Regulators around the world are grappling with understanding digital currencies, but greater regulation is necessary to attract more institutional investors to the marketplace, according to speakers at a conference The Blockchain Economy World Tour 2018 hosted by First Digital Capital.
- Regulation of digital currencies and ICOs is coming as more capital flows to the sector
- As liquidity of digital currency trading increases, so will institutional flows into the market
- Development of market infrastructure such as custody and administration services is essential to attract institutional investors
- Current drop in Bitcoin values is likely to be a blip rather than a bubble
- Digital currencies will compete against each other for integrity. Market forces will decide which one becomes popular
- Bitcoin unlikely to become next global currency
Regulators have significantly lagged digital currency development and basic questions are still unanswered, such as whether digital currencies are securities and what protections, if any, are necessary for investors.
In Australia, while digital currency exchanges will be regulated by AUSTRAC, there may be some activities that exchanges may undertake that mean they do require an Australian Financial Services License (AFSL) to protect investors. While ASIC has publicly stated that Bitcoin isn’t a financial product and therefore isn’t automatically covered under existing AFS legislation, many people are investing in cryptocurrencies as if they are financial products, speakers at the conference said.
Regulators, for example, don’t have a definition of what is a utility token, and whether is it a security, including ASIC.
Regulation need to draw investors
While much of the appeal of cryptocurrencies is that they are decentralised, regulation is necessary given the huge amount of funds now being invested in digital currencies with much more to come, said Michael Casey, Senior Advisor MIT Media Lab, Advisory Board Chairman Coindesk. “I think we need to get this balance right when it comes to regulation, it’s a fine-tuning process.”
Lasanka Perera, co-founder of Independent Reserve, a digital currency exchange said. “We’re very pro-regulation as part of building our business and we’ve worked with regulators and have been educating them for a few years so I’m definitely pro-regulation,” he said.
Perera adds that a community is building in cryptocurrency trading and that he has worked to create an exchange with integrity. “But it was difficult in 2013 when people thought we were creating an exchange for drug dealers. The biggest difficulty was that the people who knew about Bitcoin, knew about it for the wrong reasons,” that is, for criminal purposes. Now it is recognised as a legitimate financial activity.
According to Marc Fisher, a First Digital Capital Director and hedge fund manager, institutions still need more to feel safe to invest in digital currencies and initial currency offerings (ICO). They need three things to do this. First, they want to know what the rules are, so regulation needs to catch up. Second, they need custodians who can certify that the digital assets are where they should be. Third, administrators who can value these assets quickly and independently. Also, the market needs to be bigger before institutions will start investing in cryptocurrencies.
Blockchain’s applications extend well beyond currencies
The speakers at the conference believe blockchain technology is driving a revolution in business and changing the world, well beyond its manifestation in cryptocurrencies. Many people recognise blockchain as being the core technology behind digital currencies, but blockchain has many other applications, such as helping start-ups raise capital through initial coin offerings (ICOs), helping government agencies identify people and keeping track of events and resources.
Just this month, MIT Technology Review reported that a Syrian refugee’s visit to a local supermarket in Jordan involves one of the first uses of blockchain for humanitarian aid. By letting a machine scan his or her iris, a refugee’s identity can be confirmed on a United Nations database and groceries can be paid with a variant of the Ethereum blockchain by the World Food Programme (WFP), and settled his bill without any need for cash.
Another example. Charitex, a profit for purpose to achieve social impact, is involved in Australia’s first ever ethical coin offering. Blockchain will be used to create a platform for the project management of social impact projects, to affect the efficient distribution and tracking of funds cross-border and peer to peer, according to Campbell Woskett, CEO at Charitex.
So blockchain isn’t just about Bitcoin. It is much more, about the identification, verification and exchange of information, as well as goods and services.
As Michael Casey put it, blockchain tokens and smart contracts will become standard forms of commercial and social exchange. Blockchain will be the method by which the supply chain can progress and resources can be managed and allocated, as the UN refugee example above highlights.
This highlights the utility of blockchain, says Dr Scott Stornetta, a co-founder of blockchain. While working at Bell Communications Research, Dr. Stornetta co-invented the blockchain technique along with Stuart Haber. This helped lay the foundation for Bitcoin and other digital currencies.
“The blockchain’s been around a long time, it’s not a new thing. What we have got with blockchain is an immutable record with the entire world as witness … The essence of the blockchain is that we distribute the verification. As soon as you’ve distributed the verification, you’ve built the blockchain.”
Nils Veenstra, Co-Founder BECON, spoke at the conference and introduced speakers from pioneering blockchain projects, including companies and persons who have decided to raise working capital by launching a token crowd sale, or ICO. More and more applications are coming on the market and companies are increasingly considering ICOs as a way to raise capital and digital currencies as a way to engage with their consumers. Soho, for example, is helping businesses raise capital through ICOs or a token sale. Such capital raisings are poised to disrupt the capital raising landscape as their potential and greater understanding is realised.
Blip or bubble for Bitcoin
Most speakers at the conference agreed that the drop in the value of Bitcoin this year is more likely to be a blip than the bursting of a bubble. While Bitcoin has appreciated a lot, and fallen back, market forces could propel a continued climb, many experts predicted.
Marc Fisher said: “I think we are in the very early stages. Is it a bubble or is it the beginning? We’re looking at a very straight line in terms of Bitcoin’s appreciation. But we could look back 10 years ago and see that [this year’s drop] as a tiny bump on a much larger progressive path. All that’s clear is that it won’t be linear. But is there a bubble?” Given the weight of money and projects that need to be funded, Fisher says it probably isn’t a bubble.
Indeed, in contrast to other asset bubbles such as the US tech bubble, which were fuelled by debt, Fisher says Bitcoin has attracted “real money”, a key differentiator. But Fisher does expect ongoing volatility and risk characteristics will be similar to other alternative investments.
Kevin O’Hara, Group CIO at Tulla Private Equity Group, agrees. There aren’t yet enough people involved in the marketplace for Bitcoin’s rise to be a bubble. The digital currency’s run is likely to go on for years as more people get involved, including institutions. “It’s going to be an exciting inflow of capital,” he says.
Limits to Bitcoin noted by experts
While Bitcoin is now the most recognisable application of blockchain and the world’s most traded digital currency, Dr Stornetta says the developer of Bitcoin, Satoshi Nakamoto, only got some things right.
“He certainly made some design decisions, probably the most significant one was that he decided to make the ledger contain money transfers. That’s big and that’s why we are here.
“He decided to make the whole computation peer to peer. That has certain practical implications which I don’t think were that well thought through …There is proof of work and that was a big decision. The good news is it that it got us a system that was actually worth something.
“But what it didn’t do was [develop] the generalised transaction record as payload which is really where smart contracts and a whole host of other opportunities are headed,” says Dr Stornetta. “We want to honour Satoshi but we can’t worship Satoshi. We can’t view that particular volatile mix of what he did as the be-all and end-all unless you are really long Bitcoin.”
As Dr Stornetta puts it, key problems with both Bitcoin and Ethereum are “inefficiency and scalability”. While VISA and Mastercard can process thousands of transactions every minute, Bitcoin can’t. It’s not nearly as efficient and proof of work is a significant inefficiency of both Bitcoin and Ethereum in settling transactions.
Emma Poposka, Co-Founder and Director of Brontech, agrees. “My bet is Bitcoin won’t be the next global currency. It has a lot of technical inefficiencies. There are a wave of currencies coming up with more sophisticated monetary policies with more sophisticated ideas with more sophisticated technology in terms of scalability and latency,” she says, noting the huge potential to disrupt one of the world’s biggest industries, financial services and money.
While initially Bitcoin was intended for transactions, it’s lost some of its identity and purpose to some degree.
“Now Bitcoin is some kind of investment instrument. People are hoarding it, they don’t want to spend it because they think it will be worth more in the future.” Bitcoin is becoming more of a reserve currency for exchanges working in this space rather than a form of money, she says.
Instead, the market will decide which is the most stable digital currency. “These different currencies with different characteristics will compete for the first time in history and the market will decide what is the monetary policy that is most acceptable for them … People will like and push currencies that are stable.”
“The market forces will bring the optimal solution,” says Poposka.