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G20 Crypto Report: Preserve Benefits of Innovation, Contain Risk

The G20 Financial Stability Board (FSB) is rarely upbeat when it comes to cryptocurrency and its latest report won’t disappoint, although there are indications that the regulatory board is beginning to accept that crypto is here to stay.

It states that its observations are primarily based on a “monitoring framework… predominantly based on public data” and it would be interesting to uncover exactly where this data is gathered.

The usual risks to financial stability in that crypto lacks sovereign currency “attributes” and concerns about digital currencies’ price volatility are all to be found in the report, with little reference to their benefits. It also refers to a lack of regulation due to the range of jurisdictions in which cryptocurrency exchanges operate.

The FSB is formed by an amalgamation of 68 finance departments and central banks of the G20 and chaired by Bank of England’s head Mark Varney who has expressed his concerns about cryptocurrency on more than one occasion.

The G20 financial watchdog noted in its July report that previous analysis of crypto-asset markets, which included initial coin offerings (ICOs), had brought forth awareness surrounding significant challenges such as rapid market development, lack of transparency (with regard to identity and location if token issuers), as well as governing laws for white papers and gaps in data.

This latest report has upgraded some of these concerns from early in the year calling for “vigilant monitoring” suggesting that institutionalized cryptocurrency may erode confidence in financial institutions; a clear concern being shown that banks fear an alternative option for their customers. This may not be imminent, but a likelihood that this becomes the status quo in future years is bound to concern major banking institutions around the globe, as represented by the G20 body.

However, it appears there is some consensus from within the group about the value of innovation, if not the benefits of crypto, although this may be limited to the respect currently being shown for the rising swathe of DLT in the fintech space and elsewhere. The report stated:

“FSB members have to date taken a wide variety of domestic supervisory, regulatory, and enforcement actions related to crypto-assets. These actions are balanced between preserving the benefits of innovation and containing various risks, especially those for consumer and investor protection and market integrity.”

The report also goes on to refer to the widespread use of crypto as a payment system but plays down the level of its impact in the financial and commercial sector by using the word “some”, perhaps unaware of crypto’s growing stature as a payment system:

“Importantly, crypto-assets are neither backed by any government or other authority nor are they legal tender in any jurisdiction. However, some private enterprises and some public sector entities have chosen to accept some crypto-assets as payment.”

 

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UK Financial Regulator Wants Balanced Crypto Approach

The chief executive of the UK’s Financial Conduct Authority (FCA) addressed the issue of cryptocurrencies at a speech in London on Tuesday, a subject with which he said requires a balanced approach.

Speaking at the 2018 regulator’s Annual Public Meeting, Andrew Bailey initially brought up crypto assets as one of four operational risks significant in the regulators’ current work. While he said that the FCA was ”keen to see the potential of their underlying technology,” he recognized that there are also evident risks, citing a lack of education from consumers who do not understand the price volatility of their investments.

Bailey added that the FCA would not ”rule out roles for cryptoassets themselves”, an approach far from calling for a ban or restriction on trading operations. Combined with his statement that ”the FCA is firmly a supporter of innovation,” UK investors can rest assured that the FCA is not looking to impose any radical changes to the current regulations any time soon.

The section of Bailey’s speech referring to cryptocurrency came to an end with his assurance that the regulatory body was working closely with the Treasury and Bank of England to address any related issues and find ”appropriate responses”, a reference to the Cryptoassets Task Force set up earlier this year in May.

The UK task force held its first meeting on 21 May to discuss the future of blockchain and cryptocurrencies, and to establish ways to mitigate any risks that the growing industry might bring.

Alongside the FCO, the task force includes several senior government officials, the Bank of England and HM Treasury, although they have said they welcome the opinions and input of trade bodies, consumer groups, and investors in order to gain a broader perspective.

The UK has already begun establishing itself as a leading country in the blockchain industry; the outcome of these discussions are crucial in deciding whether this can remain the case in the future.

 

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Law Expert Advocates for Blockchain Use in Legal System

In an article for Lawyer Monthly, legal technology expert Paul Sachs advocated for the use of blockchain in the legal system and court proceedings, focusing on the UK in his discussion.

Sachs preceded his in-depth analysis of how blockchain could be utilized by stating a necessity for substance to be included in the growing discussion around the technology’s potential use cases; his analysis does just this.

Increased security

The most significant contribution of blockchain in law, as Sachs sees, it is the potential it has in transforming security and protecting evidence during a trial. He notes that the UK courts are currently going through a GBP 1 billion modernization effort partially focused on digitizing processes to increase work efficiency.

For courts to move away from paper, instituting new technology poses a risk, especially in that digital evidence can be altered. Sachs writes that particularly when there is a long time between the original submission and the court date, data must be provably fully compliant with security and business processes.

The solution: an immutable network of evidence that can be presented in a courtroom with no questions as to the authenticity of the data. These are the strongest features of blockchain by design.

Blockchain may be a public artifact, Sachs discusses, but legal evidence would not be revealed to the public, merely IDs and hash codes. He writes: ”In this way, it becomes an incorruptible digital ledger.” Each transaction of the evidence would be recorded on the blockchain, while the evidence itself would remain completely private.

This removes the opportunity for any wrongdoers to forge documents or edit photographs once the evidence has been uploaded to the blockchain. It also could be just the beginning of further innovation in the legal sector with security now guaranteed, as Sachs outlines.

Blockchain in the UK

Sachs’ vision for blockchain in the legal system may well be established given the UK Financial Conduct Authority’s (FCA) blockchain bullishness. It recently announced the establishment of a collaborative entity, the Global Financial Innovation Network (GFIN), to pursue innovations.

The network’s purpose is founded on the concept of establishing a global blockchain knowledge-sharing “sandbox”.

The Bank of England has also nearly finalized its Proof of Concept (PoC) project that is looking to establish a Real Time Gross Settlement (RTGS) service to meet new financial challenges emerging from the changing landscape.

 

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CFTC Chair: Blockchain Innovation Stifled by Lack of US Regulations

At a United States Congressional hearing on Wednesday, 25 July, Christopher Giancarlo, Chairman of the Commodity Futures Trading Commission (CTFC), elaborated on the need for CFTC participation in blockchain innovation in the US.

“Because we’re falling behind”

At the “Examining the Upcoming Agenda for the CFTC” public hearing, Giancarlo explained the frustrations of the CFTC not being able to participate in Proof-of-Concept (PoC) or beta tests of new blockchain innovations, that of which can be boiled down to bureaucracy.

He says that the CFTC would love to take part and create a regulatory node in the blockchain to observe these developments. However, Giancarlo noted that the CFTC was unable to do so, owing to present laws which stifle efforts to appropriately regulate the blockchain with full understanding.

The issue is that the CFTC can’t freely exchange information between itself and a private startup as it is considered a “gift”, which is something that the agency is strictly prohibited from doing, or even a bank, even if it was by invitation.

Giancarlo also points out that paying a private company for information is redundant as it will need to go through a time-consuming appropriations process, by which time he says “this thing is already launched”.

Catching up

His words come in response to Representative Austin Scott’s question of how the CFTC Modernization Act would allow them to do their job better, a bill that was also proposed by the representative.

He noted that the Bank of England had recently managed to finalize a Distributed Ledger Technology (DLT) project through their four-year-long Project Innovate that allowed them to participate in blockchain beta tests, from which they created a new “bank-to-bank payment system” and that it is going to be “blockchain compliant”.

Giancarlo was also asked earlier by the representative to explain the future intentions of the CFTC’s hub for “engagement with the fintech innovation community” called LabCFTC. To which he responded, “LabCFTC is our front door into these new regulatory fintech developments in the marketplace, and it’s so important to us to be able to understand these innovations that are coming down the pike so fast.”

US developments

The commissioner of the CFTC Rostin Benham called cryptocurrency a “modern miracle” in early June, also believing that blockchain was a remedy to globally-recognized problems such as poverty, corruption, food and healthcare.

In July, the Chamber of Commerce created a Fintech Innovation Initiative that is urging the government to establish clearer regulations on cryptocurrencies and related activities. Furthermore, it sent a report to US financial regulators also relaying the message that the US could fall behind the rest of the world.

It appears as though the cogs are finally turning in the US, though the nation will have to certainly set a high pace should it wish to be in league with countries such as South Korea, Malta, or the United Kingdom.

 

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Global Regulators Consider Capital Requirements on Bank Crypto Holdings

Cryptocurrency assets held by banks may soon become subject to new capital requirements enforced by global financial regulators, as they struggle to fit digital currencies into conventional asset ordinance.

In a report published Monday by the Financial Stability Board (FSB), the Basel Committee on Banking Supervision outlined an agenda of promoting financial stability through strengthening regulation and supervision of banks worldwide. The report was aimed at its 20 members and proposed capital requirements for crypto assets held by banks.

The regulations offered in the review would require capital lenders to adjust their services to the cryptocurrency market, namely protecting themselves against market volatility and other accompanying threats. While these regulations would bring digital currency assets in line with existing rules for established forms such as mortgages, they could push up financing costs for firms.

The Basel Committee’s members include the US Federal Reserve, as well as the European Central Bank. An ongoing study by the committee is researching how each member currently treats domestic cryptocurrency asset exposure. The FSB is reportedly waiting for the results of this inquiry before clarifying the applicability, or details of the new capital requirements.

The FSB’s position on crypto

While the FSB has said it does not believe digital currency assets present a threat to current financial order, it has continued to study and develop ways of surveying the market. Issues including pump and dump schemes, manipulation, access to price information, and volatility have been cited by the FSB as necessary to amend.

Bank of England Governor Mark Carney chairs the FSB, who is himself a vocal critic of cryptocurrencies. In March, he called for an end to what he described as the ”anarchy” surrounding the industry, saying the time had come for digital assets to face the same regulations as the rest of the financial system.

This sentiment expressed falls along a very similar line of the proposed standardization of regulating cryptocurrency assets the way traditional assets are.

 

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South African Central Bank Ethereum Blockchain Tests Successful

The South African Reserve Bank (SARB) has just completed a multi-bank testing of bank-to-bank transfers using blockchain.

South Africa’s central bank has been testing the Ethereum based platform Quorum in collaboration with eight banks including SARB, Absa, Capitec, Discovery, Investec, FirstRand, Nedbank, and Standard Bank.

The program, called Project Khoka spread over 14 weeks, conducted tests which replicated transactions normally handled by the South African Multiple Gross Operation Settlement System (SAMOS), rather than handling actual transactions.  The project was aimed at proving that a DLT based program might be able to replicate SAMOS which can handle 70,000 daily transfers in two hours.

Project Khoka successfully used public cloud servers offered by Microsoft Azure and Amazon Web Services to add power needed for the transaction verifications.  SARB was happy with the outcome of the tests and claimed that the Quorum blockchain handled the transfers with “scalability, resilience, confidentiality, and finality.” The SARB post-test report stated:

“Both the process, as well as the outcome of the project, contribute to the SARB’s goals. The decision was made to assess the use case for DLT in wholesale payments and interbank settlement and thus build on and extend the work done in other parts of the world.”

SARB suggested that more testing would be required before DLT is suitable for such interbank settlements as exhibited in the trial, and if proven satisfactory for bank use would most probably be utilized as a backup system, rather than actually replacing its current system, according to Francois E. Groepe, SARB’s Deputy Governor.

Banks are increasingly testing DLT for interbank settlements around the world, some aiming to use blockchain in order to update outmoded systems. Recently the Bank of England announced that it was rebuilding its Real Time Gross Settlement (RTGS) system to work with DLT. The announcement came after BoE Governor Mark Carney commented that private business and platforms need to be able to work with the bank’s own RTGS system.

RTGS is a system generally used to transfer large volumes of funds between banks.

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A Step Back in History May Answer the Question, Is Fiat’s End in Sight?

Naeem Aslam, Contributor to Forbes has looked to history in an attempt to answer the question, will cryptocurrency ever replace fiat as the standard currency, reports Forbes.

At the recent Money 20/20 Conference held this month in Amsterdam, the panel discussions between major banks’ representatives were all of the opinions that wouldn’t be the case. During a panel discussion, representatives from Swiss National Bank, the Bank of Lithuania, the Bank of England, and the Bank of Canada took turns in expressing their views on the topic.

The responses were generally in agreement, with Bank of Canada’s James Chapman suggesting that this situation would only occur in a hyperinflation scenario, with Swiss National Bank’s Thomas Moser concurring that a poor fiat performance may well invite more cryptocurrency activity, but argued that “as long as central banks do a good job, there is no real for central banks to disappear”.

This discussion was the first of its kind where major financial institutions were able to address a specific question that is on many private and commercial investors’ minds. Aslam suggests that you only need to look into history to find the answer. He uses the UK pound established in 1694 and the US Dollar created in 1792 as cases in point, both currencies originally only available as precious metals, a troy pound of sterling silver constituting a pound,  and 24.75 grains of gold creating a US dollar.

Aslam observes that in the UK, the process of paper replacing gold was actually created by the private sector, with London goldsmiths furnishing receipts for payment, which of course later became the banknotes that are now traditional currency.

Across the Atlantic, The Massachusetts Bay Colony were the first to print paper money in the U.S. in 1690. As a type of IOU soldiers spent or traded them just like gold and silver coins. About 100 years later, the United States dollar became the country’s standard unit of money.

Due to reports of the decreasing trust in government, and specifically, banks after the last economic crisis, coupled with an increasing number of the population turning to alternative forms of electronic payment, such as cryptocurrencies like Bitcoin could be a portent for the future, especially when one looks at the evolution of cash.

Given the private sector was originally responsible for giving life to the current financial system, so it is possible that history is repeating itself with slow the encroachment on fiat by global cryptocurrency adoption, created by a private individual for global use.

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20/20 Central Bank Execs Forum Agrees Bitcoin No Threat Yet to Fiat

At Amsterdam’s Money 20/20 Conference on 5 June, bank representatives from four countries were asked to respond to the question “Can cryptocurrencies spell the end of fiat currencies?”, reports Cointelegraph.

During a panel discussion, representatives from Swiss National Bank, the Bank of Lithuania, the Bank of England, and the Bank of Canada took turns in expressing their views on the topic.

The responses were generally in agreement, with Bank of Canada’s James Chapman suggesting that this situation would only occur in a hyperinflation scenario, with Swiss National Bank’s  Thomas Moser concurring that a poor fiat performance may well invite more cryptocurrency activity, but argued that “as long as central banks do a good job, there is no real for central banks to disappear”.

Switzerland is now well known as a crypto hub, as reported in Bitcoin News recently, and has achieved widespread adoption across the alpine nation. Moser clarified this suggesting that so far it had been “well tolerated” due in part to the crypto haven tag and a balanced approach to initial coin offerings (ICOs) and had become an attractive fintech magnet for many companies.

Martin Etheridge, head of division at the Bank of England, somewhat hedged his bets expressing, “who knows what the future will hold”, although he did say that he saw little prospect of fiat being overtaken or replace by cryptocurrency:

“[But] I think the odds are stacked very much in favor of fiat currencies. I think it would take a pretty fundamental shift of public perception or the existing market system for it to happen.”

Dr Marius Jurgilis of the Bank of Lithuania clarified that a central bank-issued cryptocurrency and a cryptocurrency are not the same things, adding that the main product of a central bank is “a matter of trust”:

“…but if the society starts questioning, or it if it thinks that the things we are selling could be got in a cheaper, more convenient way, other things will appear.”

He added it was this level of trust that his country’s banks were guarding while admitting that the bank’s position was not totally entrenched. In mid-April, Lithuania’s central bank reportedly began looking into cryptocurrencies, round tabling points of view from all sectors, including regulators and investors.

 

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Bank of England Governor Openly Considers a Central Bank Digital Currency (CBDC)

Mark Carney, Governor of the Bank of England, spoke at the Riksbank Anniversary conference on Friday, putting forward an open-minded stance about the possibility of a central bank digital currency (CBDC).

Potential CBD for England

As reported by Bloomberg, while Carney appeared open to the idea, he also pointed to several issues that prevented him from offering his full support for a CBDC. Specifically, Carney stressed his view that cryptocurrencies are not a true equivalent of money, and that should a CBDC be adopted, it will not be capable of happening successfully in the near future.

During his speech, Carney went on to explain that the Bank of England is looking to boost diversity within the institution by engaging with people who not only come from a mainstream economic background. “The future of central banking may involve fewer central bankers, ” he said, indicating perhaps a future direction more compatible with the cryptocurrency field.

Sweden’s central bank Riksbank hosted the conference. Risbank is currently researching the practicality of implementing an e-krona, a CBDC for Sweden, with results from the inquiry scheduled to be published in 2019.

Carney and Crypto

The Bank of England issued a working paper earlier this month, detailing results of an extended inquiry into the possible financial risks and stability issues associated with CBDC. The report indicated that there was no probable cause to assume adopting a CBDC would create issues surrounding private credit, or total liquidity provision to the economy.

Carney has not held back on his personal, skeptical view of cryptocurrencies in the past. In February this year, he stated ”[cryptocurrency] has pretty much failed thus far on… the traditional aspects of money. It is not a store of value because it is all over the map. Nobody uses it as a medium of exchange.”

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UK ‘Cryptoassets Task Force’ Begins on Positive Note

The UK government’s ‘Cryptoassets Task Force’ met for the first time on 21 May as part of the country’s plan to regulate the cryptocurrency and blockchain space, reported Crowdfund Insider.

One of the functions of the UK government’s task force will be to examine the risks of blockchain technology and mitigate these while examining the benefits of ledger technology in financial services. The Cryptoassets Task Force, consisting of the UK Treasury and the Financial Conduct Authority (FCA) has been set up for this purpose and is expected to report back in the summer with its findings in a roundtable scheduled for July, according to Bitcoin News.

The previously announced group involves the participation of the FCA, Bank of England (BoE), HM Treasury and other senior government officials. Some of the named participants include Katharine Braddick, director general of financial services at HM Treasury, Andrew Bailey, chief executive of the FCA, and Dave Ramsden, deputy governor of the BoE.

Bailey commented on the cryptocurrency status quo in the country saying that he was looking forward to working with both the BoE and the UK Treasury in order to develop policy.

Ramsden started on a positive note focussing on the what he saw as the potential benefits to the financial system on the UK economy:

“This task force will enable us to work closely with the Treasury and the FCA to explore how the opportunities posed by these technologies can be realized, while also tackling the risks arising from crypto assets.”

The task force’s analysis will not be limited to the central bank and regulatory bodies, but will welcome contributions from trade bodies, consumer groups and investors, in order to obtain a broad view of opinion from both government and public institutions.

The UK is known as a driving force in blockchain research and the spread of solutions is being utilized by numerous companies, as the country becomes one of the world’s most significant and dynamic fintech hubs. The government is keen to see further development of non-traditional innovation in the light of this recent progress.

BoE governor Mark Carney has moved over time from a position of claiming that cryptocurrency had “pretty much failed” as a form of money, to recent indications that he was not against innovation provided by cryptocurrencies, stating that regulation could potentially “serve the public better”.

British Conservative Member of Parliament (MP) Matt Hancock delivered a speech to the Law Society last month commenting that blockchain technology would have a “monumental impact” on people’s lives in the future.

 

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