Section 2: UPDATE ON THE REGULATORY POLICIES
GENERAL APPROACHES BY GOVERNMENTS
Global evolution of official positions
The theoretic positions taken by regulators and officials are not drastically evolving in 2019. The embryos of formal laws and regulations come to a realization, with bills being passed that confirm the overall philosophy expressed in our previous reviews.
Finance ministers around the world have again voiced concerns and negative views of Bitcoin, as its price soared again in June. This was expected by many, and as yet, there have not been any negative consequences.
If anything, what we observe is a difficulty for regulators to classify the crypto assets they are dealing with properly.
The intergovernmental Financial Action Task Force (FATF) is issuing dedicated guidelines to be followed by its member nations, in terms of requirements imposed on cryptocurrency exchanges regarding KYC. Crypto asset custodians will be obliged to obtain identification information before allowing any transactions to occur.
STATUS REGARDING OFFICIAL INITIATIVES
TO PASS FIAT ON DLT
We can safely say that most, if not all, central bankers are currently studying the opportunity of issuing fiat money as blockchain-based units of account. The questions that remain unanswered include:
Will issued central bank money be available only to commercial banks, or will central banks go a step further and make it open to the general public?
Permissioned vs. public DLT: we can bet it will almost always be permissioned blockchains.
Which technology to use?
In practice, these studies are likely to be conducted in relative secrecy, as we have not seen any recent press releases discussing this, or claiming that there are plans to move forward. China is the only exception in this respect; there are consistent rumors of a team that is speeding up the release of central bank digital money on a blockchain, which seems to confirm that work is being conducted in that direction (see Figure 3).
CRYPTO-ASSETS IMPACTS ON WORLD MONETARY SYSTEM
Cryptocurrencies will have a significant effect on macroeconomics but has the potential to go even beyond that in reshaping the world’s monetary system.
We have already had the opportunity to touch on this, primarily through a dedicated article: the current fiat system was inherited from postBretton-Woods agreements, unilaterally imposed by the USA, and still in effect today, with the United States dollar playing an unchallenged role – until now. During press reviews, we continuously run into countries and populations relying on cryptocurrencies to circumvent the position of the USD and the consequences it has in terms of the USA dictating political sanctions or using its power to advance their interests. So, it is interesting to reiterate elements in an orderly fashion.
Countries under US sanctions, such as Venezuela and Iran, have been trying to create some tokenized assets to create financial margin outside of the global USD-dominated system. Similarly, North Korea is hacking cryptos to gain some currency it can use to obtain foreign cash.
In those countries and other failed states, populations are turning to cryptocurrencies as alternatives to their official fiat currencies, and the USD.
Federal Reserve policies on the USD are decided unilaterally by the USA, but impact all countries on the planet, as most international trade, starting with energy, is priced in USD. Without a doubt, this is not an acceptable longterm situation.
The extraterritoriality of US laws related to USD transactions is driving non-US companies, especially European companies, to respond to abusive US legal actions. The loss of sovereignty here is such that the pressure to use an alternative to the USD is vast, and therefore the appetite for tokenized gold, for instance, is likely to grow.
REGULATION OF INITIAL CRYPTO-ASSETS OFFERINGS
Regulating public offerings of crypto assets has crystalized with the fight against the American SEC over whether or not to consider a given token as a security. The truth is that even before considering what requirements are to be imposed on issuers (and buyers) of crypto assets, the difficulty is inappropriately categorizing them to be capable of defining sound rules, and then consistently applying them.
The fact is that currently, most regulators are faced with a vast range of different crypto assets, without being sure of how to classify them. The variety of countries and philosophies in characterizing securities is likely to add to the mess when different jurisdictions will decide to classify tokenized gold as a commodity or as foreign exchange. Financial authorities are currently struggling to make up their minds on even simple cases such as Bitcoin, so the blur of utility tokens, even when defined in whitepapers (which is not always the case…), is likely to take time to be resolved.
In that sense, our classification, which includes five dimensions of characteristics, could assist regulators by building clusters of crypto-assets according to their relevant features, or by enunciating requirements related to each of the aspects.
To finish, the following news in the field of official classification of crypto assets can be reported: the SEC has filed a complaint about a Canadian company, Kik, which raised 85M euros in a 2017 ICO. The American watchdog is arguing that Kik presented the fundraising as a means to save itself from the draught of venture capital. The judicial fight is on, with Kik claiming that the token was intended to be used on its platform. So, here we have a perfect example of the blur experienced by many projects that obtained lucrative funding by issuing an asset intended to have future value on a platform (including Binance-like tokens). The Canadian regulator has not taken a position, but the judgment of the US court may have significant
repercussions, whichever way it turns out.
One curious point is to observe the growing number of ATM machines offering deposits in Bitcoins. US and Canada are leading the peer group (Figure 4).
KYC / AML / CFT
Privacy / confidential cryptocurrencies regulations
An exciting event occurred in the UK recently that says a lot: ZCash owners on the Coinbase exchange platform had a choice imposed on them to “convert, send, or be liquidated”. That is, British citizens are being prevented from holding ZCash on exchange platforms. We can bet we will see much more of this happening.
Legacy bank management
This section is an appropriate place to share an extraordinary experience of a relative of ours in France. This will illustrate perfectly how the banking system has been going too far with KYC and controls, but it tells us a lot more.
One of our relatives wanted to send some money to a major crypto exchange. It was only a small amount (a few thousand) that would routinely be transacted without much checking by the bank, that is, not ringing any “big movement bell” on the banker’s desk. But, in this case, the transfer took weeks, and then our relative received a letter in the post from his branch advisor, informing him that the money had been blocked until he completed and signed a form stating he had been warned and discouraged by the bank from acquiring cryptocurrencies. He was also required to declare that, under no circumstances explicitly, would he place responsibility on the bank. A press release from the AMF (French Financial Markets Authority) dated two years prior was attached, warning against price volatility and that there was no recourse attached to cryptocurrencies.
Our relative went berserk and turned to us to check if this was an isolated case. He could not accept (and who would?) that some company would judge or condemn what he does with his money, and in this case, even take steps to prevent him from disposing of his wealth as he pleased. We were able to quickly find other angry customers on social media complaining of similar situations. It appears that Crédit Agricole is systematically discouraging all its clients. Clients that transfer money to Kraken, Coinbase, or other exchanges are consistently threatened and inconvenienced with deliberate complications.
So, what does this tell us? Several things, some of which are quite profound. We have already discussed most of them, but they relate in an interesting way, which we will outline here.
First, let’s recap: banks routinely perform scans and systematic checks on all money that they transact on behalf of their clients. This is a concern in terms of invasion of privacy. Very constraining legislation is being enacted on this matter, especially GDPR in Europe, to prevent companies from inappropriately handling the data of citizens. We can only observe that these general principles imposed by the state do not apply to the state itself. State officials believe that they have the right to monitor very private data related to what people buy and invest in, and how they deal with their wealth. It is difficult to accept this from the states - and the debate has only just begun.
So, it is a fact that today, as an individual or a company, the state requires that all your financial dealings are monitored and thoroughly checked (by robots, then humans) when a significant transaction occurs. The justification for this is to fight fraud – all sorts of fraud: corruption (the blurred limits of which are subject to broad interpretation), terrorist financing (the definition of which will often depend on which government you ask), and tax evasion (notwithstanding the iniquity or confiscatory characteristics of specific tax systems). So, when Crédit Agricole becomes intrusive and extremely conservative, as they do, they act as a delegate of the state, or, if you prefer, in a manner that reduces their own risk of being accused of negligence by the state, should a fraud incur. So, it appears that public acceptance of state control in such a detailed and intrusive manner is seen as a trade-off, as they expect that, as a whole, their life will be better off with the prevention of terrorism, corruption, tax evasion, etc.
This raises two questions: 1) Is this trade-off balanced by the status-quo, that is, does the control achieve its aims?; and 2) is there no alternative to this trade-off?
Answering the first question is touchy. Measuring the benefits of a policy without knowing how things will turn out if it were not implemented, is almost impossible. Terrorism has not been defeated, and it is unclear whether tight financial controls are preventing their activities. What is sure, on the other hand, is the substantial cost to society that financial control incurs – paying hundreds of thousands, maybe even millions of employees to fulfill this incredibly dull, non-productive, harassing task. And at the cost of hundreds of billions of euros annually – look at the turnover of audit companies. This is an evident and inevitable cost that would have to be similar to the price of a higher fraud level. So, to us, the answer to this question is not so clear.
But answering the second question is even more impressive. If we believe that the privacy of the financial behavior of individuals is a goal in itself, there are ways to achieve it. Preventing tax evasion can be done by taking a cut of people’s income when it is paid, as is done already in many countries. An appropriate method to achieve this can be devised and implemented, and then, if individuals own some money, it is theirs, and nobody should be watching what they do with it from a taxation perspective. That would be far easier and make more sense, philosophically. Preventing terrorism is a matter of avoiding the sale of dangerous material; the control of weapons and surveillance of hazardous activists is far more efficient. Financial investigations could be authorized for such monitored individuals; for the rest, leaving people alone is a case to be defended. As for corruption, enforcement of some processes can do the job.
We should never forget that Bitcoin was invented specifically to enable people to short-cut the controls of large corporations, and more or less, legit official bodies. This was the clear intention of the “peer-to-peer cash” system. What remains unclear is what Satoshi would say about the implementation of anonymity into DLT protocols, because a pseudonymous environment allows for enhanced and easy traceability of crypto asset movements – they are visible to everyone.
It is necessary to have superior knowledge to be able to associate an account with an individual, but the NSA, FBI, and CIA have proved that it is astonishingly easy to do, so one should assume that this is the norm. One could even decide to make it official and transparent; that would not defeat the purpose of peer-to-peer money because nobody would oppose the movement of funds if they can see it happening. But one is tempted to believe that Satoshi, himself anonymous among the anonymous, would take the position, as we do, that payment data should be kept private and untraceable. So, it would seem that Bitcoin falls short of the goal that Satoshi set and that MimbleWimble, ZKP implementations, and Monero are the crypto assets that are delivering on the promise. They are the ones that are going to be fiercely fought by states and regulators all over the world.
Back to Crédit Agricole, on social networks, their customers and random commentators cannot find words strong enough to condemn the bank’s behavior. What shocks most people, in this case, is the actual roadblock put in place by the financial institution to prevent people from disposing of their own funds as they please, whether to go to a restaurant, purchase a plane ticket to a dodgy country, buy cryptocurrency, or to make a donation to a controversial political party. This censorship by powerful institutions is not acceptable – this must be said, and dissidents should proclaim it loudly. When one looks at Crédit Agricole’s warnings and precautions, it is easy to think: “Guys, you have no understanding of what is going on here.” Bitcoin came along precisely to make sure that this sort of situation could be overcome by anybody.
This relates to the usage of money, but there are also concerns regarding investigations by financial institutions into the origin of funds. Today you are systematically asked to explain, at length, where your money comes from when you want to transfer funds from one place to another – before the people that are keeping your money comply with your request; this is insane.
To make things clear, we pay these bankers to hold our savings. They run a profitable business by providing this service. Usually, when the money is deposited, there are few, if any, questions asked. The least you can expect is that when you need your money, you will have access to it. So, when the system does not operate this way, clients can’t understand why banks don’t merely instruct their IT systems to subtract some numbers from an account and add it to another. The bank gets paid for doing this, sometimes a lot, so they should execute, as instructed.
HSBC is also reported to be blocking all transactions related to cryptocurrencies, so this story is indeed not isolated. So, it appears that, when it comes to crypto assets, banks do not know what to do or how to behave. There is probably an element of being afraid of the unknown – the pressure of potentially being disrupted or becoming obsolete. Preventing people from reaching out to the new financial system highlights that banks are in fear of losing their business position. Commercial banks are becoming paranoid – just an observation.
In conclusion, when looking at this situation, this is no wonder that Bitcoin has so many enthusiasts. One could say that cryptocurrencies appeared just in time to enable people to be their banks, and manage their wealth as they please. And to reiterate, if regulators have the will, some other means of control can be found to fight money laundering, terrorism, and corruption, which will have nothing to do with monitoring all financial flux on the planet.
As we predicted, DLT-based solutions are beginning to appear in an attempt to ease the systemic KYC challanges. SecureKey Technologies have created a mobile app, Verified.Me, which has a DLT backbone based on Hyperledger Fabric. It appears to be working, with users storing their data on the blockchain, and granting access as they please.