Category: Regulations

Why do people own crypto?

On By mehranmuslimiblogIn Bitcoin, crypto, Ethereum, RegulationsLeave a comment

It’s an interesting question. Back at the beginning, when Bitcoin emerged,for some  the interest in crypto was partly a way of flipping the bird at the big banks and governments that had let the 2008 financial crash to happen, while for others the technology drew them in. But where are we at now in terms of sentiment?

A Coindesk opinion piece by Raphael Auer and David Tercero-Lucas starts by suggesting that at a time when cryptocurrencies’ market capitalizations are returning to all-time highs, it’s a good time to examine investor views, characteristics and sophistication. They ask, “Are cryptocurrencies sought out of distrust in fiat currencies or regulated finance? And who invests in cryptocurrencies?”

According to data from the “Survey of Consumer Payment Choice” (SCPC), a dataset that is representative for the U.S. population and spans the period from 2014 to 2019, the Coindesk authors say “there is no evidence to support the hypothesis that cryptocurrencies are sought as an alternative to fiat currencies or regulated finance in the U.S.” Nor do cryptocurrency investors have heightened concerns about the security of mainstream payment options, such as cash or commercial banking services.

Education level is a pointer to crypto ownership

What the research does show is that cryptocurrency is a niche market dominated by young, male, educated investors: “In fact, one of the main socioeconomic determinants of U.S. cryptocurrency investors is educational attainment.” Also, if you’re young, you’re more likely to own at least one cryptocurrency.

The pandemic effect

The pandemic appears to have been a factor in demand for crypto, and might the “recent crypto hype might have changed the composition of investors,” they ask. The “Survey of Consumer Payment Choice” for the year 2020 indicates that the pool of investors was much wider in 2020 than in 2019, and that almost 4% of U.S. citizens own at least one cryptocurrency in comparison with the 1.9% of the previous year. There is also an upward trend in the number of people who know about cryptocurrencies (more than 72% in 2020). Furthermore, the survey shows that crypto owners are less of a ‘niche group’ now, and are a better reflection of the general population. For example, more of the less educated people adopted crypto in 2020 than in 2019. The average age of cryptocurrency investors has also increased, with more of what might be considered “standard” investors becoming interested in this asset class.

Taking all this into account, it would seem that crypto ownership is not related to any growing distrust in today’s regulated financial markets. Nor are they bought as an alternative to fiat currencies or regulated finance. The main drive to buy appears to be their value as a speculation asset. “From a policy perspective, if the objectives of investors are the same as those for other asset classes, so should be the regulation,” the authors say, pointing out that as crypto goes more mainstream and investors better reflect the general population, then “a clarifying regulatory and supervisory framework for cryptocurrency markets may be beneficial for the industry in a context where cryptocurrencies are being targeted by less-educated investors and adoption is becoming widespread.”

The DeFi developer running for US Congress

On By mehranmuslimiblogIn DeFi, Governments, RegulationsLeave a comment

There is a saying, ‘If you can’t beat them, join them!’, which is apparently what Matt West from Yearn.Finance, and formerly of  MakerDao, is trying to do. The Yearn developer is running for Congress in the USA and has said that he may need the help of the decentralized finance (DeFi) community to win.

West declared his candidacy for Oregon’s newly formed 6th U.S. House district on 12th October. He holds a Ph.D from the University of Texas in chemical engineering with a focus on renewable energy, and works at tech giant Intel. Yearn is his side gig. He taught himself Solidity and won the Yearn hackathon in 2020 and lately has been working with the team from no-loss lottery protocol PoolTogether on Yearn’s stablecoin yield farming strategies.

West is the “first DeFi-literate candidate to run for office, and is certainly the first DeFi developer to launch a campaign,” according to Coindesk.

DeFi and crypto needs inside support

The fact that West is running is good news for DeFi platforms, and has been prompted by “recent actions from legislators – such as an amendment to an infrastructure bill that nearly rendered running an Ethereum node legally impossible – are out of touch and destructive.”  However, West is not just focused on protecting crypto and DeFi, he’s also campaigning to improve his state of Oregon. He told Coindesk, “My state’s constantly on fire, there’s federal overreach, there’s outside protestors like the Proud Boys coming in to start riots – it came to a breaking point.”

Messari founder to run for US Senate

He’s not the only crypto advocate to consider entering politics. Messari founder Ryan Selkis is currently threatening a 2024 run for Senate because of recent regulatory scrutiny. He tweeted in September: “If you’re wondering when I actually decided to run for Senate, it was when these fuckers came to my event, didn’t buy a ticket, and served one of the speakers a subpoena. Enough talk. More war on our out of control regulatory state.” Those who didn’t buy a ticket were from regulatory organizations, in case you’re wondering.

West to tackle crypto regulation and wider political issues

But West’s decision is more based on a broader political landscape. He says his decision to run came after he saw the crackdown on the Black Lives Matter protests. He pointed out that “individuals contributing to the crypto technology sport a variety of ideological stripes. “This isn’t a vanity project for me. I want to make a difference, and if I can’t do it like this I’ll find another way,” he said.

Now that he’s declared, however, he says he needs the community’s support and even postponed announcing his run on Twitter until his campaign and BitPay managed to overcome the legal hurdles presented by crypto donations.

He wants to be the first DeFi developer in Congress, and asks the community to help him achieve that by donating through BitPay.

He told Coindesk, “It was a big deal for me to accept crypto donations from the start of the campaign. There are a few folks who run as crypto-friendly and take donations, but as someone who is coming directly from the crypto community as a developer and contributor it wasn’t just a marketing gimmick,” he said. “I wanted to show to the crypto community that they matter to me.”

DeFi poses a challenge for regulators

On By mehranmuslimiblogIn DeFi, Digital Innovation, RegulationsLeave a comment

DeFi protocols are for trading or lending crypto tokens and derivatives. They exist across a throng of validating and coordinating nodes, rather than as a single portal run by an incorporated legal entity. Furthermore, they exist without the formal leadership that regulators would normally interact. 

This lack of an identifiable leadership, plus the fact that the systems are designed without any requirement for users to reveal their identities, poses a challenge for regulators. They feel more comfortable with entities like Coinbase and Kraken, because at least they have comprehensive ‘know your customer’ (KYC) processes.

Regulators see DeFi as “a potential vector for all three of the key risks that financial regulators are tasked with controlling,”

David Z Morris writes. These are basically criminal activities, such as money laundering, tax evasion and terrorist financing, as well as fraud. Their biggest fear though is systemic risk. As Morris says, “DeFi and crypto still probably aren’t large or influential enough to trigger broader financial contagion in the event of a major market collapse or system failure, but you no longer have to engage in wild speculation to foresee that level of influence in the future.”

Regulators traditionally rely on the people managing trading services to control these risks by monitoring their customers and suspicious activity on their platforms, but this simply doesn’t exist with DeFi, which is much harder to regulate than crypto. Katherine Kirkpatrick, co-chair of the financial services practice at King & Spalding said in regard to this, “The ultimate question, beyond how to regulate, is how do you enforce the rules? How do you make someone accountable for breaking the rules? It doesn’t make sense to regulate if you have no enforcement mechanism.”

Don’t stifle DeFi

On the other side of the argument, “premature or misguided” regulations could stifle DeFi innovation and growth. But despite the risk of misguided overreach, there are good reasons to want a regulatory framework for DeFi. It would for a start, “make the fundamental advantages of the technology accessible to many more participants,” as Morris suggests, including making it more appealing to public companies and regulated institutions. At the moment they aren’t participating in DeFi because, “using DeFi in its current state could expose banks like JPMorgan to money laundering or fraud risk,” says Michael Shaulov, CEO and cofounder of Fireblocks, a DeFi custody and infrastructure provider.

The future DeFi landscape

There is little doubt that regulators will pursue DeFi if they find it has become a “powerful entity floating beyond their oversight.” Morris warns, “The modern state’s monopoly on violence as the endpoint of law enforcement will likely find some way to control your access to protocols living in the cloud.” Still, there will always be jurisdictions without strict regulations, where DeFi users who take sufficient privacy precautions will continue to take the risk of using them. It may also be the case that DeFi protocols will become testing grounds for new forms of digital statelessness. However, if we want DeFi to have a role in improving the financial system, there will have to be some compromises made with the regulators.

Crypto threatens financial stability says BoE banker

On By mehranmuslimiblogIn Banks, Bitcoin, crypto, RegulationsLeave a comment

Jon Cunliffe, the Bank of England’s deputy governor for financial stability has recently given a speech where he tackled the question of whether or not, “the world of ‘crypto finance’ poses risks to financial stability.” Why and how does it do that?

Cunliffe pointed out that cryptoassets have grown by roughly 200% in 2021 ($2.3 tn), and from $16 billion just five years ago. The global financial system is worth $250 trillion, to give some context. He also mentioned that the sub-prime debt market was worth around $1.2 trillion in 2008, just before the financial crisis.

His point in using this comparison was that because the crypto industry is growing rapidly and beginning to connect to the traditional financial system, and there are leveraged players emerging in a mostly unregulated space, systemic risks, while limited now, could grow very quickly.

Referring back to 2008, he reminded his audience that in the case of the sub-prime market, “the knock-on effects of a price collapse in a relatively small market was amplified and reverberated through an un-resilient financial system causing huge and persistent economic damage.” We all remember the effects.

He called for financial stability regulators to take notice, to think very carefully about what could happen and whether they, or other regulatory authorities, needed to act. However, he cautioned against over-reaction. As he said, “We should not classify new approaches as ‘dangerous’ simply because they are different.”

Indeed, he said that innovation and technology, plus new players, could tackle longstanding frictions and inefficiencies and reduce barriers to entry, and that in the past they have been key to driving improvement and to increasing resilience in financial services.

Then, what started as a speech that may have sounded gloomy to the crypto markets, Cunliffe made an important and positive statement. He said, “Crypto technologies offer a prospect of radical improvements in financial services.” But he did add a caveat, “However, while the financial stability risks are still limited, their current applications are now a financial stability concern for a number of reasons.”

He then analysed the crypto market, breaking it down into unbacked cryptoassets used primarily as speculative investments and backed cryptoassets intended for use as a means of payment, pointing out that unbacked assets make up 95% of the market, and includes Bitcoin. His concern is that the main use of unbacked cryptoassets is for speculative investment and that fewer holders now say they see them as a gamble and more see them as an alternative or complement to mainstream investment. His greatest fear appears to be that while he doesn’t believe a collapse in the crypto retail investor sector would bring about instability, the large financial institutions with exposure to crypto are another matter, such as the many crypto hedge funds. He described one scenario: “For example, a severe fall in the value of cryptoassets could trigger margin calls on crypto positions forcing leveraged investors to find cash to meet them, leading to the sale of other assets and generating spillovers to other markets.”

Ultimately, Cunliffe called for faster action on regulating the market to manage risk, saying, “Although crypto finance operates in novel ways, well-designed standards and regulation could and should enable risks to be managed in the crypto world as they are managed in the world of traditional finance.”

While he sounds positive, as ever the demand is to bring crypto more in line with traditional finance, the very thing that caused the creation of crypto in the first place, due to ‘tradition’s’ failings.