COLUMN: Cryptocurrencies – regulators at a crossroads

Wild swings in the value of cryptocurrencies and a lack of regulatory certainty on how to treat them have failed to deter younger investors from buying coins in their billions.

There is no generally recognised definition of cryptocurrencies worldwide, yet they are valued at approximately $1.6 trillion, with 10,000 new coins created this year alone. The past four years have seen cryptocurrencies gather considerable, albeit unfettered, strength. Part of the problem is that regulatory oversight of cryptocurrencies is fragmented and ineffective. Crypto promoters have been able to advertise products without a licence — something that would amount to criminal behaviour if they were traditional financial products. Governments are now beginning to take action, however, with China’s government keen to reduce bitcoin mining and trading, and U.S. and Asian regulators preparing to take a more active role.

U.S. measures

In the United States, the Office of the Comptroller of Currency, the Federal Reserve and the Federal Deposit Insurance Corporation are working together to map out a regulatory framework. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have both warned about the increasing popularity of the crypto market. U.S. regulators are aware that the new technology has outgrown regulatory policy but have dragged their feet in terms of introducing parameters, despite the Financial Stability Board having warned regulators in 2018 that they needed to get to grips with the crypto market.

China changes course

China also sees problems on the horizon. Crypto mining is a big business in China, accounting for more than half the world’s crypto currency supply. Last week Beijing announced plans to reduce crypto mining and end operations. The high-powered computers required to “mine” bitcoin are reliant on fossil fuel such as coal, raising concerns about climate change goals. Bitcoin mining has led to a surge in elicit coal extraction, endangering lives. The annual energy consumption of China’s bitcoin industry almost exceeds the total annual energy consumption levels of Italy, Chile and Saudi Arabia combined.

The recent regulatory changes in China accelerated a worldwide sell-off of bitcoin assets. More than $400 billion has exited the cryptocurrency market and there has been a 30% decline in crypto asset values, one of the most rapid declines ever seen in the crypto industry. These events have illustrated just how volatile the industry can be.

Disentangling crypto mining in China might not be that easy, however, especially during a period of post-pandemic recovery. Some areas of China, such as Xinjiang and Inner Mongolia, have been favourite destinations for developing crypto mining. The regulatory uncertainty about crypto mining has meant that shares in this market have been declining for some time, and investors have been looking for opportunities elsewhere. Other countries have been only too willing to take China’s place, and mining activities may well shift to North America, Kazakhstan and Canada, where energy sources are cheaper and more abundant, and regulations clearer and easier to predict. For example, Kazakhstan clarified its crypto mining laws last year and has already commenced talks with Chinese bitcoin mining companies to acquire assets.

New generation of investors

A new generation of young investors has emerged. They obtain information from the internet and view cryptocurrency trading as a speculative income tool through which “easy” money can be made. Many view cryptocurrency as a legitimate alternative to more traditional investment methods, and believe it is here to stay. Cautionary warnings from financial regulators appear largely to have been ignored. The internet is awash with “get rich” bitcoin advice which suggests that $100 can be turned into $1million in just weeks. In some instances, significant falls in value appear to have been shrugged off as hitches in otherwise successful ventures. Some young players are lured into what are known in the finance sector as “pump and dump” schemes.

Elon Musk, the founder of Tesla, added a degree of respectability to the crypto market last year, announcing that his company had invested $1.5 billion in cryptocurrency and was prepared to accept payment in cryptocurrency. His enthusiasm appears to have slowed somewhat recently, however, and he has said that coin mining contributes to climate pollution.

Regulators at a crossroads

Financial regulators have been very slow to develop a coordinated international approach to cryptocurrencies. The Financial Stability Board has spent the past four years urging them to improve risk assessments and to develop a consistent framework to replace divergent approaches in different jurisdictions.

Cryptocurrencies continue to be used for illicit activities involving money laundering, prompting U.S. and, more recently, Hong Kong regulators to amend their AML laws to include crypto-assets. There is also concern that cryptocurrencies are being used to evade taxes, bypass capital controls and circumvent international sanctions.

Cryptocurrencies are unlikely to disappear, and central banks have their work cut out keeping pace with crypto innovators. An international, coordinated approach is needed to ensure consist regulatory standards, avoid regulatory arbitrage and ensure an international framework which at least provides sufficient warnings to investors. Otherwise, the rise of unregulated coins will only intensify. As coins continue to proliferate, will the youth of today have sufficient savings once the crypto craze has ended?

Niall Coburn is the Regulatory Intelligence Expert at Thomson Reuters in the Asia-Pacific region and a Barrister at the Queensland Bar.

As an expert on regulatory issues at Thomson Reuters, Niall writes articles, white papers, gives presentations in the region and liaises with the banking industry internationally concerning regulatory developments in the Asia-Pacific region.

Prior to joining Thomson Reuters, he was the regional Managing Director at FTI consulting, responsible for leading its Regulatory and Forensic Investigation Practice in Australia. FTI is a global consulting firm listed on the New York Stock Exchange with 500 offices worldwide.

Niall was also a Senior Lawyer and Specialist Adviser at the Australian Securities and Investments Commission. In this role he led high-profile investigations into complex corporate crime cases. He has also worked internationally, being part of a team that created the regulatory structure for the Dubai International Financial Centre (DIFC).

Niall was appointed Director of Enforcement at the DIFC in 2003 and worked with international law enforcement agencies to combat financial crime.

Niall has also worked in the Asia-Pacific region in his own consultancy, Coburn Intelligence in China and Hong Kong, investigating major frauds and misleading conduct in the investment industry.

Niall was awarded an Australia Day Honour from the Commonwealth Government for his work leading major criminal investigations at ASIC. He is a Barrister of the High Court of Australia and a member of the Queensland Bar Association and the International Bar Association.

 

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