This month (October 2019), the EU announced it would accelerate the pace of regulation on crypto assets and virtual currencies. The global approach to this topic has been a story of indifference, where wait-and-see has been the prescribed treatment for the most part because:
A) Cryptocurrencies are viewed as a shell game played between participants representing minor fringe elements in society; and
B) A comprehensive solution would be difficult to enforce, requiring coordinated international action and possible encroachment on personal freedoms, which are nonuniform across jurisdictions.
This changed when Facebook stepped into the picture with Libra. A pan-national institution with 2.4 billion active users has the potential to shake up international finances if its consortium of top global companies put their weight behind an alternative payment system.
By now, most people understand blockchain is the technology behind ‘programmable money,’ but the underlying value of this currency had mostly eluded proponents until 2014. When a new type of coin gained traction by pegging its value to another asset, the stablecoin was born (again). Initially used by crypto traders as a tool for escaping price volatility, organizations like Facebook began to realize this technology could, in theory, reduce payment frictions, thereby growing the company’s market reach and cementing its place as the dominant conduit for global digital commerce.
No longer relegated to the dingy, dank corners of the Internet, cryptocurrencies have once again been thrust into the limelight through Facebook’s involvement with stablecoins. With EU regulations on the horizon, what does the future hold for the industry?
On the last day of 2018, I predicted this year would be the watershed moment for stablecoins (https://www.facebook.com/
When Facebook’s Libra was announced in June, I first pointed to the difficulties of maintaining a basket of currencies (https://www.facebook.com/
I also called it that PayPal, Stripe, MasterCard, and Visa would question their roles in Calibra, an organization that is at odds with their own core businesses (https://www.coindesk.com/
1) Should Calibra take off, the organization would be expected to pursue extensive banking relationships, further blurring the lines between social media, commerce, and banking.
2) Generally, on- and off-ramps would be expected to comply with KYC and AML regulations, with permissioned networks and platforms being required to report on suspicious activity, while public networks would be monitored by dedicated enforcement agencies.
3) Trading and brokerage platforms would comply with tax reporting requirements. They will be licensed with stricter operating standards being applied to weed out market manipulation, possibly impacting prices in general.
4) Trading profits and capital gains from crypto assets will trigger taxable events. The loophole with crypto-crypto exchanges will be closed.
5) Public coin offerings might be classified as securities. Those that escape this treatment will be strictly licensed. Cross-border ICOs might remain in the regulatory grey area with enforcement being individually pursued by each jurisdiction.
6) ‘DeFi’ platforms will be tested in court. Those with an element of promised returns will be targeted first. A sudden market downturn could catalyze regulatory scrutiny.
7) In the long run, payment operators will be impacted with cross-border fees declining drastically. Developing economies will benefit the most because industrialized economies, such as the EU, already have efficient systems in place. Nevertheless, healthy competition is expected to bring down payment fees across the board.
8) The world’s unbanked and under-banked will have more freedom to access global markets. Cheap peer-to-peer credit flowing in from mature economies will catalyze a boom in economic activity, commodity inflation, and real estate prices.
9) With more regulations, incumbent institutions are expected to join in the fray. This may lead to a string of important acquisitions and the demise of many startups. Industry consolidation is an inescapable outcome when the stakes are this high.
As a payment technology, blockchain stands to disintermediate financial middlemen starting with payment processors, but only if it can play nicely with everyone else.
Author: Robert Vong
As a BlockFin Asia co-founder, Robert organize Vietnam’s first blockchain conference in 2016 to advocate for closer collaboration between industry and regulators. In addition to advising startups, he is helping in the organization of Bitcoin Saigon Bitcoin Saigon, the original home of the city’s Bitcoin, blockchain and Fintech community. In 2014, he played an early part in voicing industry concerns about cryptocurrency double taxation in Australia.
Prior to this, Robert was a buyside equity research analyst in Melbourne and New York City. He has an MBA from New York University and an engineering degree from RMIT University.