The U.S. government mood on crypto is shifting

Senator Elizabeth Warren, who sits on the Senate’s banking and finance committee, is not known for her love of crypto, and indeed is better known for her push for tighter regulations on cryptocurrencies. So, it was something of a surprise when she made a statement on Wednesday of this week, saying that digital currencies, and in particular those issued by central banks, could assist unbanked, low-income Americans. She pointed out that this group has long been denied access to bank accounts in the mainstream banking system.

So, is this a signal that support for cryptocurrencies is picking up in Washington D.C.?

When Warren spoke to CNBC’s Squawk Box, she said, cryptocurrencies and central bank digital currencies “may be an answer” to the “enormous failure by the big banks to reach consumers.”

She also pointed out that digital currencies have “extremely low transaction costs,” and that this could make them an ideal way to include the 15 million Americans without bank accounts in the financial system. Warren also highlighted a fact that is well known to those working with the financially underserved: they have to pay intermediaries to cash their pay cheques or to pay bills. Access to a digital currency could change all that for these people and give them back full control of their money.

When asked about her objections to crypto, Warren replied that her concerns focused on “bad actors” rather than cryptocurrencies per se, saying that in her view a “wholly unregulated market” has allowed “big guys to take advantage . . . of small investors and taxpayers.”

The sentiments Warren expressed this week are significantly different to her thoughts expressed in a letter to Janet Yellen, the Treasury Secretary, in which she urged Yellen to lead “a coordinated and cohesive regulatory strategy” to help mitigate the “growing risks” cryptocurrencies pose to the financial market.

Before we get too excited about what appears to be a change of direction on Warren’s part, it is probably best to reserve judgement until we see the Fed’s highly anticipated report on central bank digital currencies, which is due to be released in early September. Fed Chair Jerome Powell has already insisted the Fed isn’t rushing into the space, but he has suggested that a digital US currency could make all other cryptocurrencies obsolete. He said, “You wouldn’t need stablecoins, you wouldn’t need cryptocurrencies if you had a digital U.S. currency. I think that’s one of the stronger arguments in its favour.” That’s quite a big claim that smacks just a bit of American exceptionalism.

Meanwhile the Bank of America is reconciled to digital currencies, and sent out a note to its clients this week saying:

“Digital currencies—either issued by central banks or privately issued with safe, liquid backing—seem inevitable.” It added that central banks in particular “have the power and the will to prevent a very bad outcome in terms of collateral damage in the financial system.”

In the end, that is their real concern. Make of it what you will.

Will a boom follow Covid-19?

Many people must be wondering what the rest of this decade might look like after such a disastrous start to the 2020s. Can we look back at history and see a trend? For example, the 1920s that followed World War I and the Spanish flu epidemic was a Golden Age when economic growth surged, society relaxed a lot of its restrictions, women cut their hair for the first time, all of it captured and portrayed in F. Scott Fitzgerald’s ‘The Great Gatsby’. Now there’s a book that has never gone out of fashion.

This week I read an article by Rich Karlgard in Forbes that is written from the optimist’s viewpoint. He believes there are four possible reasons that the 2020s might be another 1920s, although he does so with caution.

Digital tech will accelerate

There is no doubt that the pandemic made all things digital vastly more important. Otherwise, we wouldn’t have seen so much change in such a short time. Karlgard first points to the fact that back in 2017, Diane Greene, then the Google Cloud CEO, told a Forbes audience that the rate of digital technology progress was accelerating rapidly. But that does not necessarily bring productivity along with it, because the business model needs to change for that to happen. Then along came Covid-19, which forced a rapid business change. Microsoft CEO Satya Nadella has said that five years of digital transformation had taken place in six months, all because businesses needed to work smarter, faster and be more nimble.

Artificial Intelligence is now scalable

A number of digital technologies reached maturity at the same time: cheaper cloud computing, universal digital computing and faster telecoms with the arrival of 5G. And then there is Artificial Intelligence (AI). Karlgard says this will be the decade of enterprise AI, and that’s spot on. Prior to 2020 using AI was hard, labour-intensive, expensive work, but now it is very much easier to use and it is going to transform many areas of industry, from logistics to customer service.

We’re awash with capital

Although it may not always be obvious the world is swimming in capital right now, which makes it easier for start-ups to get the funding they need. Investors have their eyes on digital technology and AI products, because as Karlgard says, “thy know they are game changers.” He adds, “These will disrupt business models and markets, and power enormous fortunes.”

Revolutions in the physical world

We are not talking about physical revolutions here; but revolutions in the way aspects of the physical world are being changed by technology. For example, autonomous trucks don’t need to take rest breaks, drone cameras can improve agricultural crop yields, and gene sequencing combined with AI can create personalised medical treatments.

However, whilst all these may lead to a boom after what feels like a bust, if we look back at the 1920s, we must note that while cities grew and grew, rural areas were not invited to the party, creating a divide that lingers to this day. The 1920s also experienced a stock crash in 1921 that almost buried the decade, followed by the more famous Wall St crash of 1929. So, even the Golden Age had its downsides. Still, after our experience of 2020-21, one that has been globally shared, let’s focus on optimism and the way in which the Covid-19 pandemic has accelerated digital technology for our benefit and forced us to be more agile.

European Commission causes crypto shock!

Early yesterday, the European Commission regulators declared that they were “banning anonymous cryptocurrency wallets” as part of a money laundering crackdown. The shockwaves rippled through the markets and probably caused some near heart attacks for a few crypto holders.

Thankfully, it soon became clear that the EU had not been quite clear about the substance of its proposed regulation. It is one of four proposals intended to “to strengthen the EU’s anti-money laundering and countering terrorism financing (AML/CFT) rules,” as its press statement says.

The statement also says:

“At the heart of today’s legislative package is the creation of a new EU Authority which will transform AML/CFT supervision in the EU and enhance cooperation among Financial Intelligence Units (FIUs). The new EU-level Anti-Money Laundering Authority (AMLA) will be the central authority coordinating national authorities to ensure the private sector correctly and consistently applies EU rules. AMLA will also support FIUs to improve their analytical capacity around illicit flows and make financial intelligence a key source for law enforcement agencies.

In particular, AMLA will:

  • establish a single integrated system of AML/CFT supervision across the EU, based on common supervisory methods and convergence of high supervisory standards;
  • directly supervise some of the riskiest financial institutions that operate in a large number of Member States or require immediate action to address imminent risks;
  • monitor and coordinate national supervisors responsible for other financial entities, as well as coordinate supervisors of non-financial entities;
  • support cooperation among national Financial Intelligence Units and facilitate coordination and joint analyses between them, to better detect illicit financial flows of a cross-border nature.”

Unfortunately, Mairead McGuinness, the EU Commissioner for Financial Services, tweeted that the measure “will ban anonymous crypto wallets and make sure that crypto-asset transfers are traceable.” But, as David Z Morris writes, “The statement from McGuinness is straight-up FUD.”

The EU is not proposing a ban on anonymous wallets; instead it is proposing tighter rules on money service providers, such as exchanges or custody services. Morris explains, “In short, the ban would impact the crypto equivalent of Swiss bank accounts, not the use of crypto as cash.”

What Morris also pointed out is important: media outlets reported McGuinness’s tweet without checking the veracity. As a consequence crypto prices slumped, although they have recovered since. However, he does say, and this is important: the EU knows it can’t ban anonymous wallets, so why would a Commissioner tweet misinformation? He suggests, “by obfuscating the difference between custodial wallets and self-custody software, they may hope they can mislead some portion of the public into thinking that custodial accounts are the only kind that exist.”

The upshot of all this is “if you’re willing and able to self-custody, which you should be doing anyway, you can still hold and spend crypto anonymously.

Europe and UK offer fintechs a strong base for success

Don’t let the current crypto market news depress you; things are not as bad as they seem, especially if you are able to look at the bigger picture around cryptocurrencies.

According to media reports, in April 2021, the cryptocurrency market topped $2 trillion of valuation for the first time, and Bitcoin’s market value was sitting at 1.15 Trillion dollars. Bitcoin registered a crucial growth in the last six months, equivalent to a 450 percent rise, and Bitcoin and Ethereum have also been witnessing huge rallies this year.

Add into this mix the fact that cryptocurrency has rapidly gained popularity and has begun affecting the economy of some countries and you have a promising outlook.

An interesting report IBS Intelligence shines a light on the European fintechs that are doing well, as does an article in today’s Guardian that reveals a growing level of value in the UK’s digital finance industry, which has just passed a “multibillion-pound peak of investor interest.”

IBS Intelligence claims that the four fintechs currently performing well across Europe are Luno, Wirex, Ziglu and Bitcoin Suisse – two of them (Luno and Ziglu) are London based.

Luno is a global cryptocurrency co-founded by CEO Marcus Swanepoel and CTO Timothy Stranex. Its products and services aim to make it safe and easy to buy, sell, store and learn about cryptocurrencies like Bitcoin and Ethereum. Last year, the Securities Commission (SC) of Malaysia gave Luno its approval to operate as a recognised market operator (digital asset exchange), and the fintech now has hubs in Singapore and Cape Town. It has grown significantly in recent years, with nearly 400 employees and more than five million global customers spanning over 40 countries.

Wirex is already well known. It is a digital payment platform and regulated institution that developed a contactless payment card giving users the ability to seamlessly spend crypto and traditional currencies in real life.

Ziglu was founded in London in 2018 and is a cryptocurrency venture that aims to offer exchange services at interbank rates and at the same time, facilitate the purchasing of cryptocurrencies through various exchange platforms. It has a Peer-to Peer payment app that enables Ziglu customers to instantly send or receive any currency from any contact within the challenger’s community. Significantly, the founders of this enterprise come from Starling Bank, one of the strongest British challenger banks.

Bitcoin Suisse is a Swiss-based financial services and technology services provider that offers trading, brokerage, storage, staking, collateralized lending, and crypto financial solutions. Payments supplier, Worldline recently entered into a partnership with Bitcoin Suisse in a bid to provide crypto payment services to Swiss merchants and consumers.

Meanwhile in the UK, Revolut confirmed last week that it had raised another $800m from big investors including the Softbank Vision Fund, taking its valuation to $33bn. It came just weeks after Wise, the forex transfer business listed on the London Stock Exchange for £9bn.

There is, the Guardian reports, a high level of private investor interest in fintechs. “I’m very positive that we will see additional and similar success stories in the UK coming down the track,” said Janine Hirt, chief executive of the UK’s fintech lobby group Innovate Finance. She added, “British fintech firms continue to attract huge amount of international investment, second only to the US,” largely because most business is done in English, it has access to top tier universities, a diverse talent pool and has strong support from regulators and government.

Brexit may be a deterrent for European talent wishing to work in British fintechs, but the sector is working hard to push the government to secure greater access to international markets for UK fintech firms – particularly a post-Brexit EU – in a way that will make it easier for them to go global. That seems likely to happen given the UK and Europe’s glowing future outlook for fintechs.