First, if you’re a libertarian then think again. The state is going to crackdown. From ZDNet:
Cybercriminals managed to launder at least $8.6 billion worth of cryptocurrency in 2021, according to a new report from blockchain analytics company Chainalysis. The company said the $8.6 billion represents a 30% increase in money laundering activity over 2020 but is dwarfed by 2019, which saw at least $10.9 billion laundered. Chainalysis said cybercriminals had laundered $33 billion worth of cryptocurrency since 2017.
There is no way that the authorities will let cybercrime grow through cryptocurrencies without thrying to regulate such currencies. That’s why the Financial Stability Board released a paper last week about the threat to the global financial system of such currencies.
Crypto-assets markets are fast evolving and could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system. The rapid evolution and international nature of these markets also raise the potential for regulatory gaps, fragmentation or arbitrage. Although the extent and nature of use of crypto-assets varies somewhat across jurisdictions, financial stability risks could rapidly escalate, underscoring the need for timely and pre-emptive evaluation of possible policy responses.
So, what are you going to do about it?
Considering the crypto asset landscape, areas for ongoing vigilance include:
- Potential increasing bank sector involvement in the crypto-asset eco-system, especially where activities give rise to balance sheet exposure to crypto-assets, not captured by (or not in compliance with) appropriate regulatory treatment.
- Institutional investors increasing their exposures to crypto-assets relative to the size of their portfolios. Risks could increase further if such exposures employ high levels of leverage, including through the use of derivatives referencing crypto-assets.
- Acceleration in adoption of crypto-assets for payments. This could happen via partnerships with established payment firms or retailers/social networks.
- The growth, role and risks associated with crypto-asset trading platforms.
- Losses in crypto-assets, where accompanied by leverage, liquidity mismatch and interconnections with the traditional financial system, may amplify systemic risk arising from wealth effects. Loss of confidence in stablecoins could also trigger sales of their reserve assets, potentially affecting the functioning of short-term funding markets.
- A rapid growth of DeFi, in the absence of clearly identifiable intermediaries or parties responsible for governance, challenges core financial (stability) regulatory and supervisory disciplines and doctrines.
- Differing regulatory approaches could lead to regulatory arbitrage, thus increasing potential systemic risks.
- Data gaps impeding risk assessment and calibration of policy options.
Given the international and diverse nature of the crypto-asset markets, authorities globally prioritize cross-border and cross-sectoral cooperation. Efforts to enhance monitoring and to minimise regulatory arbitrage through further cooperation and information sharing are needed to keep pace with crypto-asset developments.
If you think that sounds a bit bland or could be ignored, well, the G20 are assembling to endorse the paper and implement these recommendations. Thing is, can they? Can they implement these regulations?
I stumbled across a fascinating twitter thread by punk6529 (270,000 followers), who begins by stating that you cannot have any human rights without the freedom to transact. Freedom of speech needs the ability to pay for adverts, travel, online services and more; freedom of assembly needs the ability to pay for travel to assemble, paying for food and shelter and more; freedom or religion needs the ability to pay for getting to the church on time and more.
It's an interesting angle: you cannot have human rights without the freedom to pay without punishment. The reason why punk6529 posted such a trail, and it’s worth reading the thread …
punk6529 goes on to state that the aims of CBDCs is a system to centralise controls by states so much that it would wield powers far beyond anything we have seen before.
It’s an interesting thread, so here’s my take.
What is the acceptable form or governance for the majority?
How should it be implemented and used?
Can you ensure it is fair and equitable and not false and punitive?
In this context, yes, we need payment systems but who should govern and control such systems? The state or the individual? My money is my money. It’s not your money or the government’s money. It’s my money. But what if that money is used for bad causes? When should the overseer’s step in and take action?
In the context of punk6529’s discussion, it was the Ottawa truckers’ protests.
The government closing access to money is a way to break a protest, but was it the right thing to do?
These things have been debated for eons, as money controls behaviours, and the bottom-line is that the governance of finance does not have to be with a government. It can be with the network or any other players, as long as those players are accepted by the community as the entity with the right to govern.
What do I mean by this?
I mean that if I accept the Parliament or Senate are given the vote to oversee my use of money, then they are the government of the economy; equally, if I accept that eBay is the platform with the right to oversee my buying and selling, then they are the government of that platform; if I accept that the network community can oversee my use of cryptocurrencies then the network is the government.
In other words, government is not a centralised authority that represents a nation; government is the accepted oversight of a network. That may be a nation state network or a globally connected community. It is whoever and whatever we accept.
Going back to the issues of DeFi, crime, laundering and such like … if the community votes this to be unacceptable, then it will change. If the community accepts such activities and believe there is no issue, then it will carry on.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...