World politicians and bureaucrats have been busy with digital currencies again these days. The IMF have published their communication note on virtual currencies “Virtual Currencies and Beyond” last week, the European Parliament’s Committee on Economic and Monetary Affairs held public hearing on virtual currencies yesterday with the participation of representatives of the OECD, EC, academia and a digital money groups.
Generally the tone of their contributions was quite unaware up to welcoming though institution representatives only repeated many times used mantras on criminal risks.
“Virtual currencies (VC) don’t really protect consumer and there are also some risks in term of platforms stability, price volatility and a classical cyber threats like thefts, hacking, loss. All those risks will have to be addressed. As a regulators we are going to watch these developments,” Olivier Salles of the European Commission reiterated.
The representative of the OECD compared digital currencies as a store of value to frequent flyer programs. “The existence of non-governmental store of value is nothing new. One of the most recent is the frequent flyer miles (FFM) but there are many other examples as well. One major difference between FFM and VC is the ease with which VC can be transformed back into legal tender currency, mainly but not exclusively through exchanges and trading platforms. There could be other ways of making such a conversion in the future but it’s hard for us to tell exactly what they would be. VC provide an alternative to cash and other nationally issued currencies and they are certainly smaller in total value.”
He further stressed out the beneficial role of VC in transactions because of low costs and instant delivery. “It’s important for governments and legislators to enable such currencies, but in a way that would instill confidence and future viability without expressing a preference for one over another.” He also pointed out the fact that “cash is a much more anonymous mean in transferring value and the VC are public and that allows tremendous amount of transaction analysis. If the address and transactor are in some way identified by law enforcers they have a powerful mechanism to track an entire chains of value transfer. So the arguments used against the VC may be much weaker than the arguments against the use of cash.”
According to Primavera De Filippi of the National Centre for Science Research at Paris University, “the real challenge is to figure out how we can regulate in the way that does not impinge the consumer benefits that blockchain technology can provide. Blockchain can bring down the cost of regulatory compliance thanks to specific features such as multi-signatures and other technical mechanisms as for example proof of solvency. In this sense blockchain technology can be regarded as a kind of regulatory technology. One of the key benefits of blockchain to regulation is that it solves the problem of who watches a watcher, which is a common problem in fiduciary institutions.”
Jeremy Millar, a partner with Magister Advisors also tried to explain how digital currency system is self-regulating. “The initial interaction of Bitcoin with the regulated, fiat financial system occurred when an early bitcoin companies attempted to open commercial bank accounts as money transfer agents. Many banks refused, concerned with fulfilling their own KYC and AML requirements. As a result, in large companies today you will find up to 40% of the staff working in compliance. More interesting has been the birth of software products that apply machine learning to inspect the Bitcoin blockchain for suspicious activity and monitoring the dark web for illicit transactions. This is far beyond the capabilities of banks today to monitor cash deposits.”
Thaer Sabri, CEO of Electronic Money Association gave an example of how no or mild regulation can help businesses. “You have all heard about M-pesa, which is very successful in Kenya. Its success was extremely difficult to replicate, that’s why you don’t hear about next M-pesa. There was no regulation in the earlier stage and M-pesa prospered in very low regulatory environment and regulation came there very late. That’s not to say that regulation doesn’t have a role, it does. It just needs to be sensitive to the evolution of business model and market place.”
Siân Jones, a founder of European Digital Currency and Blockchain Technology Forum (EDCAB) focused on disproving the myth about digital currencies being used for money laundering. “The statements that digital currencies are mostly used to launder money are grossly overstated and unsubstantiated. The ability to trace past transactions render cryptocurrencies highly unsuitable for money laundering. The best estimates of global money laundering according to the FATF are around 1.6 trillion USD or 2.7% of global GDP in 2009. Compare this figure with the total dollar value of cryptocurrencies at around 7 billion USD.
Detailed analysis of bitcoin blockchain allows us to deduce that virtual currencies account for something considerably less than 1/100 000 of 1% of global money laundering. According to a recent Europol report 500 euro notes account for 30 % of 1 trillion euros of banknotes in circulation despite not being a common means of payment. It would not take much to conclude that the euro is at least 92 times more likely to be used in money laundering than virtual currencies.”