IBM is seen as the number one provider of blockchain to business, well ahead of its competitors. These results are based on a survey of 400 business users from organisations actively considering, or in the process of deploying blockchain technology. Of the surveyed 43% ranked IBM first, followed by Microsoft (20%) and Accenture.

IBM is better positioned than competitors as far as its blockchain credentials are concerned. The study noted that IBM’s high-profile research development efforts and use of Hyperledger “helped push it to the number one spot”. IBM has been making considerable steps forward not only by research. Also with the development of a great number of projects aimed at broadening the scope of distributed ledger technology to include industries other than the financial services, including asset tracking, logistics, healthcare and the music industry.

Though this blog will especially focus on IBM, I will start showing the main differences between its main rival, Microsoft and that of IBM in their blockchain approach.

IBM versus Microsoft: different approaches

IBM and Microsoft are now intensively working to become the dominant commercial blockchain-as-a-service (BaaS) platform. They are positioning themselves in the middle of a “frenzy” of blockchain projects and partnerships.

While Microsoft has been adding blockchain modules to its cloud platform Azure already since 2015, IBM launched the first commercial application of blockchain named IBM Blockchain just in March this year. Both systems seem similar on the surface: modular, operate in the cloud, based on open-source code, with massive ecosystems. Both are decentralized ledgers that can be used to manage and validate almost any type of transactions.

Different visions

But on closer inspection it is clear they have different visions for blockchain technology. Both are They thereby are taking decidedly different paths. These two big tech corporates are …

Read the full article of our expert Carlo de Meijer on LinkedIn

 

Carlo de Meijer

Economist and researcher

 

Regulation of ICOs: the end or beginning of a healthy market?

| 29-9-2017 | Carlo de Meijer |

One of the hottest – and also one of the most controversial – things in the crypto currency environment are so-called Initial Coin Offerings or ICOs. ICOs, which employ the use of crypto currencies, have become a popular means of fundraising for start-ups in recent months. The increasing need of blockchain technology and the lack of regulation allows them to raise money quickly in return to so-called tokens (also described as digital certificates). This hype has driven a steep rise in this sector’s market value, reaching a high of $177 bn.

The latest cryptocurrency boom however is beginning to stall as a growing number of regulators worldwide turn their attention to the ICOs world and have decided to come into action. China recently decided even to ban these ICOs. And others such as the US SEC, Singapore, Hong Kong, Russia and others followed soon though in a more lighter variant.

Is this the end of fundraising via ICOs or should it be seen as the beginning of a healthy market?

ICO hype

ICOs have become highly popular. In the past months there has been a complete hype around ICOs. ICOs have allowed digital currency start-ups, to raise millions of dollars quickly, in many cases from ordinary investors. The ICO fever is especially triggered by the success of Ethereum, the platform that invented the digital currency Ether. Already in 2014 Ethereum arranged a very successful ICO.

More than $1,6 billion has been raised worldwide from these ICOs up till now. China for example has seen 65 ICOs and 2.62 billion yuan ($400 million) raised from more than 100.000 individuals so far in 2017.

Read the full article of our expert Carlo de Meijer on LinkedIn

 

Carlo de Meijer

Economist and researcher

 

Microsoft Coco Framework: blockchain game changer?

|18-9-2017 | Carlo de Meijer | treasuryXL

Microsoft recently announced the introduction of the Coco (or Confidential Consortium) Framework. A ‘first of its kind innovation’ as they named it, designed to work with any ledger or operating system. CoCo is a blockchain protocol technology aimed to make it easier to build enterprise networks quicker and more secure using any distributed ledger. Our expert Carlo de Meijer explains the relevance of the new technology for confidential consortiums in an article on LinkedIn.
We present a short summary of the article.

What’s the issue?

Corporate interest in blockchains is firmly growing. Embracing this innovative technology however remains a big hurdle for most enterprises, as there is no unified approach in this regard. As a result they have difficulties integrating in into their systems.

There are many different blockchains, but major blockchains are not designed to be interoperable with one another. As enterprises look to apply blockchain technology to meet their business needs, they’ve come to realize that many existing blockchain protocols fail to meet key business requirements. The problem is that most blockchain protocols today require complex development techniques to meet the operational and security needs of enterprises.
Issues like performance, confidentiality of data, governance and required processing power are still major stumbling blocks for using blockchains. One of the other key enterprise blockchain problems is that of access controls for transactions.

What is the Coco Framework?

The Coco Framework is an open-source Ethereum-based protocol, designed to provide high-scale and confidential blockchain networks for enterprise purposes. It should be seen as the foundation of blockchain for the enterprise.

It is designed to work with any ledger or operating system. It can connect existing blockchains with one another. The Framework is targeted especially for consortiums where nodes and actors can be controlled.

The Coco Framework is built to address some of the current limitations of enterprise blockchain. It is meant to reduce the complexity currently associated with blockchain protocol technology and make it easier for enterprises to adopt blockchain technology. This by increasing transaction speeds, offering confidentiality and simplify governance decisions. The ultimate goal is to boost widespread adoption, particularly among enterprises, of blockchain technology.

The CoCo Framework is not a decentralised solution in this regard as participants will still be able to exert a high degree of control over their blockchain. CoCo is more of a distributed ledger-oriented approach than a decentralised technology.

The design of the CoCo Framework

Microsoft is developing the CoCo Framework in cooperation with Intel, JP Morgan and Ethereum. The Coco platform is designed specifically for confidential consortiums, through the introduction of a trusted execution environment (TEE), advanced cryptography and innovative blockchain-focused consensus mechanisms “to open up new blockchain enabled scenarios across industries”.

The Coco Framework needs a trusted execution environment where nodes and actors are explicitly declared and controlled because it relies on shared trust between machines running modified blockchain software in order to avoid the need for transaction verification. With these TEEs a network of trusted enclaves can be build that all agree on the ledger and Coco code they are running. Because it’s an open framework, it can also support other compatible TEEs as they become available.

The idea is that enterprises may place their blockchain code in a trusted area, which is established through integrated tools such as Intel’s Software Guard Extensions (SGX) or Windows Virtual Secure Mode (VSM). These are hardware-based security technologies that the CoCo Framework uses to improve the throughput, efficiency and privacy of the blockchain.

Compatibility

The CoCo Framework is designed to integrate with a wide range of blockchains and distributed ledgers. It is meant to provide the infrastructural underpinnings for the growing number of such ledgers that are emerging from different vendors and groups. Although CoCo is not an actual ledger, it will help other companies with established blockchains to come together, link with each other and built large networks.

Problems to solve

Despite taking a more centralised approach there are many benefits to embracing the the CoCo Framework. When implemented into blockchain networks and processed in a trusted environment, allowing for a “simplified’ consensus mechanism” may solve the various privacy, speed and governance issues for commercial adoption by corporates. At the same time, ”they will not lack in security and immutability”, which are two of the driving factors behind blockchain technology as a whole.

According to the Coco Framework White Paper, these “enterprise-ready trusted blockchains networks” that all agree on the ledger and the CoCo code they are running, will deliver:

  • Throughput and latency approaching database speeds.
  • Richer, more flexible, business-specific confidentiality models.
  • Network policy management through distributed governance.
  • Support for non-deterministic transactions.
  • Reduced energy consumption.

When to start?

According to Microsoft, the company has now started exploring the CoCo Framework’s potential across different industries, such as retail, supply chain and financial services.

Microsoft plans to make the Coco Framework available as an open source software project by 2018. It will be posted to and available on Github.

You can find more details about CoCo in Carlo de Meijer’s article on LinkedIn.

 

Carlo de Meijer

Economist and researcher

 

 


More articles about blockchain technology from Carlo de Meijer:

 

How can treasurers use cryptocurrencies?

| 7-9-2017 | Carlo de Meijer |

 

Recently I read a blog from Victoria Beckett published in GTNews, titled “How can treasurers use cryptocurrencies”.  Nowadays there are more than thousand different cryptocurrencies in circulation. The dollar value of the 20 biggest cryptocurrencies is around $ 150 billion. While cryptocurrencies soared to unknown levels, also the explosion in Initial Coin Offerings, or ICOs for funding purposes is evidence of their growing attraction. But are these cryptocurrencies suited for corporate treasuries.

Benefits

In her blog Victoria Beckett said that there are several benefits to treasurers using cryptocurrencies. These may bring various benefits including avoiding paying large transactions fees to banks, realising immediate payments and the ability for transactions to be kept open or private. According to her corporate treasury business no longer need to use mainstream financial regulatory frameworks. Cryptocurrencies could provide business with the ability to move assets outside of the normal banking regulatory framework.

She argued that one of the key benefits to making business payments using cryptocurrencies is that it cuts out banks in the transaction completely, avoiding large transaction fees, while “payments can also get transferred immediately anywhere in the world”.

Critics

But there were some critics as “banks have to trade off the operational benefits that the technology may provide against the added cost of needing to buy and sell a cryptocurrency to make a transaction.” “Therefore, the benefits are low when dealing with efficient ‘corridors’ such as US and Europe, but higher when transacting with Zimbabwe” David Putts.

Besides, there are a large number of different cryptocurrencies in circulation with different protocols etc. These are not interoperable/interchangeable.  So when using cryptocurrencies they at some point in time have to be transferred into fiat money. And that also costs money.

I also missed other use cases for corporate treasurers in the article. Just using cryptocurrencies payments would be a very limited use case, given the large number of other activities performed by corporate treasurers.

Risky business

When reading the article I got the impression that the risks of cryptocurrencies were rather  under estimated. Certain features of cryptocurrencies are not backed by any government, have no status as legal tender and rely on network protocols and cryptographic techniques to enable counterparties to transact. This may present various risks.
First of all cryptocurrency exchange platforms normally have no regulation. Thus there is no legal protection. And we have seen the various examples of hacking these exchanges with many people losing their money.
Second, virtual money is normally stored in a digital wallet on a computer. Though these wallets have passwords and key they are still valuable for hacking etc.
Third, there is no protection for funds under EU law when using cryptocurrencies as a means of payment. We still live in a largely fiat-money dominated world. So these cryptocurrencies had to be concerted one day into their own legal currency and that costs money.
Fourth, cryptocurrencies are very volatile. There is no guarantee that the cryptocurrencies will remain stable.  Cryptocurrencies currently lack a derivatives market, which makes them a risky medium for business contracts that last for any amount of timer, especially given their constant value fluctuations. This year for example the exchange rate of the bitcoin climbed from a low of 968 dollar to more than 3000, fell back to 1.800 six weeks ago and climbed to 5.000.
Fifth, due to the untraceable nature of cryptocurrencies, they provide a high degree of anonymity, making them vulnerable to misuse for criminal activities.

Action from regulators across the world

For some, it is a pro that cryptocurrencies in most countries are not regulated, such as for hackers and/or speculators.  That idea is however rapidly changing giving the risks associated. At a global level, there is an urgent need for regulatory clarity given the growth of the market.

All these risks mentioned above are prompting action from a growing number of jurisdictions.

Regulators in China have publicly announced that they will forbid the use of ICOs. And also regulators in other countries like Japan, Singapore, and the US are looking at ways to regulate. The SEC in the US has officially confirmed it was looking into regulation of cryptocurrency ICOs. The SEC is mainly concerned with the risks these ICOs pose. And Singapore will regulate ICO offerings that are deemed to be securities.

But also on a more broader scale Europa there is increased activity by regulators in Europe to reign in the use of crypto currencies. The EU Parliament is expected to pass measures soon to bring certain virtual currency service providers within their AML (anti money laundering) / CTF (counterfeiting) regulation. These measures do not seek to prevent the use of cryptocurrencies, but will require virtual currency service providers to implement customer due diligence measures.

Polish regulators are warning investors and banks to avoid dealing with digital currencies like bitcoin and ether. The regulators clarified that cryptocurrencies are not considered legal tender in Poland.

The Maltese regulatory watchdog (MFSA) also warned traders about the risks associated with the virtual currency. According to them a virtual currency is an unregulated digital instrument and is a form of money that is not equivalent to the national currencies. The MFSA however stressed that It does not (yet) regulate the acceptance of payment of service in regards to the virtual currencies.

Are central banks overcoming their reservations?

Central bankers, from Russia to China, Frankfurt and New York, are increasingly wary of the risks posed by these crypto currencies. I therefore question if central banks worldwide are overcoming their reservations versus cryptocurrencies and really come out in favour of the cryptocurrency.

The recent boom in cryptocurrencies and their underlying technology is becoming too big for central banks to ignore. The risk is that they are reacting too late to both the pitfalls and the opportunities presented by digital coinage.

Bitcoin and its peers pose a threat to the established money system by effectively circumventing it. CBs are well aware of losing control over the money supply, if they don’t react. A solution may be that CBs are issuing digital money themselves to maintain control. Various central banks worldwide are now experimenting with that idea.

Forward thinking

The attraction of virtual currencies is mainly for speculative reasons, rather than for corporates to facilitate treasury. Corporate treasuries are increasingly looking for centralisation of the treasury organisation away from decentralisation. They also are very much focused on reducing the various corporate risks including FX, short term interest rate, cross currency liquidity, etc.

And when it is regulated on a larger scale it is questionable if the described benefits of speed, efficiency or scalability attributed to the use of cryptocurrencies still will meet the costs associated .

The announcement by the Bank of China to put a halt on initial coin offerings or ICOs had a negative impact on the very volatile bitcoin and other cryptocurrencies. In one day it lost almost 15% of its value. The corporate treasurer however does not like volatility!

 

Carlo de Meijer

Economist and researcher