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The conundrum of cryptocurrencies

Arthur Piper, IBA Technology CorrespondentFriday 16 July 2021

​​​​​​​The debate about cryptocurrencies, and how they’re regulated, continues to be volatile. While some jurisdictions continue to clamp down on their use, others are taking a more liberal approach.

It seems nobody can make up their minds about cryptocurrencies – digital money that is protected from theft or fraud by deep encryption. The Tesla and SpaceX entrepreneur Elon Musk, for instance, has had a few changes of heart when it comes to the planet’s highest-profile cryptocurrency – Bitcoin.

In February, Musk announced that Tesla had bought $1.5bn worth of Bitcoin and would allow customers to use them to buy the business’ ground-breaking electric vehicles. In May, he changed his mind. Bitcoin are too energy-dependent on fossil fuels to mine, he explained, as he pulled the plug on the arrangement. In June, he signalled another rethink, stating that if cryptocurrency mining becomes greener, Tesla could resume allowing transactions in Bitcoin.

Musk is not alone in his thinking about Bitcoin, Dogecoin and Ether, to name a few of the better-known cryptocurrencies. On the one hand, they democratise finance by essentially crowdfunding money based on its popularity, while on the other they are anonymous. Because transactions are encrypted, the money transferred is untraceable to actual people. That makes cryptocurrencies popular among hackers, criminals and others who operate between the light and dark webs. It seems that attitudes to cryptocurrencies are as volatile as the price of the currencies themselves.

A messy situation

While many regulators do not like cryptocurrencies, cracking down on them is difficult. In a similar way to the days of unrestricted music file-sharing through platforms such as The Pirate Bay, closing an operator down can take months or years and is seldom effective. Punters can often continue to log in to their accounts in countries where the platform is still open.

Binance is a case in point. The cryptocurrency platform was set up by Canadian-Chinese entrepreneur Changpeng Zhao in July 2017. Chinese regulators cracked down on the business, forcing it to move to Japan in 2018. In June, Japan’s Financial Services Agency warned Binance for a second time that it was operating without a licence. And as the business fragmented to places as far afield as Malta, the UK and the US, regulators – such as the UK’s Financial Conduct Authority, who stated in June that Binance cannot undertake regulated activity in the country – have kept up the pressure.

Despite all this, the trading continues through what is essentially a country-less company. The platform did announce in early July that it will double its compliance staff, perhaps in reaction to the regulatory pressure.

Regulatory attitudes have naturally impacted on the legality of Bitcoin – the best known and perhaps most trusted cryptocurrency – around the globe. The situation is, at best, a mess. Currently, in most countries Bitcoin is legal, but in many jurisdictions banks have banned or restricted its use.

Regulatory attitudes have naturally impacted on the legality of Bitcoin around the globe. The situation is, at best, a mess

In the UK, for example, Morten Friis, Chairman of the Board Risk Committee at NatWest, announced in April that the bank was taking a ‘cautious approach’ because of what it sees as the high risks to customers – and by implication the bank – when dealing in cryptocurrency.

‘We have no appetite for dealing with customers, whether taking them on as new clients or having an ongoing relationship with people, whose main business is backed by an exchange for cryptocurrencies, or otherwise transacting in cryptocurrencies as their main activity’, he told shareholders.

Some commentators have assessed this as the bank saying it could turn away clients who are hoping to accept cryptocurrency payments. But the bank’s position seems more nuanced than that – it’s more of a warning that if those types of payments become too large a portion of a company’s turnover, it has the right to pull the plug. Like Musk, the bank wants to keep the door open but in ways that they can control.

Many law firms accept cryptocurrencies – a practice that began in around 2013. For those with clients at the cutting edge of the tech industry, it makes sense to do so. But not many customers use those facilities – and there are practical issues for both customers and law firms who do use cryptocurrency payments.

Many law firms accept cryptocurrencies. For those with clients at the cutting edge of the tech industry, it makes sense to do so

For example, clients could cash out too early. ‘You don’t want to be remembered as the guy who paid his $10,000 legal bill in Ether that would be worth $200,000 later’, says DLA Piper partner Mark Radcliffe. And while legal firms may benefit from price hikes, they could also suffer a steep drop in fees if a currency crashes.

So far, El Salvador has become the first country to make a cryptocurrency legal tender. When the country’s Congress approved President Nayib Bukele's initiative to legalise Bitcoin, Bukele said it would make it easier for ex-pats to repatriate money. The legislation also legalised the US dollar.

According to the BBC, 20 per cent (about £2.8bn) of El Salvador’s gross domestic product comes from money sent home by the two million workers living outside the country. ‘It will bring financial inclusion, investment, tourism, innovation and economic development for our country’, Bukele said in a tweet.

Opening banking

Here, it seems, is the nub of the problem. As noted in the June/July 2020 edition of Global Insight (see Facebook: the new face of ‘stablecoin’?), the state of banking regulation has left billions of people without access to an account. When Facebook tried to remedy the issue with its stablecoin – a cryptocurrency backed with real money, originally called Libra, and which is now known as Diem – the regulators did not approve. Banks’ ‘know your customer’ rules demand that people provide information about their lives that not everyone is in a position to produce. Having a phone with a Facebook account could have remedied that.

Governments, including in China and the UK, are looking to develop their own digital currencies. Such stablecoins may introduce a little more sanity into the market. But if they do not provide the flexibility and anonymity that users demand, the volatile cryptocurrency debate is likely to continue into the foreseeable future.

Arthur Piper is a freelance journalist. He can be contacted at arthur@sdw.co.uk

Header pic: Shutterstock.com/lucadp