The Bank of England Governor Mark Carney, in his speech on the future on money, has called for a regulatory crackdown on cryptocurrencies in order to quell the “speculative mania” caused by the “inherently risky” market.
Carney took the opportunity on Friday to target cryptocurrency following a turbulent period for the infant industry which witnessed the value of a single Bitcoin peak at just under $20,000 in mid-December before crashing to $7,000 at the beginning of February. The BOE Governor noted that “the prices of many cryptocurrencies have exhibited the classic hallmarks of bubbles” which if left unregulated could not only mean a risk for investors, but potentially for the market as a whole.
To protect investors Carney suggested that “the time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system”, which would attach the responsibilities of being part of the financial system on to cryptocurrencies. The move would also combat the illicit activities of the market which not only pose a threat to the ecosystem, but to investors who risk getting “caught up” in such behaviour.
Whilst it is certain that cryptocurrencies provide opportunities for innovation and development, they are also used to facilitate illicit behaviour. Any government regulation must find an equilibrium which supports innovation and disrupts illicit behaviour. The Chair of the UK’s Treasury Committee Nicky Morgan stressed the need for such a balance following the launch of the committee’s inquiry into digital currency.
Valois Dombrovskis of the European Commission, in a Financial Times article, pointed out the need to protect investors and consumers from price volatility, market manipulation, gaps in liability and exchange failures in potential regulatory frameworks. The benefit of stopping a misguided investment bubble in its tracks would also be achieved through regulation. A greater government oversight in cryptocurrencies would most certainly mean the illegitimate use of it as a currency would be significantly reduced.
The anonymity of Bitcoin and other cryptocurrencies has led to them being used extensively on the dark web, most notably over the Silk Road marketplace, a section of the dark web where users could trade in Bitcoin for drugs and other illegal products.
At the same time overzealous regulatory crackdowns may incur risks to innovation and especially to the blockchain technology developed by cryptocurrencies, and Carney noted that the BOE would avoid such risks if possible.
Recent regulatory developments
Whilst the European Central Bank (ECB) noted that the regulation of cryptocurrencies is not a top priority, its Chief Supervisor Daniele Nouy confirmed that the ECB stands ready to act if it becomes necessary.
Voices within the Commission such as Dombrovskis have proposed the EU leading international efforts if risks begin to emerge. Whilst France and Germany have collectively called for regulatory steps to protect investors from the volatile market in a letter addressed to G20 finance ministers.
The UK’s position is homogeneous with that of other EU states, Theresa May noted at an interview at the Davos World Economic Forum, that the UK would be “looking at these (Cryptocurrencies) very seriously — precisely because of the way they can be used, particularly by criminals”. It is likely that France, Germany and the UK will take the opportunity at the G20 Summit in Argentina to further develop the approach of European countries this month.
Across the pond, the U.S. Securities and Exchange Commission warned of an investment bubble in financial backing through Initial Coin Offerings (ICOs), and warned investors to exercise caution with cryptocurrencies.
Meanwhile South Korea has taken steps to ban transaction anonymity in order to “reduce room for cryptocurrency transactions to be exploited for illegal activities”, as stated in the Financial Services Commission paper of 23 January.
The regulative approach posited by these actors is a stark contrast to that of many Asian states, for instance in September the People’s Bank of China declared ICOs illegal, and in Indonesia and Bangladesh where trading in Bitcoin is illegal.
It is certain that further fragmentation is all too likely as governments around the world seek to further consider their policies regarding cryptocurrencies, and matters of regulation will likely “remain national issues for some time” according to Carney. For those interested in further developments, the G20 meeting of finance ministers and central bank governors beginning next week will undoubtedly be of interest.