Crypto-currencies are causing wide reflection about the future of financial services, among both market participants and regulators, writes Richard Metcalfe, Head of Regulatory Affairs, WFE.
So, when the WFE moderated a conference panel on the topic of exchanges, regulation and crypto-currencies in London in November, there were plenty of questions to address. The UK authorities were certainly out in force, announcing the outcome of a crypto task force, which would see much closer scrutiny of the phenomenon.
While the City & Financial Global conference was strictly speaking about currencies, it inevitably spilled over into questions about other forms of digital asset, including the rapidly emerging trend of tokenisation – rendering assets such as shares in digital form. And there was the now customary issue of whether the truly interesting bit was not so much the latest coin and its related platform but the underlying blockchain technology – the much vaunted yet little implemented mutually distributed ledger.
Still currencies were front and centre. And platforms said they welcomed regulation. But it quickly became clear that this does not necessarily mean the same as regulation in the world of equity or bonds. For one thing, even ‘real’, fiat currencies are not directly regulated, at least where spot transactions are concerned. So, there is no ready template for crypto-currencies, which themselves do not even pass the usual tests for a currency: being a store of value or a unit of account. As a show of hands demonstrated (and this at a conference with plenty of open crypto-enthusiasts), they are barely used as a means of payment, even if first converted to a regular currency.
Against this confused backdrop, a theme that emerged was that, ‘If it walked like duck and looked like a duck, then it should be treated like a duck… and regulated as such’. In other words, the more crypto-currencies or other virtual assets were used like established forms of fund-raising and asset, the more regulation could and should subject them to the same strictures.
But the problems are rather more fundamental. The crypto-currency industry is emerging from a period when fraud, market manipulation and bubbles have loomed too large. Questions were asked about the risks to sanctions regimes. Regulators are taking note of the evolution and uniformly proclaiming support for innovation. Equally, though, they are alert to risks of consumer detriment, market integrity (particularly price discovery) and even systemic issues (if a run on a crypto-currency proves significant enough).
The evangelists argue that bitcoin and the rest are The Future; the millennial way of doing things; that regulators and the press do not understand them. It all sounds very derivatives circa 2000. But the platforms did speak eloquently of forward-looking national regulatory regimes (Malta and Gibraltar as well as Switzerland) and of the revolution in micro-payments in Africa.
The FCA appears unmoved. It announced plans to consult – before the end of 2018 – on the regulatory perimeter. It has already warned that derivatives on crypto-currencies are caught by MiFID, much as the US authorities have. Which leaves a big-picture question about international standards and coherence. The international standard setting bodies in Basel including the FSB are watching, particularly the interaction between cryptos and the banking system, but are not planning on stepping in yet. The reality, therefore, is likely to be a patchwork for some time to come. In this world, it seems traditional exchanges have a huge opportunity to lend credibility to the crypto field.