AN ALL-STAR TEAM OF PANELISTS AT THE IG BLOCKCHAIN FORUM
Cryptocurrency has become the most talked about asset class in the investment world. There are many reasons for this. For one, it has faced unmatched volatility and growth in an incredibly short span of time. It also is baffling to many traditional financial players, a game-changing technology that is still figuring out what it will become.
At an all-star panel at the IG Blockchain & Cryptocurrency Forum, held at the Atrium at Dubai International Financial Centre, experts discussed one of the key issues facing cryptocurrency—regulation. Should cryptocurrency be regulated—and can it be? What is the best possible future to ensure growth and safety for investors?
To Mohammed Damak, Senior Director & Lead Analyst, S&P Global, one first must answer the question of what a cryptocurrency is, and whether it qualifies as a currency at all.
“To me, it’s not a commodity, nor a currency. It’s not a currency because it fails the basic test of the two characteristics of a currency, which are a store of value, and an effective means of exchange. Let me explain myself. We published research of cryptocurrency in February. I started to look at the numbers in January. In January the market cap was $823 billion, and when we published the research in February it was 324, then 267 on 30 March and now it’s $401 billion. The market is concentrated. There are 1700 cryptocurrencies, but the top 10 make up 80 per cent of the market capitalization. The price of bitcoin is 3,200 times more volatiles than gold. It’s 2,200 times more volatile than the exchange rate between the euro and the US dollar. 1700 users control more than 26 million other users. The concentrated nature make it prone to market manipulation. When we ask ourselves the question over what a crytpocurrency is, we deduced that it is a speculative instrument at this stage,” said Damak.
Dr. Marwan Alzarouni, Bitcoin & Blockchain Investor, does not believe it is a currency. “The licence I have right now is in DMCC, and it says propriety trading in crypto commodities, meaning it is considered a commodity,” said Alzarouni.
Utpal Nath, President of Dubai Chapter, Government Blockchain Association, pointed out that bitcoin, the most famous cryptocurrency, never called itself a currency.
“We have to take a step back and realise what regulations we’re talking about. Bitcoin, when it came up, it never stated that it was a cryptocurrency, it called itself a digital payment solution. Adding up the blockchain as a technology, this addresses the core problem of double spending. This disrupts many processes around the industry. So what will the regulator regulate? Anti-money laundering, anti-terrorism, and know-your-customer data privacy,” said Nath.
Kyp Zoumidou, Senior Executive Officer, IG, which hosts a platform using which users can invest and track their investments into cryptocrrency, regulation will be necessary.
“If you put the word crypto before anything, does that mean you should get away with not regulating it? If crypto is such a big thing that can be used beyond currencies, such as medical usages, it should be regulated. If it’s used for finance, it should be regulated by the finance agencies. It’s such a wide thing that areas crypto should be regulated. Currencies should be regulated. Commodities should be regulated. I used to be head of compliance for ten years, so I have worked close with regulators such as the DFSA, FCA, and a number of European regulators. They’re getting to grips with what blockchain is because they want to use it themselves. They’re getting to grips with how cryptocurrency will come into the financial sector, and what to do with them. Regulators are people like us, though less like the people in this room, as they don’t know what cryptos are, and they’re trying to learn about it. Regulation are there to protect investors, and that’s why it needs to be there. It might be an inconvenience that you get your bags searched and scanned at the airport, but there’s a reason for it,” said Zoumidou.
“Blockchain was set up in 1991, and at that time the blockchain technology taht that part of the digital ledger technology was created. Cryptocurrency came after with bitcoin. Immediately, United States and the national regulatory institutions wanted to regulate it. It’s the only time in history where a product existed that was meant to escape state regulations. The idea of cryptocurrency is to not be effected by the regulatory system. This is an advantage and inconvenience. On the one hand, it can give you the chance to be very rich, but also to lose everything. It can give you a chance of escaping regulations—such as when Venezuela launched an ICO to escape the US embargo. It may give you the possibility of submitting money, but it will never replace the fiat money as we use it today. It could be seen as a security, or a security of exchange for the people that are a part of it. But legally speaking, if you pay someone in cryptocurrency, is it legally binding? Have you liberated yourself from the obligation to pay? If I pay you in bitcoins, did I legally pay you? This is only one of the legal issues that it has,” added Alain Zahlan de Cayetti, Managing Partner of CVML (Dubai).
Matthew Amlôt, Editor at CPI Financial, believes that the vastness of the space creates unique issues.
“There are some 200-odd countries in the world, each one broadly having their own currency. Last time I checked, there were 1700 differs. How can we regulate a market like that?” asked Amlôt.
“At IG, we cover about 10,000 different products. If you split that 1700 up, i’m sure there’s subdivisions you can categorize them into different areas, and from there you can give them to different regulators to which they fit best. There’s no magic answer, you have to apply your regulatory resources to whatever area it is at best you can. The regulators in the UAE are a resource that helps the economy grow, and that’s how we need to think about cryptocurrency regulations too. Perhaps there should be a tax on bitcoin transactions, much like VAT was implemented in the UAE,” said Zoumidou.
De Cavetti believes that there are already regulations in place that affect crytocurrencies—the basic regualtions on anti-money laundering, anti-terrorism funding and know-your-customer privacy issues.
“All of these apply to all transactions, including cryptocurrencies,” said De Cavetti.
“In Dubai, we’re fortunate enough to be in a place that is well advanced when it comes to technology and embracing new technology, but you cannot use bitcoin to buy your groceries at Spinney’s or Carrefour. You may be able to buy a Tesla, but not everyday payments. Because o that, it must be called a speculative instrument. Once we’ve agreed on that, we can move forward on how it can be regulated. On that point, the future will depend on the way that it will be regulated. In our opinion, if it’s regulated at the G20 level and it starts to be accepted by more governments and economic operators, then it could become a viable instrument,” said Damak.
“Blockchain is the real positive disruptor. It’s the technology that could make the financial transactions more rapid. Banks could use blockchain to make transactions more rapid. In the UAE, Emirates Islamic has started to print chequebooks with QR codes that are stored on blockchain. Blockchain could be a positive disruptor for the financial services industry, and probably will in the future,” he continued.
According to Amlôt, a key feature of crytpocurrency is the anonymity associated with it, creating a challenge for how exactly regulation could work in something that is inherently about anonymous transactions.
“We do this in my business with a phone number and a picture of the customer’s ID. We also limit the amount he can draw per day. For larger sums of money, we’re much more extensive in checking these things,” said Alzarouni.
Nath pointed out that there must be a middle ground between anonyimity and proper regulations.
“Yes, some tokens coming out from blockchain technology have an underlying anonymity parameter, but it will have to fall under local regulations, as it could fall under tax evasion,” said Nath.
Damak stressed that there must be an effort to protect the consumer.
“When 1700 people can manipulate the price of bitcoin, and do whatever it takes to work in their. benefit, it can create problems. This is why we’ve seen banks internationally stop their customers from buying this speculative instrument on their credit cards,” said Damak.
IG’s SEO Zoumidou pointed out that one of the key issues with cryptocurrencies is how it interacts with traditional finance, especially once investors are trying to cash out.
“There’s an important aspect: what are you going to do with this stuff? If you have it and cannot transfer it to any other value, is it useful? If you’ve made profits in crypto, and you want to take that money out and get it back into your bank account and use it for something, if you transfer this money to a UK bank and tell them that the source of funds is crypto, they won’t accept it, because they don’t know where it’s come from. There’s a requirement in the financial services system to do AML and KYC, and while my initial reaction is that you have to regulate it to protect people, some countries put sanctions in place are overreaching and made problems for other people in the world because they’re trying to control things—and while i support regulation, I think that may have gone too far,” said Zoumidou.
However, while cryptocurrency is lambasted because of its volatility, Zoumidou pointed out that without volatility, there’s no reason to invest in something to begin with—because that is where gains are made.
“Volatility is the key to trading. If you get too much volatility, you’re going to get whipped in and out of whatever it may be, commodity or currency. There needs to be a level of volatility in an asset class in order to trade it. Depending on your position and portfolio, the question of whether now is a good time is different for everyone in the room,” said Zoumidou.
“Your risk appetite and your access to funds are very important. Don’t get into anything without getting into the research yourself,” warned Alzarouni.
Cryptocurrency has the potential to change the finance world, according to Damak, in far more exensive ways than many may realise.
“I represent a rating agency, so I cannot advise investors what to do or what not to do, but on a macro level, if we were to see banks start to issue cryptocurrency in a decentralised manner, it would be the end of central banking as we know it. If we were to see central banks start to issue cryptocurrency, it would mean the end of the banking system as ew know it. Which way the market will go, only the future will tell, but at this stage, this is our view,” said Damak.
Nath stressed that investors need to practise caution—even while others are getting rich overnight.
“My advice would be do not fall into FOMO, or fear of missing out. A lot of work has to be done in the blockchain space itself. I’d say 90 per cent the cryptocurrencies are not giving promising business case. Think about what type of a security you’re putting the money in, what the business is behind it, and what your risk appetite is. From a tech perspective, we’re only at the ground level. There will be enormous opportunities. and there will be use cases that we haven’t seen yet. Do not fall for the gold rush, be realistic in your approach,” said Nath.