Prosenjit Ganguly
AVP, Sales and Client Success at iResearch Services
It looked like something out of Breaking Bad: a secret homespun lab with 100 computers grinding out product in grim light-industrial premises, with wires everywhere. But it wasn’t drugs they were making, it was a Bitcoin mine.
The comparison to drugs is pertinent because that’s what police thought they were looking for when they conducted the raid last month on the hidden operation in an industrial unit in the West Midlands: a cannabis factory. In fact, the only crime being committed was that the electricity they were using in gargantuan quantities hadn’t been metered and paid for, but allegedly stolen.
Once upon a time in the West Midlands: cryptocurrency, cowboys and the need for a sheriff. Source: pexels.com
What was most noteworthy about the story was that, for many ordinary people, it was the first time they’d ever had a visual image to connect to the concept they had heard so much about — cryptocurrencies generally and Bitcoin specifically.
The illegal ‘mine’ made headlines – and just a week after that West Midlands raid, another crypto story went mainstream: an advert that encouraged inexperienced consumers to buy Bitcoin, which was banned by the Advertising Standards Authority as “irresponsible”.
These stories shone a light on the issue of sustainability in cryptocurrency, and the volatility that remains present within it.
Cryptocurrency has undoubtedly been in the firing line recently, plagued by news stories that have fueled the negative perception that it is a volatile market.
The problem we are noticing is that there remains a gold rush to get on board the next potential moneymaker, and that there is no sheriff in town to regulate and properly protect both those involved and the market itself. It’s a bit of a Wild West, where fortunes are made or lost in seconds, and this must change.
When Elon Musk announced that Tesla, previously an enthusiastic backer, would no longer be endorsing Bitcoin as a payment option, it was just the latest wake-up call that manipulation in an unregulated space like this is very easy to do, even unintentionally, as in Musk’s case.
If those involved in cryptocurrency decision-making want to be able to operate across the board they need to be inside, not outside, the tent of the financial services world — and that means regulation.
The demand for regulation is growing constantly. Christine Lagarde, President of the European Central Bank, for example, said at the beginning of the year that she was concerned that cryptocurrencies were being used for some “totally reprehensible money laundering activity” — and called for regulation at a global level.
But the move to regulate globally thus far has been piecemeal and disjointed.
In The UK, the Financial Conduct Authority — which has consistently warned investors of the risks of crypto assets — appeared to take a recent step towards regulation when they told some 200 cryptocurrency firms recently that they would be able to apply to register. But only five did so successfully. Many pulled out when it became clear they were too lax in their systems to comply with money laundering rules. Most were allowed to register temporarily pending fuller checks. This was hardly a robust riposte to Lagarde.
A number of banks in the UK, including Starling, Monzo and Barclays, have reportedly suspended payments to cryptocurrency exchanges in recent weeks to address “high levels of suspected financial crime with such payment”. Banks remain outside of the crypto game because it is unregulated; we would suggest that the moment regulation is brought in, the risk will be removed and you’ll start seeing the high-street banks get involved.
Back in Europe, the Basel Committee on Banking Supervision (BCBS) released a consultation, closing in September 2021, on the prudential risks to banks of crypto asset involvement – another clear indicator of increasing regulatory attention and impending legislative measures, against a backdrop of growing interest from investors and traditional financial services.
The paper calls for increasing capital controls, dividing crypto assets into two camps. One is for the more traditional assets that have been tokenised, which fall under the existing Basel supervision rules and would therefore be expected to have comparable capital requirements to assets such as bonds, equities, and loans, for example. Another segment would cover Bitcoin and Ethereum, which do not fit into the existing Basel regulatory framework and would instead need risk weightings to the absolute value of the asset.
Markets took the regulatory announcements as a positive sign, as it signals more widespread uptake of crypto assets and a serious policymaker approach to preparations for mitigating risks for providers, markets and investors as popularity grows.
Meanwhile in the US, the Biden administration is actively looking at crypto regulation.
It is the world’s other great superpower-however, took the opposite tack; instead of regulating crypto, they banned it. China had hitherto been the global capital of Bitcoin, with over 65% of the world’s mines found, according to a Cambridge University study, to be based in the country in April alone. The state’s attacking move the very next month prompted a panicked market to contract by 30%.
This lack of regulation is a perennial issue in the crypto space, inhibiting its reach and influence.
The UK launch of the first listed security tracking the price of Bitcoin launched at the time of writing. But ETC Group will launch using the crypto-friendly Swiss market rules to swim against a tide of regulatory skepticism here, with the company saying that it hit a regulatory brick wall when it explored going to the London Stock Exchange.
Take a recent examination of the sector by financial industry lobby group, TheCityUK. Its report called on the UK government to use Brexit trade discussions to position itself as a global hub for offering currencies such as Bitcoin and Ethereum. It’s a nice idea — but it simply won’t happen without better regulation and compliance across the sector.
And all of this is before the industry even gets on to confronting the other big — no, gigantic — problem it faces: the environmental impact of the mining model. This takes us back to that dodgy computer-filled room in the West Midlands.
Until crypto can become part of the financial establishment, with all the benefits that doing so brings, what hope does it have of addressing its environmental issues? The crypto Wild West needs a sheriff who can clean up Dodge. It’s time to shed the cowboy image.
SEE ALSO:
Pay Space
Our editorial team delivers daily news and insights on the global payment industry, covering fintech innovations, worldwide payment methods, and modern payment options.
