What are Cryptocurrencies in a commercial context?

What are cryptocurrencies?

Cryptocurrencies are decentralized virtual currencies that operate independently from governing oversight. All transactions take place on a decentralised ledger where payments between users are publicized and therefore cannot be directly regulated by watchdogs.  Cryptocurrencies allows users greater ownership to conduct transactions by eliminating third party and escrow involvement. For users wanting to minimise expenses associated with a business transaction, cryptocurrencies are an attractive alternative to fiat currencies.

The reason why cryptocurrencies are a popular technique used by businesses to manage holdings is because they are a legal tender operating on a decentralised ledger outside the control of any governing authority. This means that cryptocurrencies are not vulnerable to the same fluctuations as fiat currencies. In particular they are not subject to interest and exchange rate mechanisms that are set by the government.

However, this does not mean cryptocurrencies are not vulnerable to fluctuations and continue to be a volatile form of exchange. Bitcoin was the first cryptocurrency created under the pseudonym Satoshi Nakamoto. As of August 2020, Bitcoin has had a 52 week share price range of $4,106.98 – $12,038.36 according to Yahoo Finance. Demonstrating that there is a broad sense of instability compared to fiat currencies like the Euro or the Dollar which undergo far less fluxes in its value.

Another key difference is that fiat currencies are typically issued by the Central Bank to commercial lenders and high-street banks and is therefore in infinite supply. Comparatively cryptocurrencies are made available in finite supply and are capped in the number of entities in circulation at any one time. For instance, there are only 21 million Bitcoins that can be mined at any given time and there are currently only an estimated 18.5 million currently in circulation.

What are exchanges?

Exchanges are the vehicle for users to convert cryptocurrency holdings into fiat currencies. Authorities have already attempted to securitise cryptocurrencies to overcome the threat of terrorists and cybercriminals who are disrupting the ability to safeguard society. This is because cryptocurrencies create a favourable environment for money laundering and illicit remittances between terrorist operatives.

As of 2018, according to Forbes there were over 200 cryptocurrency exchanges globally in operation. The regulations implemented on exchanges have ensured that in order to obtain operating licences from authorities, they are now required to run a basic background check for users who are acquiring a cryptocurrency wallet. In relation to cryptocurrency securitisation, the prominence of regulation on exchanges in recent years indicate the extent of attempts to securitise the issue.

How are exchanges regulated?

Regulation varies from jurisdiction to jurisdiction based on the government’s stance. Russia and China have completely banned the use of cryptocurrencies whereas countries like Australia consider cryptocurrencies as legal tender.

Exchange regulation of cryptocurrencies has been employed in the latest Anti-Money Laundering (AML hereafter) and Counter Financing of Terrorism (CFT hereafter) directives by the Department of Treasury Financial Crimes Enforcement Network (FINCEN hereafter) in connection with the United States Bank Secrecy Act.

This regulation empowered watchdogs to now compel exchanges to conduct an audit and abide by the Know-Your-Customer (KYC hereafter) checking method. These background check measures enforced by both AML and CFT attempt to disrupt cybercriminal and terrorist activity who have benefited hitherto from being undetectable.

To some extent, these countermeasures have been effective in dislodging these groups and making them more visible when they attempt to convert between fiat currencies and cryptocurrencies for illicit activities. In particular, alongside the United States of America, FINCEN’s regulations have been implemented by the Canadian government in an effort to monitor, flag and eliminate terrorist activity on cryptocurrencies. Similarly, the Singapore authorities have enforced the AML and CFT in an effort to minimise the potential for money laundering by cyber criminals and terrorists. 

Thus, the efforts of the AML and CFT strategy implemented by regulatory watchdogs creates a layer of defence, demonstrating the extent to which regulation of cryptocurrencies has already taken place. 

Cryptocurrencies in a commercial context

There has been a drive for cryptocurrencies by Fortune 500 companies across the world. The most notorious being the proposed introduction of Libra which was spearheaded by Mark Zuckerberg and Facebook. The plan for Libra involved a total of 27 partners at one point with the support of high-profile companies including: PayPal, eBay, Mastercard and Spotify. The objective was to create a remittance independent from fiat currencies for consumers of the 27 partners companies. This would mean users converting their fiat currency to Libra to begin paying for services on or between these companies in their own currency. This would in turn create a closed off economy whereby the users would be exchanging assets in cryptocurrencies for products and services. Congressional oversight shut this down rather quickly and rejected Libra’s attempt to go live.

After speaking with the Blockchain Lead Associate at the law firm Thrings, Will Foulkes comments:

What Facebook did badly was they went out quite aggressively and said they were doing Libra without wanting to consult government and that put a lot of peoples backs up. Trying to get a global currency legal is massively difficult because every jurisdiction has different regulation. Therefore, the rate of adoption will depend on the jurisdiction as of many things in this field the less developed countries are faster to adopt because they have more incentive to adopt whereas the countries that are more stable have less incentive.

Getting over the perception of these things being dodgy, fraudulent or inherently volatile is going to be the biggest barriers to adoption other than legislation. Although there might be the technology there and readily available, certain things like that are slowing adoption. That being said have you come across AliPay run by Alibaba which is their own form of payment which is sent via WeChat which is like China’s WhatsApp.

If you have any further questions regarding this article please contact Matthew Berrick. There will be additional articles relating to cryptocurrencies to come that will take a closer look at state backed cryptocurrencies as well as the Bank of England’s recent decision to create their own cryptocurrency – RSCoin.

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