During last few years, in addition to Taiwan, another frontier of contest emerged between China and the USA – the wrestle to control more than 2 billion worth of crypto market. Last week, Beijing has announced new strict regulation pertaining to the trading with cryptocurrencies. Even the mining is prohibited. The regulators in the USA are planning also to initiate new range of restrictions which may threaten the existence of the whole private crypto industry.
The crypto industry was growing long time without serious impediments, and meanwhile the sector became so overwhelming that regulators, central banks and politicians could not afford any more to ignore it. Supporters of decentralized finance system indicate about the core qualities of blockchain-technology, where crypto currencies are based. One of them being the privacy of users – decentralized exchanges do not collect data about the users of the currencies. Despite the regulatory threat, many players of the crypto market consider it almost impossible to completely stop trading with crypto currencies. Although after the news from China the oldest cryptocurrency, Bitcoin, has shed more than 15 % of its value, tokens from decentralized exchanges as Uniswap, Sushiswap, Pepetual Protocol and DYPS either increased or maintained their prices on the same level.
Chinas systematic attack on crypto currencies, since the start of the year, made them even more volatile. The latest restriction were issued in May which banned local financial institutions to offer crypto services. Crypto exchanges moved to the gray-zone of regulations. On Monday, Huobi, one of the larges crypto market, advised its customers from China to quit the platform by the end of the year. Its competitor, Binance, refused to accept any user with Chinese mobile phone registration. Beijing declares the restrictions fight against fraud, speculations, money laundering and increased power consumption, demonizing bitcoin as the biggest culprit. Still, against all odds, Chinese authorities announced to issue their own digital currency – so called “Stablecoin”.
Despite, the hurdles created by China to the users of crypto currencies, the most populous country still plays an important role in the crypto-market. According to the Chainanlysis, during the first six months of the year, wallets and digital markets booked more than US $150 million revenues from Crypto-users of Chinese origin. This makes China the second most important player on the market after the USA.
In the USA, the Securities and Exchange Commission (regulator of the securities markets), plans to bring in the new regulations and rules for the market of more than five thousand crypto currencies. The cause for such steps is that many crypto firms are in breach with securities’ regulations. Especially, the biggest claims come against crypto-lending services, where the users earn interest rates from lending the coins. Besides, they consider coins as the threat to the stability of the economy, as last month the chief of the SEC called coins as “chips in the Casino”. Still, like the other side of the pacific, the Federal Reserve Bank (Central Bank) of the USA plans to consider the idea of launching a U.S. digital currency.
Many industry experts surmise that the regulation of the crypto-market is imminent. However, the step from Chinese authorities is considered as the movie to control all financial transaction and the users, instead of insuring stability of the industry.
In line with the USA and China, central bank digital currencies are a hot topic among monetary-policy makers world-wide. More than 80 countries, representing 90% of the world’s gross domestic product, are looking into the blockchain technology. In my opinion, all these initiatives are caused by the fear of loosing control over financial transactions. This can a reasonable concern. However, a state controlled digital currencies come with serious risks.
Without additional privacy measures, central bankers shouldn’t establish them. Some of us may remember, privately issued digital dollars, such as electronic balances in checking accounts. Central bank digital currencies are similar, except the liability is on the central bank, rather than private banks. One benefit of tying digital currencies to a central bank is that payments would also be processed by central banks, strengthening national and international payments systems and potentially lowering transaction costs. The regulators also mention that “unbanked” part of the populations, can also benefit from having direct account at the central bank.
However, it changes a lot of things. And, most important is that the states cut off lager chunk of financial industry from private businesses and creates it own crypto start-up, with inherent risks.
First, governments have strong incentives to simplify society for the purpose of social control. Bringing commerce within a centrally managed payment system is a textbook example. If widely used, these currencies would give central banks unprecedented power over the financial system. Without additional safeguards, virtually all transactions would be a matter of public record and the financial privacy would be difficult to maintain.
Also, since this currency would be a liability of central banks, they could place conditions on its use to nudge users in desired directions.
Second, governments can use centrally managed digital currencies to meet its macro-economic policy target, even sometimes, at the detriment of a particular individual. Imagine your digital balance shrinking slowly over time to motivate rapid consumer spending. Or a Central Bank blocking payments to politically disfavored businesses. The temptation to manage a central bank digital currency in line with these agendas would be strong.
For these reasons, some central bankers, such as Governor of the Federal Reserve Mr. Christopher Waller, oppose creating their own digital currency. In a recent speech, Mr. Waller emphasized concerns about privacy and government control of payments. One of his comparisons is highly illustrative: China, the major economy that has made the greatest strides toward a central bank digital currency, could use that technology “to more closely monitor the economic activity of its citizens.”
The third, and not least, is that governments’ involvement in the crypto business will halt the development and innovation in this field. Not only private investors will lose their investments, but they will stop to innovate and make the business more efficient and cheaper for so called “unbanked”. The latter is left “unbanked” mainly by regulators, not by his own misfortunes. Otherwise, the mentioned strata of the society will maintain status quo for the long time, due to regulatory restrictions from authorities.
The last, but not least, changes in financial industry, inducing cost reduction, increase of speed, and inclusion of broader part of population will have spillover effects on other industries and economies in general. To restrict economic development has never been a good idea.
The Other Side of the Coin – Opportunity
On the other hand, most “gifted states”, use such moves from “regulation lovers” as opportunities. Singapure, as one of the pioneers of the crypto-openness, surmises to entice crypto users on its nascent crypto market.
The regulators in Singapore have got it right. Whether or not the region’s “big bet” pays off, they think, banning cryptocurrency trading makes no sense. The industry remains a “wild west” because there is no consistency on standards to make it stable and secure for investors. Trading, in particular, remains fractured and illiquid, which contributes to the wild price swings.
In Singapore, they think that people anyway will continue to use cryptocurrencies so this will only push activity underground or elsewhere. Just look at the number of start-ups and talent piling into the sector. Singapore can use its approach as an option to find out how to solve these problems and benefit from being part of the crypto journey.
Done correctly, regulation can be very productive and foster crypto development in a healthy way by working with the industry to improve standards and prevent illicit activity. Plenty of businesses out there want to help create that framework. It’s about time the US and other leading markets caught up and took steps to establish collective frameworks so investors can operate safely and business can thrive.
This is not the first time Singapore’s authorities used restrictive measures of other large states as opportunity to support its economy. Nowadays, the financial competition in the region as a game of fintech innovation, so it does not make sense to exclude cryptocurrencies. Singapore’s approach to inclusive crypto regulation can create an environment that fosters innovation while setting up frameworks for security and stability.
Now that Singapore’s crypto startups are gaining momentum, its mainstream financial institutions are learning about the technology and global fintech will make next steps from here.