Crypto regulation shouldn’t kill innovation but it is needed
Cryptocurrencies are in need of regulation, but it is important that it doesn’t ‘stifle innovation’ according to Jo Torode, a senior financial crime lawyer at Ropes & Gray.
Cryptocurrencies, and especially initial coin offerings (ICOs) of new digital tokens, have come under increased scrutiny by regulators as the market rises in popularity amongst investors looking for quick cash. With cryptocurrencies become increasingly interlinked with the mainstream financial services industry, some have exploited them and use crypto as a means to hide illicit proceeds in the monetary system.
Europol have estimated that 4% of all criminal proceeds in Europe are currently being laundered through cryptocurrencies, meaning around $5.5bn (£4bn) is illegal money.
As it continues to rise in popularity, regulators worldwide are grappling with ways to control trading. Bank of England governor Mark Carney recently called for cryptocurrencies to be regulated. Speaking at the inaugural Scottish Economics Conference, he said that the currencies themselves could present a future risk to financial stability and called for them to be more rigorously regulated.
“The key to successful regulation of cryptocurrencies is to ensure that regulation does not stifle innovation,” according to Torode. “Appropriate regulation would for the first time offer legal and regulatory protection to individual investors and high street customers seeking to benefit from the opportunities presented by cryptocurrencies and the underlying blockchain technology.
“This is the next stage in bringing cryptocurrencies and blockchain within the regulatory framework, speeding up the march towards legitimisation of an asset class that, until a few years ago, many law enforcement agencies believed had limited legitimate reasons for people to use. The flip side of this is that it will take more time and effort for those agencies to distinguish lawful transactions from those predicated on illegal activity,” Torode added.
If appropriate and settled regulation is in place, particularly for money laundering purposes, this is likely to make investment in cryptocurrencies more viable for certain mainstream and regulated investors.
While the UK is looking at regulation in the future, the U.S. has already made its first moves. The U.S. Securities and Exchange Commission (“SEC”) has already started to act on cryptocurrencies and bitcoin by opening investigations into a number of ICOs. Last year, the regulator filed charges against a former cryptocurrency exchange and its founder. It alleged that BitFunder and its founder Jon E. Montroll operated an unregistered securities exchange and defrauded its users by misappropriating their bitcoins.
The SEC are starting to act on cryptocurrencies and bitcoin and some people have said that this would halt development, according to Torode.
“However, I take a slightly different view. The SEC are undoubtedly taking the issue seriously but this can also be a seen as a gateway to thinking about how cryptocurrencies can be properly integrated into the regulatory system,” she added.
The US and the UK, among others, are seeking to clamp down on Cryptos through regulation, but there is divergence between jurisdictions about what approach to take and how to deal with this.
“Different jurisdictions are taking different approaches. There are some jurisdictions which are considering banning cryptocurrencies and there are others, like Venezuela and Estonia, which are planning to introduce their own cryptocurrencies,” she added.
“The technology is here to stay, and I don’t see how banning them helps. I think regulation that supports innovation is the way forward. Once you have started with an asset class, such as Crypto, trying to outlaw it is almost impossible. People are using them and trading them, and have done for a number of years, it is time to accept that this is a paradigmatic shift. A new reality. “
To be truly effective, Torode suggests that regulation might ultimately need to be on a more global scale and some moves have been made towards this…..
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