blockchain
Evaluating current regulatory frameworks
Sirpa PIETIKÄINEN mep
Finnish member of the Group of the European People’s Party (Christian Democrats) at the European Parliament
Blockchain carries potential for the financial sector, but risks should be monitored
T
he sudden expansion of the market has pushed cryptocurrencies onto the global regulatory agenda. Last year, the market capitalisation of cryptocurrencies surged by over 1,200 %, from US$17.7 billion at the beginning of the year to over US$230 billion in November, Forbes reported.
From a policy perspective, the introduction of virtual currencies, such as bitcoin, raises concerns about their speculative nature and excessive price volatility, risk of total losses, operational failures and a risk of fraud. A particular concern is the trend of startups issuing digital currencies through initial coin offerings (ICOs) and the current anonymity of cryptocurrency traders. Lack of transparency regarding the identities of cryptocurrency traders and their location is feared to encourage their use for moneylaundering, tax evasion and terrorism financing. As essentially a cross-border technology, cryptocurrencies raise a question regarding their impact on financial stability. A fundamental question related to cryptocurrencies is whether they should be treated as currencies or a category of securities. If they be treated as currencies, questions arise regarding their relationship with traditional currencies, central banks and foreign exchange, with implications for monetary stability. Cryptocurrencies, like Bitcoin, Ether and Ripple, lack key attributes of sovereign currencies: an intrinsic value and exchangeability guaranteed by a central bank. Therefore, I see it as more appropriate to talk about crypto-assets rather than currencies, as G20 and Financial Stability Board (FSB) have opted to do. Moreover, it is essential to distinguish cryptocurrencies, and the related problems regarding ICOs and tokens, from their underlying technology. Blockchain, and the distributed ledger technology underpinning it, is likely to have transformational applications in financial www.governmentgazette.eu | 60
services, healthcare, logistics and public e-services.
In financial services, the new technologies have the potential to lower costs of transactions and cross-border transfers, increase operational efficiency and security, and enable innovation around smart contracts with digital signatures. Despite the risks associated with cryptocurrencies, blockchain as technology is in fact expected to improve the traceability and security of online transactions. By facilitating access to services for those without a bank account and by lowering costs, blockchain can support socioeconomic and financial inclusion, provided that safeguards are developed in order to guarantee exchangeability and consumer certainty. By inducing greater competition among market actors, blockchain technology can contribute to a deeper Capital Markets Union. As in digital and innovation policy more broadly, a regulatory approach to cryptocurrencies will need to be pre-emptive yet technology-neutral so as to allow for a level playing field between FinTech companies and traditional ones. The same regulatory principles should be applied regardless of the technology or channel used for the service, following a risk-based approach rather than focusing on the entity or structure. Digitalisation is becoming an integral part of modern economy and cannot be distinguished from other forms of economy. Therefore, while a pre-emptive regulatory approach is needed to monitor emerging risks, a premature or excessive regulatory action needs to be avoided in order not to hamper nascent innovation. Still, regulators should be ahead of risks by monitoring them as they emerge. Here, the framework for monitoring risks related to crypto-assets, presented by the FSB on 16th July in response to a request by G20 finance ministers and Central Bank governors in March in Buenos Aires, is welcome in order
to keep emerging risks insight.
The framework looks at risks related to crypto-assets with a focus on key sources of risk related to cryptocurrencies, volatility, size, leverage, ICOs, the use of cryptocurrencies in payments, and financial institutions’ exposure to virtual currencies. Back in March, however, FSB Chair and Governor of the Bank of England, Mark Carney, reminded us that the size of the cryptocurrency market, less than 1 percent of global GDP, was still relatively small when it comes to posing a risk to financial stability. The EU has been poised to support innovation while combating criminal uses of cryptocurrencies. A recent parliament study found anonymity to be the key challenge permitting cryptocrime. In the latest update of the EU Anti-Money Laundering Directive, the EU introduced new requirements for cryptocurrency exchanges and custodian wallet providers to conduct due diligence procedures, such as customer verification, andreport suspicious transaction activity. Cryptocurrency platforms will need to apply for registration to operate. Going forward, there is a need to ensure market integrity, interoperability of cryptocurrencies with traditional payment solutions, investor protection and, ultimately, financial stability. Identification and know-your-customer techniques related to cryptocurrencies should be further developed. Finally, increased awareness of the risks related to cryptocurrencies is crucial, particularly among non-professional investors. As several member states are starting to develop their own regulatory approaches, for the integrity of the EU single market it will be crucial to have common principles to prevent regulatory arbitrage. A common approach would allow the EU to be competitive in the global competition visà-vis large jurisdictions such as China and the US