Until now blockchain and cryptocurrencies have been largely the playground of tech geeks, cypher punks, activists who want to decentralise financial systems and make the world a fairer and more equal place, and lambo-chasing moon-shooting millennials. Until now. The crypto landscape is beginning to change. The men in suits have arrived. The regulators, the bankers, the lawyers and the accountants. And they all sat in a room discussing how they would rule the world of crypto.
At the Gibraltar Fintech Forum this week around 300 delegates convened to discuss the future of regulation of crypto. More than once it was said that a year in crypto and blockchain is like 7 years in the ‘real’ world of finance. The crypto dog year. In less than a year blockchain technology and cryptocurrencies have gone from being largely unheard of, to something that your taxi driver gives you investment advice on which coins to buy. It won’t be long until blockchain technology and cryptocurrencies are ubiquitous in the world around us. The ideology at the heart of blockchain is decentralisation of command and control from authoritarian institutions to the global community. The current irony of blockchain is that at present a small number of operators and investor whales dominate (and often manipulate) the blockchain ecosystem and associated cryptocurrencies, and smaller ‘investors’ are vulnerable to wild-west style criminal and dangerous operating practices. Will official regulation, such as that in Gibraltar, lead to mainstream blockchain acceptance, or can community consensus and self-regulation drive the technology forward to mainstream acceptance?
Many GibFin Forum speakers argued this week that regulation is a good thing. Kristoffer Nelson cited (as is often the case) the Californian gold rush as an example of how, historically, regulation has improved stakeholder protection, economic performance, financial returns and the relative industrial landscape. He suggested that because of the legal creation of the State of California along with the introduction of gold mining law and regulation in 1850/51, mining production and revenues doubled within a year and that surely blockchain and cryptocurrencies would benefit likewise. However, economic historians at Stanford University, argue that it was not legislation, but the race to the top that drove gold production to its peak. From 1849 to 1852 miner numbers increased from 100,000 to 250,000 and they worked hard, long hours quickly moving from one opportunity to the next, so, therefore, regardless of legislation, just the pure volume of mining drove production up. Just as in 2017 $5.6bn was raised from 902 ICOs, for 2018 predictions are that thousands of ICOs will raise funding ranging from $7bn to $xxbn, according to bitcoinist.com. The race to the top of the blockchain is on.
On one level regulation is a welcome attempt to create a ‘safe zone’ free of bad actors where consumer rights are enforceably protected. Companies such as The Gibraltar Stock Exchange will provide the ‘safe harbour’ for cryptocurrency and ICO participants, all those trading on the exchange will be KYC/AML verified, and the offerings vetted to high regulatory standards. But where does this leave those currently left behind by the banks and existing financial systems, that blockchain and cryptocurrency are meant to help? Millions of people who, through no fault of their own, don’t have KYC/AML compliant paperwork. An official identification and control of who is eligible to access services on the blockchain is, in itself, a step away from the original purpose of a new technology designed to benefit all. By restricting access to those outside of existing financial system there is a real risk that instead of benefiting the masses, the blockchain benefits only the existing privileged few.
So apart from excluding bad actors, and providing a standard of quality assurance, realistically how effective will regulation be to this emerging industry? The Stanford paper tells us that in the 17 years following the introduction of mining regulation for the Californian gold rush, all the cases brought to court were judged not by regulatory rules, but instead by the miners’ own ‘customs and usages that were becoming standard at the state level’ – the common consensus. In Gibraltar the FSC regulators have recognised that detailed financial services-style rules and statutes does not suit the quickly evolving world of blockchain technology. Accordingly, they have devised a set of guiding principles based on the best practices of existing financial services to which those seeking a DLT license must adhere. So in practice the regulations should be reflective of the best practices of those dominating the crypto ecosystem and lessons learned from other financial service industries, and therefore be largely consensus driven.
It is likely though that whilst some operators will embrace the opportunity to become regulated and demonstrate adherence to industry standards, others will, for good (and not so good) reasons, actively choose not to become regulated. During the course of the conference there was discussion of a split within the industry, a post-regulatory hard fork perhaps? Some companies will still wish to operate true to the ethos of complete decentralisation, and they may, potentially, benefit from an advantage of being able to innovate and grow independently without constraint, perhaps at a faster rate and with more creativity than those ingrained in the regulatory system. Indeed, one of the problems in the California Gold Rush was that miners who became part of ‘the system’ found themselves spending a lot of time and money in court and on lawyers fees for either breach of regulatory restrictions or contesting claim authenticity. Judging by the number of ‘suits’ at GibFin there is no shortage of firms ready and waiting to represent those entering the new regulatory structure.
(Clay and Wright, 2003) https://web.stanford.edu/~write/papers/Order%20Without%20Law.pdf