Are Regulators and Corporations Embracing the Power of Cryptocurrency?

The crypto world has always faced backlashes as a result of its unregulated nature and the fact that young entrepreneurs use technology as a tool to defy long-standing financial bureaucracy. However, more than ever, we have begun to see more efforts on the parts of regulators and traditional institutions to understand crypto, integrate it with legacy systems, and capitalize on its commercial appeal.

The result is a cascade of crypto developments that promise to expose the concept to a broader range of audiences and, in the process, demystify some of the elements that make digital assets unique. In this article, I will be tracking some of the developments that showcase the increased involvement of traditional entities in the crypto sphere.

Institutional Adoption of Crypto

The crypto community mostly celebrates the influx of institutional involvements in digital assets. According to a majority of crypto proponents, the explosion of established corporations in the crypto industry is perhaps the main driver for mainstream success. However, although a majority of powerhouses have had one or more stint in the crypto landscape, only a few have invested a large chunk of resources to the crypto narrative. While this is a given, the introduction of Facebook’s Libra in 2019 marked a turning point. Following Facebook’s announcements, financial and technology giants, as well as regulators, have become aware of the possibilities embedded in digital assets-enabled infrastructure and have begun to reposition themselves to profit off these opportunities.

Sarah Austin aptly documents these events in a recent publication where she acknowledged the impact of Libra:

“Central banks, governments, and even some technology giants have begun exploring the option of creating their own “stable” currencies. Facebook’s Libra, for example, can fit this role quite easily. It is backed by a reserve basket of different national currencies to help keep its value somewhat stable. However, the Libra project has received a lot of backlash, and its future remains uncertain. The efforts by Facebook have not gone unnoticed. Central banks and governments are contemplating whether they can create a digital national currency. Efforts are underway in Russia, China, and other countries.”

Subsequently, the global stance on crypto regulation has experienced a mild shift that indicates that regulators will continue to have regulatory oversight on the crypto economy, most especially now that large corporations are considering upping their stakes in the industry. In that timeframe, we have witnessed China’s resolve to harness the components of cryptocurrency to create a central bank-backed digital currency and how such a move has sparked similar developments in various countries.

Likewise, nations that are yet to implement regulatory frameworks for crypto firms operating within their jurisdiction have suddenly revealed their intent to do so. For instance, the Nigerian Securities and Exchange Commission recently announced that it is looking to introduce regulations targeted at the country’s buzzing crypto economy. The regulator stated that “virtual crypto assets are securities unless proven otherwise.” It added that the “burden of proving that the crypto assets proposed to be offered are not securities and therefore not under the jurisdiction of the SEC, is placed on the issuer or sponsor of the said assets.”

However, it made it clear that this is not an attempt to stifle the growth of crypto but a critical step to reduce the risks brought about by unregulated and unscrupulous crypto investments. The document reads:

“The general objective of regulation is not to hinder technology or stifle innovation, but to create standards that encourage ethical practices that ultimately make for a fair and efficient market.”

In response to this announcement, Ray Youssef, CEO of Paxful, reiterated the p2p exchange’s commitment to contributing to the formative stage of the Nigerian SEC’s proposed crypto regulatory framework. Youssef explained that “regarding the proposed rule by the Nigerian Securities and Exchange Commission (SEC) to regulate crypto-token or crypto-coin investments, we are at too early a stage to make any comment. We are analyzing the impact of the current information on the business and also on the community.” He added:

“That said, we are open to an opportunity to talk to the regulators and help showcase the various benefits that we’ve learned through the years that cryptocurrencies provide. We envision building and helping communities to be financially independent. We see Africa as a leader in fulfilling this vision.”

The US Embraces Crypto

In the US, there is more at stake. Right from the onset, US-based crypto firms have had to scale a plethora of regulatory hurdles at the state and federal level to establish the legality of their businesses. In an unexpected turn of events, these stumbling blocks are on the verge of giving way to improved regulatory structures.

On September 15, The Conference of State Bank Supervisors (CSBS) introduced a state-initiated program, which will allow nationwide payment companies to scale a single licensing test that contains all state regulatory requirements. The announcement reads:

“Known as MSB Networked Supervision, the initiative will apply to 78 of the nation’s largest payments and cryptocurrency companies that combined move more than $1 trillion a year in customer funds. Building on years of multistate coordination, this exam protocol will enable states to fine-tune a risk-based approach to each company’s operations. When compliance issues arise, the states will be better positioned to follow up throughout the year. The single exam will be led by one state overseeing a group of examiners sourced from across the country. By relying on experts across the state system — including in cybersecurity and anti-money laundering — regulators will gain more insight while also freeing up state resources.”

Following the introduction of a federal licensing structure, the acting head of the Office of the Comptroller of the Currency (OCC), Brian Brooks, expressed his support for this approach. He stated:

“I congratulate CSBS and the states on recognizing what we have been saying for years that for national financial service businesses, it makes little sense to have a patchwork of regulation and supervision. While the efforts alleviate the inherent challenges facing a system based on 50 state laws and licensing regimes, only federal law and the uniform regulatory framework it provides fully addresses these issues.”

Recall that the OCC had made headlines in July after giving the nod to nationally-chartered banks to provide crypto custody. Experts believe that this initiative will promote financial inclusion and encourage more traditional institutions to explore the crypto industry. Hong Fang, the CEO of OKCoin, reiterated this sentiment in an interview with Cointelegraph. He stated:

“The OCC has made an important milestone by allowing traditional banks to provide custodial services that will apply to crypto, thereby strengthening the overall financial system and broadening financial inclusion. While the public letter didn’t introduce new regulations, it added much-needed clarification in regard to national banks providing cryptocurrency custody services.”

Sam Wyner, a co-lead of crypto-asset services at KPMG, added that this development bodes well for institutional investors and projected exponential growth in the near future. He explained:

“Custody is a fees-based business and regulatory support behind a new fees-based business makes it that much more desirable. The institutional crypto markets continue to grow in size, maturity and sophistication, driving the need for custody services. Uncertainty in the market further increases the appeal of a net-new fees-based product offering.”

Furthermore, Alex Batlin, the founder and CEO and founder of Trustology, believes that banks now have more reasons to engage with the crypto industry, since this new regulation removes regulatory roadblocks and reduces the cost for doing business. Batlin asserted:

“Now that the greenlight is official, in principle, one of the things it should do is reduce the cost of entering this line of business, it’s easier to do so because there are less hurdles[…] Banks are very risk-conscious. So, when you have them looking at a proposal, and there is lack of regulation, why would you risk your license for something that will yield pretty low returns in the next couple of years? I think there will be demand whether it’s on the lower end or whether it’s sufficient for the likes of BNY and others.”

Nonetheless, this initiative will put existing crypto custodial firms on their heels. Market players may worry that the influx of competition from established banks will force them to optimize their offerings or reduce their fees so as not to lose prominence – or so it seems. As for Diogo Monica, president of crypto custody service Anchorage, OCC’s directives put the spotlight on the crypto custody sector and promised to push more institutional crypto involvement. He stated:

“For those of us who have been building up this ecosystem for years, it’s hugely validating of those efforts. But the real significance here is for the kinds of institutional players who may have been sitting on the sidelines in the absence of clear regulatory guidance. The OCC coming out and saying that more traditional financial institutions can custody crypto effectively erases that concern.”

Similar to this view, Mati Greenspan, the founder of Quantum Economics, agreed that the actions of US regulators suggest that the country is starting to embrace the power of digital assets fully:

“It did take a while, but governments and large corporations are finally realizing the power of programmable money and the necessity for digital scarcity. The internet of value is now under construction and they don’t want to be left behind.”

Without any doubt, similar tropes have emerged in other regions where crypto is actively being traded and utilized. Nevertheless, this does not erase the fact that the crypto industry is still far from where it hopes to be, nor does it downplay scenarios suggesting friction between the market and traditional entities. For example, Brian Armstrong, CEO of Coinbase, recently expressed his frustration at Apple’s somewhat stifling business policies. He made this known in a series of tweets where he accused the tech giant of limiting innovation and avoiding competition from the emerging DeFi landscape. He tweeted:

“Why would Apple want to prevent people from earning money during a recession? They seem to not be ok with it, if it uses cryptocurrency. I’m not sure why. This is what our Coinbase Earn product does.”

Armstrong went on to explain that Apple’s policies often force Coinbase to modify its offerings, which is sometimes detrimental to user experience. He added:

“We sometimes end up in bizarre negotiations with them, modifying the product, and asking users to jump through hoops (do a task on mobile, then move to the web to claim your reward!) to comply with their guidelines. This creates a worse experience for Apple and Coinbase customers[…] Forcing users to use the App Store instead of Dapps (websites), or IAP instead of crypto payments, reminds me of what Microsoft did back in the day (forcing users to use IE if you were on Windows) which led to all their antitrust issues[…] Apple, it’s time to stop stifling innovation in cryptocurrency. We would like to work with you productively on this. Someday, cryptocurrency could even be integrated into IAP to give people in emerging markets better access to the financial system globally.”

In another example of the clash of interests, the US Internal Revenue Service (IRS) has upped its efforts to unravel the privacy-functionalities of certain coins. It released a proposal that offers a $625,000 bounty to anyone who can develop and implement a way to track the transactions executed on Monero and Lightning Network. The proposal reads:

“IRS-CI is seeking a solution with one or more contractors to provide innovative solutions for tracing and attribution of privacy coins, such as expert tools, data, source code, algorithms, and software development services.”

The tax regulator acknowledged that it lacks the resources necessary to bridge the privacy features of some crypto networks and other off-chain transactions, and it will not shy away from sourcing for external help:

“Currently, there are limited investigative resources for tracing transactions involving privacy cryptocurrency coins such as Monero or other off-chain transactions that provide privacy to illicit actors.”

While crypto tracking helps reduce money laundering and curb potential terrorist funding campaigns, it does shrink users’ right to privacy. As expected, developments such as this will continue to spark arguments for and against crypto privacy and the apparent lack of interest, on the part of government agencies, to preserve this right.