09 February 2018
Martin Arnold and Chloe Cornish
They have been branded a Ponzi scheme, a tax dodge and an environmental disaster — and that is merely a fraction of the criticism that regulators have thrown at cryptocurrencies in the past week alone.
When the price of bitcoin and the hundreds of copycat virtual currencies were rocketing last year, many financial watchdogs stayed quiet, limiting themselves to warning about the risks of investing in such unregulated and volatile assets.
Now the cryptocurrency bubble seems to have deflated — their combined market value has slumped from more than $800bn to less than $400bn in a month — the world’s financial regulators are starting to bare their teeth.
The latest to do so is Yves Mersch, a member of the executive board at the European Central Bank, who likened virtual currencies to the “will-o’-the-wisp, a malignant creature that dwelt in marshes” and often lured travellers “to their untimely death and a watery grave”.
Giving a speech in London, Mr Mersch added his voice to the growing chorus of financial supervisors who are calling for cryptocurrencies to be reined in to ensure they do not infiltrate the mainstream financial system. “Even if virtual currencies are not money, central banks should still be aware of the potential risks they pose for price stability and financial stability,” he said.
His comments echo those of Agustín Carstens, general manager of the Bank for International Settlements — known as the bank for central banks because it is where they hold accounts — who this week condemned bitcoin as “a combination of a bubble, a Ponzi scheme and an environmental disaster”.
Already, South Korea is drawing up a bill to ban cryptocurrency trading, while China has outlawed bitcoin exchanges and initial coin offerings. Meanwhile, tax authorities are gunning for the nascent asset class, with Indian authorities recently issuing 100,000 notices to cryptocurrency investors suspected of concealing profits. The US Internal Revenue Service also classes the virtual coins as property that is subject to capital gains tax when sold.
Juan Pablo Thieriot, vice-chairman at Uphold, a US-based digital money wallet, said the latest regulatory developments were inevitable, adding: “Cryptocurrencies are here to stay. It’s very early innings.” While he admitted that most cryptocurrencies were “eggs and they will splatter” under pressure from regulators, he insisted the top three by market value — bitcoin, ethereum and Ripple’s XRP — were “rubber balls, not eggs”.
The total value of cryptocurrencies is tiny compared with the stock market or monetary supply — they would buy only a fifth of all euro banknotes in circulation, Mr Mersch said. But what seems to worry regulators most is the danger that crypto-assets will seep into the traditional financial system, raising the risk of contagion to major institutions in the event of a crypto crisis.
Most banks steer clear of cryptocurrencies, worried about money laundering or terrorism finance because of the inherent anonymity of the assets. Jamie Dimon, chief executive of JPMorgan Chase, said anyone caught trading bitcoin at the US bank would be fired. US and UK banks have blocked cryptocurrency purchases on credit cards, while some British lenders are refusing mortgages to clients with deposits funded by selling cryptocurrencies.
However, Mr Mersch said “there are signs that greed has weakened their [financial institutions’] resolve and some have begun to form tentative linkages”, citing the “derivative products pertaining to virtual currencies” that have recently been launched.
“There is rising activity in euro at virtual currency exchanges and some jurisdictions are falling over each other to issue licences to largely unregulated platforms and exchanges in a misplaced competitive race,” he added. He may be referring to Switzerland with its “Crypto Valley” hub in the canton of Zug near Zurich, or territories like Gibraltar that are racing to catch up.
Cryptocurrency exchanges and wallet providers seem particularly vulnerable to cyber attack, he said, especially after last month’s theft of $530m from Japan’s Coincheck.
France and Germany’s finance ministers and top central bankers issued a joint statement on Friday calling on the G20 to discuss cryptoassets at its next summit in Buenos Aires in March. “This discussion could lead, if appropriate, to international harmonised actions,” they said, adding that while there could be opportunities from the new technologies, they “pose substantial risks for investors and can be vulnerable to financial crime without appropriate measures”.
Until the G20 summit produces results, Mr Mersch says: “Resolute ringfencing measures might be needed.”
In particular, he frowns on the bitcoin futures contracts launched in December by the two big US exchanges — CME and Cboe. Goldman Sachs and Morgan Stanley are clearing these contracts for customers while steering clear of directly handling cryptocurrencies for clients.
“In my view, it should be examined whether any virtual currency activity carried out by financial market infrastructures must be ringfenced from their other activities,” said Mr Mersch. “The enforcement of segregated accounts and liabilities could be discussed.”
Banks should be required to hold “adequate” capital against any crypto assets they hold to reflect their volatility, he said, adding that exchanges could be subjected to the same licensing and supervision rules as payment providers have been under a recent EU law.
Mr Mersch likens the new asset class to “bubbles of marsh gas — insubstantial and foul-smelling, but also flammable and sometimes able to burn things around them”. But he also admits that his son is considering an initial coin offering for his own start-up — a source of heated family debate.
Ultimately, he said the underlying blockchain or distributed ledger technology that underpins bitcoin appears promising, saying: “The technology may in time become widespread and useful, but early versions of it may fade from view.”
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Link To FT.com: https://www.ft.com/content/038d92d6-0d32-11e8-8eb7-42f857ea9f09
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