Crypto Cat and Mouse: 2018 Will Be the Year of Policy Subterfuge

The new year will usher in regulatory arbitrage amongst companies that want to develop innovative solutions, as well as from states seeking to maximize tax receipts from cryptocurrency-related businesses.

While this may sound like a bold statement given what we saw in 2017, I believe the controversy brought by state approaches to cryptocurrency regulation this year far will exceed that of last year. In the regulatory world of financial services, the divergence of attitudes between state regulators is striking, ranging from the official recognition of bitcoin as a payment form in Japan to a shadow ban in China.

At the same time, a number of countries have decided to keep their powder dry whilst they explore how the industry unfolds prior to spelling out their thinking on the technologies.

Looking ahead, I believe it’s worth keeping in mind the diversity of approaches.

UK: Positioning for maximum market share

The UK has decided to play a clever game so far.

It appears to want to keep its reputation as an easy place to do business in tact whilst it seeks to understand the best way to move forward. This may be in part due to the spectre of a full blown banking meltdown if banks fall too far behind in the constructive destruction that accompanies the natural order of innovation.

Traditional banks have seen the writing on the wall, too. Take, for example, the ill-informed vitriol emanating from the likes of JP Morgan’s Jamie Dimon who calls bitcoin a scam whilst also being a founding member of the Enterprise Ethereum Alliance and forming a partnership with Zcash.

Not all bankers are cut from the same cloth, however. There is no better marketeer for the campaign to bring change within the banking sector than former Barclays CEO, Anthony Jenkins. He revealed his view during a CNBC interview that banks stand to experience their very own “Kodak moment” should they refuse to keep up with the progress that fintech represents.

To what extent bankers listen to Jenkins’ warning that “…we can imagine total transformation of the banking system, using blockchain for example, in a world where banks don’t really exist anymore,” remains to be seen. Jenkins was seen a classy operator in the UK banking sector and his views will have informed the UK government’s positioning on the matter.

In the UK, an official announcement was made by the regulator to “warn investors of risks” associated with bitcoin, whilst simultaneously veering sharply away from any rules to inhibit commerce. Such an approach suggests savvy thinking from a government that understands the need for high-growth companies to take up the slack in a post-Brexit environment.

According to recent data from the International Monetary Fund (IMF), the UK financial sector represents around 7 percent of GDP but accounts for 10 percent of tax revenues and 14 percent of exports. Any draconian crack down on cryptocurrencies could be taken as a red flag by global investors responsible for the UK’s soaring FDI, which grew to $253.7 billion (197 billion pounds) in 2016, up from £33 billion the previous year, according to OECD data.

China: Hiding away from financial freedoms

China, on the other hand, has gone for the “head in sand” option, placing a covert ban on exchanges and massively shooting itself in the foot. China’s citizens make up some of the most technologically able people in the world. Everyday Chinese people demonstrate on a daily basis how globalization and peoples’ need to control over their own financial futures act as a cosmopolitan impulse shared by the whole of humanity.

Whilst the country’s political class comes to terms with unstoppable changes, its citizens find ingenious ways to circumvent prohibitions and the state loses its chance to share in the spoils of progress.

China can bury its head in the sand for now but the tremendous losses it is stacking up in terms of opportunity costs will come home to roost in a relatively short period of time.

There is a good deal of complexity in how most other states communicate their intentions towards cryptocurrencies.

And, this reinforces a zero-sum game model as far as the cryptocurrency focussed businesses are concerned. Just as traditional banks move headquarters to jurisdictions with favorable regulatory regimes, so too will cryptocurrency related companies move to light touch or ‘wait and see’ countries…

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