regulatory clarity is winning
By announcing new rules on the regulatory treatment of cryptocurrencies the Dutch central bank is following a global trend for growing clarity in the industry.
From January 2020 crypto firms in the Netherlands must now register with the authorities to operate from the country. 400 years ago the Dutch created Europe’s first stock exchange and it seems that pioneering spirit is still alive as they open the doors to the vast market of legal cryptocurrency trading, overseen by market regulators.
It’s another sign that the world’s largest economies are finally coming to terms with cryptoassets.
regulation always wins
Behind closed doors regulators have admitted struggling with how to fit cryptocurrencies into existing regulatory structures. The issue here is that decentralised, private currencies like Bitcoin are neither issued nor controlled by central banks, and in practice upend thousands of years of monetary policy.
The success of the likes of Coinbase in becoming one of the largest and most trusted cryptoexchanges in the world for retail investors is because of their investment in compliance. An ability to work with financial regulators will set a business head-and-shoulders ahead of its competition. Financial companies perhaps more than in any other sector must have the trust of their customers and having the backing of market regulators in your country of choice is a huge stamp of approval.
Possessing a digital asset licence to trade will give one cryptoexchange an undeniable advantage over its competition. This allows business owners to concentrate their time and energy on growing their business, not fending off legal challenges and regulatory headaches.
bitcoin ban just loses money
In countries more hostile to cryptoassets, like India for example, innovative firms have found themselves in a kind of regulatory desert, having to navigate through a murky landscape existing only on policy hints and often being caught off-guard by regulators. This is an odd scenario for the financial sector: one that normally relies on stringent and complex directives and rules that firms must follow.
Any lack of regulatory clarity will always stop businesses from growing effectively. Management cannot plan ahead properly and don’t know where to invest R&D money to abide by the law.
The Koinex exchange is just the latest victim of the failure of Indian regulators, following on the heels of Coinome. Koinex co-founder Rahul Raj wrote in a Medium blog announcing the exchange’s June 2019 closure: “We took on an immense financial burden to continue trading of digital assets and allow law-abiding Indians to participate in the decentralized revolution that has swept across the globe.”
Blockchain industry lobbyists have pointed out the immense value in allowing cryptocurrency businesses to flourish. India could lose a market valued at more than $12.9bn if it brings down the shutters to ban Bitcoin. And those innovative entreprenuers creating jobs and generating tax income for the state? They just move elsewhere.
India’s Supreme Court has most recently given the central bank two weeks to justify its Bitcoin ban. But this is an argument that has been going on for almost two years. the Reserve Bank of India has repeatedly delayed explaining its position, perhaps in favour of issuing its own Central Bank Digital Currency. In the meantime cryptocurrency firms are left in the dark, often finding their bank accounts frozen and their operations regularly disrupted. No successful economy can prosper like this.
Some jurisdictions have been more welcoming than others to the cryptoasset revolution. Everyone in the industry will know about the ‘Blockchain Island’ of Malta and its success attracting the world’s largest exchange by volume Binance to its shores. It will also surprise no-one that financial centre Switzerland is light years ahead of the competition. The Swiss regulator FINMA recently debuted specific new rules on the treatment of stablecoins, for example.
Its Zug canton is home to Ethereum and a cluster of hundreds of other crypto businesses, while Facebook’s Libra Foundation, the operator that hopes to bring a stablecoin-like product to its two billion users, is located in the capital Geneva.
Portugal’s recent clarification that income from cryptocurrency trading is tax-free provides welcome relief for investors there.
It is up to regulators to inform banks how they should treat cryptocurrencies and other digital assets.
Even if they wanted to, law-abiding private citizens can struggle to pay tax on their crypto holdings because of the lack of institutional architecture available to support them. In Israel, cryptocurrency investors who want to pay tax on their gains are struggling to do so because traditional banks often decline to process cryptocurrency transactions.
Some more enlightened bodies, like the UK’s Financial Conduct Authority, have allowed cryptoasset firms to join regulatory sandboxes, where they can test products in live markets without the threat of falling foul of existing laws. July 2019 saw the FCA set out clear policy on how cryptoassets will be treated under the law. There is a direct link between good regulatory governance and world-leading innovation. UK firm London Block Exchange, knowing it has the backing of the FCA, was able to release the first ever full crypto fixed income bond to institutional clients.
While the headaches of running a successful, truly global financial business are clear, positive regulatory compliance is a fundamental part of how they must operate.
There is no other way for the industry to develop but by good quality regulation. Customers and investors must be protected from bad actors. And financial operators must be allowed to succeed within the rules.
The process of attaining a license takes a huge amount of investment in both time and money, in developing relationships with regulators who are working out the correct rules over time as best they can.
But in the long run it is clearly worth it.