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.

Read this before October 2021 if you’re in crypto!

For those of us who believe in the concept of decentralization that underpins Bitcoin, I believe we are shortly going to receive a shock in the form of new regulations. The wealthiest countries in the world are snapping at the heels of the crypto universe and are looking at ways they can use financial regulations to bring fintechs, exchanges and crypto owners into line.

What do governments want to restrict?

Here’s a list of ‘things’ they are planning to target:

  • Peer-to-peer transactions
  • Stablecoins
  • Private wallets (phone, desktop, cold storage)
  • Privacy (privacy coins, decentralized exchanges, TOR and I2P)
  • Former ICOs & future projects (NFTs, DeFi, smart contracts, second layer solutions and more)

What is their intention?

At it’s most basic, you could say that they want to know EVERYTHING!

They want to:

  • Businesses active in crypto to be licensed and regulated like banks
  • Ensure full transparency for all transactions
  • Have the ability to freeze crypto assets belonging to persons or countries they believe are a ‘risk’
  • Force the disclosure of user information for all transactions
  • Revoke licenses of any that don’t comply with regulations.

They want control of a space that emerged precisely as a reaction to government and bank controls on money, both of which allowed a global financial crash to happen in 2008.

Why do governments suddenly want more regulations?

The answer is fear. Wesley Thysse in his document “Government Planning Worldwide Regulation of Bitcoin”, he points to one event that suddenly made them sit up and take real notice of cryptocurrencies, and that was Facebook’s 2018 announcement that it intended to create and launch a ‘so-called’ stablecoin. As Thysse says, “Until then they didn’t see cryptos as a risk to the global financial system.”

Why did Facebook’s Libra coin, as it was called at the time, send a ripple of unease through wealthy governments? Because Facebook’s billion users would have access to an instant payment system that was faster and more importantly cheaper than anything offered by the existing financial system.

Governments and the central banks huddled together in talks about what to do, and engaged an organization called Financial Action Task Force (FATF). Its goal is “to protect the integrity of the global financial system.” A real Big Brother!

FATF has already passed similar legislation for global governments, and it is the organization behind the rule insisting that all cryptocurrency exchanges that exchange fiat for crypto have the same KYC and anti-money laundering requirements as banks. What they will do now is turn their attention to all the elements of the industry outside this kind of control and as Thysse says, “declare what is, and isn’t acceptable.”

In 2018 FATF set out to control money laundering and terrorist financing, but now it is going much farther, and they are making swift progress. The document anyone in the crypto space should be looking at right now is FATF’s ‘Guidance for a risk-based approach to virtual assets and VASPS’ (GVA). This is due to be implemented in October 2021. Furthermore, it is impossible to move FATF out of its powerful position, because the organization is protected by the Vienna Conference on Diplomatic Intercourse and Immunities, which means they enjoy immunity with regard to their actions and are unburdened by the rules the rest of us must live by.

The so-called public consultation on the GVA was a farce, as they only chose the feedback that suited their agenda. They have delayed the implementation of the GVA until October, but after that expect to see their recommendations being implemented at national level, and in our legal systems. You should also note that the GVA will not apply to central bank-issued digital currencies. So, the agenda is very clear!

It may not be all bad news

As much as those dedicated to crypto may be horrified by all this, let’s take a moment to look at a possible upside: regulations may just pave the way for mass adoption, something the crypto community has long been waiting for. But at what cost? However, I urge you all to read the FATF GVA, because in just a few months it is going to start affecting your life, and most likely it won’t be in the way you would like.

The New China Syndrome

Do any of you remember the 1979 film ‘The China Syndrome’? In it, a news reporter (Jane Fonda) and her cameraman (Michael Douglas) are unintentional witnesses to a SCRAM incident, an emergency core shutdown procedure at a nuclear power plant in California. The crew prevents a catastrophe, but the plant supervisor (Jack Lemmon) begins to suspect the plant is in violation of safety standards, and tries desperately to bring it to the attention of the public, fearing that another SCRAM incident will produce an atomic disaster.

You may ask why was it called ‘China Syndrome’ when the action took place in California. The answer is that the nuclear meltdown scenario in the film is based the fanciful idea that there would be nothing to stop the meltdown tunnelling its way to the other side of the world, i.e. China.

This week we have seen another form of ‘China Syndrome’ in the cryptocurrency markets. Bitcoin, Ethereum, Cardano and others have plummeted in value after Beijing renewed efforts to rein in the sector by cutting power to bitcoin miners in Sichuan province over the weekend, one of the country’s largest producers of the digital currency, writes Robert Hart at Forbes.

China accounts for 80% of global bitcoin operations and the crackdown in Sichuan has cut the country’s bitcoin production by more than 90%, according to China’s Global Times. This state media source also says, “regulators in other key mining hubs in China’s north and southwest regions have taken similar harsh steps.”

The move has cut bitcoin’s hashrate and caused bitcoin to drop to its lowest value in nearly two weeks. As you’ve probably noticed, the altcoins suffered as well.

China has an abundance of cheap electricity, making it an ideal location for energy intensive bitcoin mining, and Sichuan has an abundance of hydropower, hence its regional domination of the sector. However, a great deal of the energy used for mining coming from coal power stations, which means the industry is at odds with China’s new climate goals…and Elon Musk’s thinking.

This sounds commendable for a cleaner energy future, but that is not the only reason China has clamped down on mining. According to Hart, “China is also keen to prevent cryptocurrencies from “infringing” upon financial order, prompting a ban on financial services facilitating crypto trade.”

China has been causing problems in the cryptocurrency market since May when it announced its intention to intensify its regulatory crackdown on cryptocurrencies, something it does periodically.

Shentu Qingchun, CEO of Shenzhen-based blockchain company BankLedger, told the Global Times on Sunday: “We had hoped that Sichuan would be an exception during the clampdown as there is an electricity glut there in the rainy season. But Chinese regulators are now taking a uniform approach, which would overhaul and rein in the booming Bitcoin mining industry in China.”

And then he added, “As a result, Chinese miners must form alliances to migrate overseas, to places such as North America and Russia.”  It sounds like a move that might stop the meltdown that is currently tunnelling from China to the rest of the world.

Has China really changed its tune on crypto?

I am of course talking about China’s recent turnaround regarding cryptocurrencies. The change of tone coming from Beijing and the People’s Bank of China (PBoC), with regard to cryptocurrencies makes you pause to think, ‘What’s all this about?’

China’s central bank is now referring to bitcoin as an ‘alternative investment’, signalling something is afoot in the country that cracked down on digital assets four years ago.

Of course it is a welcome shift in perspective from the Chinese, and many are describing it as ‘progressive’. At the same time, they are closely monitoring the PBoC for signs of forthcoming regulatory changes in relation to the crypto sector.

During a panel hosted by CNBC at the Boao Forum for Asia on Sunday,

Li Bo, deputy governor of the PBOC, said, “We regard Bitcoin and stablecoin as crypto assets … These are investment alternatives.” He went on to say, “They are not currency per se. And so the main role we see for crypto assets going forward, the main role is investment alternative.” This indicates an unwillingness to see bitcoin and other similar tokens, such as Litecoin, as a means of payment, but at least it is a move towards a broader acceptance of cryptocurrencies in China.

As CNBC points out, China was once one of the world’s biggest buyers of bitcoin, before banning ICOs in 2017 and closing down crypto exchanges in the same year, both moves prompted by a perceived financial instability in the digital asset sector.

Li said, in explaining more about what he meant by calling them investment alternatives: “Many countries, including China, are still looking into it and thinking about what kind of regulatory requirements. Maybe minimal, but we need to have some kind of regulatory requirement to prevent … the speculation of such assets to create any serious financial stability risks.”

Flex Yang, CEO and founder of Babel Finance, called the comments “progressive”, while Vijay Ayyar, head of business development at cryptocurrency exchange Luno said, “I think it is quite significant and is definitely different to their previous statements or positions on public cryptocurrencies.”

When asked about what he thought had changed China’s thinking following the PBoC announcement, Ayyar said, “Governments are realizing that it is a viable and established, yet growing, asset class and need to regulate it. China regulating crypto would be another massive boost to the industry in China and globally.”

At the moment, China is still trialling its digital yuan, which will eventually replace the cash and coins in circulation, and there is a rumour that the country may wish to trial with foreign visitors to the Beijing 2022 Winter Olympics.

As with everything to do with China and finance – watch this space!