Bitcoin bonanza: the rise of regulation

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By:
Farah Khalique
Published on:

The latest cryptocurrency price crash is shining the spotlight on the regulation of these borderless, digital currencies, but the rules differ wildly from country to country; global super-regulator IOSCO is set to make an announcement.

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The world of cryptocurrencies is on fire, with the price of bitcoin slumping from $14,755 a piece to $9,928 in the space of a week, having shot up to almost $20,000 in mid-December.

Ethereum, the world’s second largest cryptocurrency, fell from a high of $1,415 at the weekend to under a thousand dollars on Tuesday; its next biggest competitor ­– finance industry-backed Ripple – fell from a high of $3.40 on January 7 to just under a dollar.

The volatile price of bitcoin
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These wild price swings come amid moves from regulators to clarify their stance on cryptocurrencies.

Most recently, South Korea announced it intends to abolish cryptocurrency exchanges, while China is rumoured to roll out a total ban on bitcoin mining. Given South Korea is home to some of the largest cryptocurrency exchanges and most bitcoin mining comes out of China, this is significant.

Whereas coal is mined from the ground using heavy machinery, bitcoin is mined from computers using gargantuan amounts of electricity. If bitcoin isn’t mined, transactions aren’t approved and new bitcoins aren’t produced.

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Kerrie Walsh,
Capital Economics

This could bring chaos to the bitcoin community, says Kerrie Walsh, assistant economist at research house Capital Economics.

In the short term, the cryptocurrency industry can simply up sticks and move elsewhere to a region with fewer restrictions, as happened in September. China banned cryptocurrency trading – South Korea and Japan quickly established themselves as trading hubs – but this pattern cannot continue indefinitely, suggests Walsh in a recent research note.

She writes: “The more widespread bitcoin becomes, the more likely it is that stricter regulations will be enforced.

“Indeed, regulators are leaning towards forcing traders to disclose their identity. Any scheme that reduces the anonymity of bitcoin transactions could strip away much of the cryptocurrency’s appeal.”

The threat that bitcoin poses to official monetary policy and even tax collection means that authorities will “probably want to get even tougher”, according to Walsh.

Already, Pan Gongsheng, the deputy governor of China’s central bank, is publicly encouraging the country’s national and local authorities to ban cryptocurrency players.

"While bitcoin has overcome previous regulatory hurdles, it’s not certain that it could get past a bigger clampdown,” writes Walsh.

Regulatory roads

Regulators around the world are taking different approaches to cryptocurrencies.

Russia is expected to announce regulations in July; president Vladimir Putin has decreed that legislation will be “definitely required in future”. It has also been reported that the eastern city of Vladivostok will be home to two cryptocurrency agencies, intended to oversee digital currencies.

Singapore issued a statement in December, warning the public to act “with extreme caution” if investing in cryptocurrencies, while in the Middle East Israeli authorities announced they would block companies that trade in bitcoin from operating on Tel Aviv’s stock exchange.

However, the betting-friendly tax haven Gibraltar has taken a more conciliatory approach. This month, it set up a new framework in collaboration with the financial services industry to govern the cryptocurrency sector.

A number of high-ranking regulators, including the Commodity Futures Trading Commission and the Financial Conduct Authority, are scrutinizing digital currencies, but there appears to be no united regulatory front.

However, a spokesperson for the International Organization of Securities Commissions (IOSCO) – a global association of organizations that regulates the world’s securities and futures markets – tells Euromoney that it will issue a statement shortly regarding cryptocurrencies.

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David Cheetham, XTB

The regulatory clampdown in South Korea has “raised the spectre of tighter regulation” elsewhere, says David Cheetham, chief market analyst at online trading firm XTB, in a recent research note.

“[It] has in many ways been a victim of its own success in attracting the unwanted attention of regulatory authorities after the scarcely believable gains seen last year,” writes Cheetham.

Scam stories around cryptocurrenices have spawned a number of manifestos from concerned industry participants, setting out basic standards.

Think-tank Z/Yen launched in October a voluntary code of conduct, the London Fundraising Token Manifesto. The idea behind it is to bring integrity to initial coin offerings, which are a popular way for cryptocurrency start-ups to raise funds for a new venture without the regulatory hassle that comes with a traditional initial public offering.

The manifesto has 41 signatures from respected names, including Roger Gewolb, founder of the Campaign for Fair Finance. However, it remains to be seen whether the self-regulatory approach will placate increasingly suspicious regulators.