Some blockchain predictions for 2019

| 10-1-2019 | Carlo de Meijer | treasuryXL

2018 was a challenging year for the blockchain world. Not all my predictions were realised. But what is sure: the hype is over. The adoption of this technology by the industry was less outspoken than predicted. Blockchain spending by companies went slower than expected, while many ongoing projects were stalled or even stopped. This had much to do with the turbulences on the crypto markets. And that is not that strange as many still see a narrow link between bitcoin and blockchain technology. The crypto markets lost more than 80 percent of their overall value from the beginning of the year. Add to that increased government scrutiny and outright bans of certain activities like crypto currency trading, ICOs etc.

As 2018 has come to an end, many are wondering what awaits us in the near future. Where are things going, and what are the trends and developments CIOs and other leaders interested in blockchain should be aware of. It is thus time to give an insight into predictions for blockchain technology for 2019 and beyond. I know, it is always difficult to predict what is in store for the future. But here are a number of my predictions in 2019 concerning the blockchain technology that should be on their radar screen. So let’s take a look at how things are likely “to work out” over the next 12 months.

The blockchain industry is working to improve its image

Blockchain has a bit of a reputation problem. It is believed that a lot of businesses are actually sceptical of blockchain and unwilling to adopt this technology just because it is too much associated with cryptocurrencies, and especially bitcoin.

The blockchain industry is expected to further try to work on its image in 2019, and separate blockchain from crypto in the minds of business. This in order for blockchain adoption to happen on a larger scale. It should be broadly communicated that blockchain technology can have numerous use cases that are completely unrelated to cryptocurrencies.

We will also see a shift in terminology. It is reasonable to expect that the term blockchain will be gradually replaced by another more neutral one: DLT or distributed ledger technology. This to send a clear signal to executive teams within corporates that their projects have nothing to do with the hyped world of cryptocurrencies and ICOs. Once this becomes clear to more people in business, blockchain will be able to experience much wider adoption.

The trilemma problem will (largely) be tackled

Another challenge for the blockchain industry is to solve the so-called trilemma problem. Despite the hype and huge investments in existing blockchain projects, the great promise of this technology has largely gone unfulfilled. A major stumbling block the industry faces is the imbalance between scalability, decentralisation and security. This seemingly intractable trilemma of technical barriers has undermined the trust and capabilities necessary for mainstream adoption and business relevance.

Much work is already being done to figure out solutions to this trilemma. Major research on possibilities to overcome the key shortcomings in existing architectures have been exploited, this to allow blockchain transactions becoming faster while preserving security and decentralisation.

This should enable  developers to build applications that solve real-world business challenges. Though it took time to attain a consensus, scaling solutions such as sidechains are already showing promise. And as we move further into 2019, these solutions will become more and more sophisticated. Real breakthroughs in scalability and performance are expected to begin coming to fruition and the blockchain trilemma largely being solved in two to three years from now.

Companies will look for best-fit applications

Moving further down the line, we will begin to see a separation between hype and reality. 2019 will be a year where the industry will shift its focus toward the real-world problems that blockchain technology could solve, with the goal of making “incremental and necessary changes to operations”.

Blockchain technology has long time be wrongly seen by many as a “magical way” to resolve all issues that we struggle with today. While it is true that blockchain can help with a lot of them, there are still numerous other problems that are better suited to be solved by alternative technologies, such as robotics, AI, and similar ones.

According to Deloitte’s 2018 Global Blockchain Survey, companies are starting to move from proof-of-concept projects to real-world applications. There will be a particular focus on discovering not just where blockchain could fit, but to find places where it is the best fit.

We will therefore see a transition of enterprise interest towards identifying tangible, productive use cases for blockchain. Projects will thereby move away from a “blockchain-for-everything” approach to back-to-earth implementation.

Blockchain projects may become more mature …

In 2018, companies have implemented a large number of high profile blockchain pilots but the results of these developments have yet to come to full fruition. Earlier this year Forrester Research anticipated that 90% of blockchain pilots won’t become complete products or services.

For the industry to mature and gain legitimacy, this shake out had to happen. 2018 has been a tough testing ground to establish how this technology could be improved, and what problems they could solve. The successes and failures of blockchain technology have given technology providers the tools they need to launch into the next stage of development: clear, targeted goals and expectations.

In 2019, it is expected that blockchain technology will come off age. As technology and valuation start to converge at rational levels the stage will be set for the blockchain industry to enter the next phase of maturity. A level of maturation within the blockchain space, with sustainable blockchain projects on the rise as dedicated blockchain teams are steaming up their efforts to deliver “exciting” projects.

…. and will raise visibility for blockchain

In 2019 we will see a growing number of new projects and new platforms continue to emerge. Developers and the innovative projects they work on will continue to advance blockchain capabilities, by creating ground breaking proofs-of-concept and building and achieving product-market use cases.

We may expect to see projects ranging from supply chain, identity, transparency, and governance proving the true value of blockchain. Several prominent blockchain projects will significantly raise its visibility and if delivering as promised it will positively influence corporate interest in this technology.

As a result we will see a wave of widespread and compelling specific use cases and real applications coming into the market emerge in 2019 as corporates are looking to implement more focused blockchain applications.

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Carlo de Meijer

Economist and researcher

 

Ripple Report says Blockchain is reaching critical mass in global payments

| 15-11-2018 | Carlo de Meijer | treasuryXL

Recently Ripple launched its “Blockchain in Payments Report 2018”. Main finding of this Report was that global payments based on this technology is reaching critical mass this year. And on top of that organisations are already ‘looking to incorporate digital assets into payments flows’. I was wondering where these findings were based on, so this blog. But what is even more important, did they also tell the whole storey: i.e. what about the various challenges?

Blockchain and cross border payments

The Ripple report showed, a fast majority of respondents acknowledged that improvements in cross border payments can be made, especially in regards to the pre-funding system and real-time gross settlement (RTGS), and that may help expand business scope and sale.

According to Ripple, the consequence of this is, if they want RTGS for global payments ‘without any incremental costs’, the only way to achieve that is by using blockchain and digital assets to source liquidity.

Blockchain’s potential

Respondents did not only acknowledge that blockchain could bring improvements to cross border payments, they also attribute benefits such as speed and greater geographic access to this blockchain technology. Of these benefits speed ranked first (42%), followed by greater geographic access (40%), cost reduction (38%) and, improved transparency (36%).

Respondents in the financial and broker area show the strongest recognition of blockchain’s potential: 60% were very interested; followed by FinTech (47%); and, banking (46%). Based on the services provided remittance providers showed the strongest recognition of blockchain’s advantages (49%).

Nearing blockchain momentum

The findings in the Ripple Report clearly showed that blockchain is ‘moving from experiments to production’ in 2018. And acceptance of blockchain technology will accelerate in the coming five years.

There are various indicators for that. The activity of the so-called Early Majority, including innovators, early adopters and those that are running blockchain pilots or PoCs (totalling 45% of all respondents) are convincing signals that ‘we are nearing the tipping point for mass adoption of blockchain’, says the Report.

Another interesting finding is that while first movers (mostly large companies), thus those that already have started deploying blockchain technology in production as a way to survive in their markets, ‘ stand to lose most in the face of’ the smaller, more agile mid-market organisations that make of the largest part of Early Majority and Late Majority groups.

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Carlo de Meijer

Economist and researcher

 

Blockchain versus GDPR and who should adjust most

| 18-10-2018 | Carlo de Meijer | treasuryXL

It has now been more than four months since the European Union General Data Protection Regulation (hereafter GDPR) came into effect. This regulation aims to strengthen privacy and personal data protection in the EU, by giving private persons more control over their personal data. But it also offer a uniform set of regulations for businesses with customers in the EU region, with the risk of hefty fines in case of non-compliance.

This event however has caused a lot of concerns in the blockchain industry. At first glance some GDPR provisions seem in direct conflict with the fundamentals of blockchain technology, and may even be intrinsically incompatible with what the new European privacy rules seek to uphold. For blockchain the most controversial GDPR mandate is the “Right to be Forgotten”, giving individuals the right to request that their personal data be removed from a record. Because of its decentralised character with immutable blockchains, data however cannot be deleted. Blockchains are designed to last forever. That puts blockchain in direct opposition to the GDPR.

Main question is: Are there ways to be found so that GDPR and blockchain may co-exist? Can blockchain work properly in tandem with the new GDPR regulations without harming its fundamentals? And how should regulators react?

EU General Data protection Regulation (GDPR): what does it mandate?

The General Data Protection Regulation (GDPR) is a far-reaching privacy legislation that is designed to enhance the protection of personal data and give individuals in the EU greater control over their own data. The GDPR is requiring not only transparency into what companies will do with consumer data, but also mandating clear consent mechanisms to ensure that consumers understand what companies are sharing, with whom, and for what purpose. GDPR thereby regulates the collection, processing, transfer and retention of every EU citizen’s personal data, requiring companies to provide visibility and control to individuals, on demand. Non-compliance with GDPR can result in heavy fines.

GDPR however has a number of key provisions that could heavily impact blockchain.

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Carlo de Meijer

Economist and researcher

 

African countries open for blockchain acceptance

| 04-09-2018 | Carlo de Meijer | treasuryXL

Even though Africa did not get a lot of attention in the press when talking about blockchain and its acceptance on this continent for long, that is fundamentally changing. Did you know that last year African countries had the highest number of online searches for “blockchain” and “bitcoin” last year. This especially goes for Ghana and South Africa. And did you now that a growing number of blockchain events and conferences have been organised throughout the continent.

There are various developments on the African continent that indicate the growing interest for blockchain. We are seeing some impressive inroads on the use of blockchain in various African countries. In those countries local tech startups have taken up blockchain technology to counter many of the economic and political issues that exist within the continent today.

In this blog I will be diving somewhat deeper into why it may be important for Africa to use blockchain, what are the main use cases and what blockchain initiatives, experiments and projects have been launched both by governments, financial institutions and companies.

Why blockchain in Africa?

To date, blockchain adoption has been sporadic across Africa, but that is changing. Studies have found out that blockchain technology could solve a number of fundamental political and societal challenges facing Africa.

One of the main pulls of blockchain technology in Africa is that it is decentralized, and transparent, leading to many possible use cases based on combating corrupt political and voting systems. In South Africa (but also in other African countries), where corruption is undermining the image of Africa’s most advanced economy, blockchain could play an important role. By implementing blockchain’s “tamper-proof” record of transactions in both the public and private sectors, one could combat fraud and corruption across the whole region.

Blockchain technology through social media based models could also contribute to a more open and inclusive economy. This opportunity is particularly relevant for Africa, where a large portion of the population is excluded from the formal economy, because they can’t open a bank account, don’t have a birth certificate, passport, driver’s license, etc. Blockchain may help to overcome many of these challenges.

Foreign aid and charity donation do not (yet) reach its full potential. Less than 40% of charity money reaches the intended beneficiary in Africa. But also the use and distribution of medicines and food by the many NGOs is far from optimal. Using blockchain could make these streams much more transparent.

And there are many other economic and financial areas including agriculture, where African countries are behind Western countries, in which blockchain can help Africa accelerate into the future.

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Carlo de Meijer

Economist and researcher

 

Corda Enterprise blockchain platform: unlocking new opportunities

| 30-07-2018 | Carlo de Meijer | treasuryXL

Early this month R3 announced the launch of Corda Enterprise, a commercial version of its open-source Corda blockchain platform, which aims to help a wider range of business use blockchain in their sector. With the launch of Corda Enterprise, companies can now select a version of Corda that fits their unique needs – regardless of their industry, size and stage of development. It however took more than a year hard working, because of the various challenges, such as scale, security and privacy.

Corda Enterprise brings greater enterprise capabilities to the Corda platform. Built upon the existing Corda’s functionality, it is thereby enhancing availability and performance. These extra features may enhance security and make Corda Enterprise easier to scale. Next to the We.Trade platform for trade finance (see my recent blog: We.Trade on blockchain: yes we can), Corda Enterprise is the second commercially available blockchain platform for business, specifically optimised to “meet the demands of modern day businesses”, especially complex regulated institutions.

Why Corda Enterprise?

The whole idea of the original Corda platform (see my blog: R3CEV Corda Platform: the blockchain app store, 9 October 2017) was to enable businesses to transact directly and privately, reducing transaction costs and streamlining operations. Many large users however are facing technical, regulatory and compliance issues that prevent them from using blockchain internally at scale. Not all businesses can realise the full potential of blockchain because of technical constraints like their existing IT systems and complex infrastructures, as well as issues around privacy, scalability and interoperability between systems. R3 is therefore launching Corda Enterprise and has implemented additional functionalities so that every business can benefit.

 

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Carlo de Meijer

Economist and researcher

 

Blockchain for trade finance: A network business

| 19-06-2018 | Carlo de Meijer | TreasuryXL

Trade finance has become one of the top focus issues for blockchain technology use. The number of pilots and other trials that are looking into the opportunities of blockchain technology for trade finance and supply chain have dramatically increased in 2017 and intensified this year. The sheer complexity of trade finance is thereby reflected in the variety of potential solutions. Different parts of the ‘trade finance supply chain’ had their own blockchain initiative. A large number of these pilots however stopped or failed being too narrow in their set-up. These were mainly focused on certain – and limited – aspects of the trade finance chain.

The various parties who are involved in the trade finance and supply chain business however are increasingly becoming aware that stand-alone solutions are not the answer to the various challenges in the trade finance industry. The success of using blockchain in trade finance purposes stands or falls with networks effects and if it is adopted widely. They are increasingly convinced that as well as developing a platform and blockchain solution, a network must be in place that covers all the parties in the trade finance chain so that the full transaction can be completed on the blockchain.

As a result we have seen the upcoming of blockchain trade finance networks with exotic names like Batavia, Marco Polo, We.Trade and more are expected to follow. In this blog I want to go somewhat deeper in these various offerings.

Trade finance: a complex process

Trade finance is a complex process. Various parties from exporters, importers, banks, truckers, shippers, custom agents and regulators all require checks and verifications at various points along the chain. Each interlocking part of the chain depends on successful completion of the previous phase and on reliable information.

Banks thereby play a large role in the trade finance chain, notably in the supply of letters of credit and other financing mechanism. Letters of credit are the most widely used way of financing between importers and exporters, helping guarantee trade transactions. At the moment buyers and suppliers use a letter of credit typically concluded by physically transferring paper documents to underpin transactions. This process however creates a long paper trail and it may take between five and ten days to exchange documentation.

A network business

Trade finance is a network business. It is an activity that often involves multiple counterparties in various and far-away parts of the world. Creating a blockchain trade finance ecosystem that combines all the different stages of trade from production to end-delivery is a must. For blockchain trade finance platforms to work in an optimal way this means on-boarding other banks, regulators, customs and all parts of the trade cycle. This asks for the setting up of blockchain-enabled trade finance platforms or networks with common standards enabling interoperability.

“Of course we are closely monitoring initiatives among all the other consortia that we know about developing trade finance on blockchain and we are mindful of ensuring inter-operability where we can”. Hubert Benoot, Head of Trade KBC and chairman of We.Trade

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Carlo de Meijer

Economist and researcher

 

Hyperledger blockchain projects: from incubation to production-ready status

| 26-04-2018 | Carlo de Meijer |

Last year I wrote a blog on the Hyperledger project and what that could mean for blockchain acceptance (see my blog: Hyperledger Project: collaboration pays off, 9 April 2017). We are now almost a year later and I am wondering if they are meeting my expectations. “2017 was a milestone year for Hyperledger both for new members and for new technical breakthroughs. In 2017 we doubled our membership, gaining companies like American Express, Cisco, Daimler and Baidu, and we’re expecting more companies and organizations to join in 2018.” Brian Behlendorf, Executive Director, Hyperledger.

Many blockchain followers know the Hyperledger Fabric Framework. This is the most used one in the various trials worldwide. But in the meantime the Hyperledger community has developed a whole series of these projects and tools that are less familiar. The purpose of this blog is to get more insight into these offerings and how they are developing from the incubation to the real production-ready status.

But first of all a reminder!

The Hyperledger Project

The Hyperledger project that was launched end 2015, is the international blockchain consortium of companies and organizations hosted by the Linux Foundation. Their goal is to collectively build an open source platform for the development of blockchains. Hyperledger thereby aims to enable organizations to build robust, industry-specific applications, platforms and hardware systems to support their individual business transactions by creating enterprise grade, open source distributed ledger frameworks and code bases.

The project has attracted the attention of several large companies that were early adopters of distributed ledger technologies at that time. The consortium nearly doubled in size last year to reach almost 200 members. Today, more than 220 organizations now support the Hyperledger initiative, including leading companies in finance, banking, Internet of Things, supply chains, manufacturing and technology development.

Pros of the Hyperledger project

The Hyperledger project has a number of pros that distinct them from other blockchain consortia. First of all Hyperledger is open-source, offering a “neutral home” for incubating technology. They are developing codes as open-source and bringing enterprises together to share knowledge and experience. This may lead to much faster adoption and better solutions than if it is simply built in-house. Second, Hyperledger is not focusing on one area of appliance, but on universal use cases. The software developed at Hyperledger has been adopted in many industries including supply chain, healthcare, finance etc. But what is more important, the Hyperledger Fabric, one of the (considered) most mature, extensive, flexible and active developed frameworks, allows users to create private channels in public settings, enabling the security and privacy that is needed.

Umbrella strategy

Hyperledger operates under an “umbrella” strategy. It is set up as a specialized hub for blockchain projects that facilitates not only the development, but also the commercialization of enterprise-grade blockchain based projects. Hyperledger “incubates” and promotes blockchain technologies for business, including distributed ledgers, client libraries, graphical interfaces and smart contract engines.

This strategy nowadays encompasses a (growing) number of blockchain projects, including blockchain frameworks, in addition to a number of development tools. At the moment Hyperledger incubates nine business blockchain and distributed ledger technologies, of which five blockchain frameworks and three development tools. These are in various stages of development and cover unique blockchain applications.

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Carlo de Meijer

Economist and researcher

 

 

What future role for CSDs in blockchain post-trade environment?

| 05-04-2018 | Carlo de Meijer |

Blockchain technology enables real-time settlement finality in the securities world. This may mean the end of a number of players in the post trade area. For a long time, central securities depositories (CSDs), as intermediators in the post-trade processing chain, were expected to become obsolete. CSDs, but also other existing players in the post-trade environment, are however changing their mind on these new technologies and on their future position in the blockchain world. Increasing regulation, legacy systems and costs pressures, are drivers for CSDs to at least embrace some aspects of blockchain. They are increasingly considering them as enabler of more efficient processing of existing and new services, instead of a threat to their existence. It is interesting to see that some of these actors – who could be potentially big losers in a distributed ledger technology (DLT) or blockchain system – are open to innovation with blockchain and willing to invest in DLT. Last January SWIFT and seven CSDs worldwide agreed on a Memorandum of Understanding to explore the use of blockchain technology in the post trade process esp. e-proxy voting.

Where do CSDs stand now?

Complex and fragmented post-trade infrastructure

The current post-trade infrastructure is highly complex and fragmented, crowded with intermediaries, and dealing with outdated legacy systems and technologies. Much of the complexity and fragmentation of the post-trade world is the result of the various participants (custodians, issuers, registrars, CSDs) holding their own, separate ledgers in order to carry out the processes. Consequently, they spend much time and resources on reconciliation and risk management, in order to ensure that transactions can be (and are) appropriately carried out. The completion of securities transactions is as a result a costly and risky business. This has important consequences, efficiency-wise.

Situated at the end of the post-trading process, CSDs are systemically important intermediaries. In the post-trade process the CSDs play a special role both as a depository, involving the legal safekeeping and maintenance of securities in a ‘central depository’ on behalf of custodians, in materialised or dematerialised form; and for the, involving the issuance of further securities by issuers, and their onboarding onto CSDs’ platforms.

Is there a future for CSDs in a disruptive blockchain world?

Blockchain: disruption in securities post-trade

DLT has the potential to heavily disrupt existing post-trade processes in financial services, impacting the business model of a number of intermediaries. This raises significant questions for the present actors in the post-trade world as their role may change dramatically or even disappear. For some actors in the post-trade world, DLT could completely replace their businesses or even make them obsolete. And others should question what will be their added-value within future DLT services.

With blockchain, that is linking trading partners directly, everything will be in place in the ledger at the time of the transaction. Institutions will no longer have to maintain their own databases in the future with DLT, as there will be only one database for all participants in the transaction.

With DLT, all of the complex systems and processes to transfer cash and equities from one account to another are not required. Everything can be embedded into the blockchain. Buyers and sellers can match transactions in seconds and all parties are aware a transaction has been done. This will heavily ease the reconciliation process. Blockchain could ultimately become the standard for financial transactions and real-time settlements, increasing transparency and efficiency in a highly fragmented industry.

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Carlo de Meijer

Economist and researcher

 

Ripple is making blockchain waves

| 23-03-2018 | Carlo de Meijer |

Almost a year ago I wrote my blog “Blockchain and the Ripple effect: did it Ripple?”. Now twelve months later we may conclude it did. And even more than that. Ripple is making many waves. A lot happened both in broadening their offerings and in enlarging their network. A growing number of banks and payment providers, increasingly join RippleNet, Ripple’s decentralized global network, to “process cross-border payments efficiently in real time with end-to-end tracking and certainty”. By using the growing set of Ripple solutions they are able to expand payments offerings into new markets that are otherwise too difficult or too expensive to reach. The focus of Ripple therefor has especially moved towards emerging markets.

BROADENING RIPPLE OFFERINGS

Ripple was set up in 2012 to create a streamlined, decentralized global payments system named RippleNet, using technology inspired by the blockchain, to record transactions between banks. RippleNet is an enterprise-grade blockchain platform, that nowadays has over 100-member banks and financial institutions. These partners can use all the Ripple offerings.

Solutions

Ripple makes software products based on blockchain technology and sell them to banks, payment providers and others to be used on RippleNet. These are aimed to make cross border payments truly efficient for these players and their customers. Next to their digital asset XRP, the XRP Ledger, and xCurrent, that helps banks settle transactions, Ripple has added a number of new services/offerings to the platform including xRapid and xVia. This in order to attract more clients to enter RippleNet. Ripple is now taking the next step to help build the Internet of Value (IoV), by establishing an Infrastructure Innovation Initiative.

a. XRP: digital asset

From the outset, XRP, Ripple’s digital asset was expected to be an important part of Ripple’s decentralised payment system. Ripple uses its own XRP cryptocurrency as a payment method to make it easier for banks to move money internationally. Banks and payment providers can use Ripple’s digital asset XRP to further reduce their costs and access new markets. One rationale for using XRP is that unlike Bitcoin, the token has one narrowly defined (payments method!) but clearly useful purpose: to help banks move cash faster and more cheaply, especially across borders. The token could be used as a kind bridge currency between fiat currencies. For example South African rands in Johannesburg could become XRP, which could then be turned into baht in Thailand. That could help banks avoid the time consuming and expense of tying up money in different currencies in accounts at other banks.

b. xCurrent: processing payments

RippleNet is powered by xCurrent, for payment processing. xCurrent is the new name of Ripple’s existing enterprise software solution that enables banks to instantly settle cross-border payments with end-to-end tracking (and bidirectional messaging across RippleNet). It provides real-time messaging, clearing and settlement of financial transactions. The xCurrent messaging platform however does not involve XRP. It includes a Rulebook developed in partnership with the RippleNet Advisory Board to standardise all transactions across the network. That ensures operational consistency and legal clarity for every transaction. The Interledger Protocol (ILP) is the backbone of the solution and makes it possible for instant payments to be sent across a variety of different networks.

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Carlo de Meijer

Economist and researcher

 

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.

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Carlo de Meijer

Economist and researcher