How long can bitcoin defy the laws of gravity? The cryptocurrency has evoked comparisons with Dutch tulip mania and the South Sea Bubble as it regularly tests new record levels since the start of 2017.
The head of the UK’s Financial Conduct Authority (FCA) has made it clear that he regards bitcoin as the latest in a series of financial bubbles that threatens to end in tears. In a TV interview earlier this month Andrew Bailey warned those hoping to get rich quick: “If you want to invest in bitcoin, be prepared to lose all of your money.”
He also made clear that bitcoin is technically a commodity and not a fiat currency backed by a central bank. “I don’t think bitcoin is prevalent enough to be a systemic threat,” Bailey added, meaning it’s not yet regarded as needing to come under the FCA’s regulatory review.
However the lack of transparency that has always surrounded bitcoin, coupled with the sharp fluctuations accompanying the steady rise in its price, has alarmed others in the financial services world who feel that regulation is needed.
A litany of concerns
The possibility of cryptocurrency regulation periodically arises when the price either falls sharply – or booms, as with this year’s 1,000%-plus rise. Other concerns include the finite number of coins that can be ‘mined’ and the lack of any connection to any tangible commodity.
Scotland Yard has warned that organised criminal gangs have been among the early adopters of cryptocurrencies, using them to dodge anti- money laundering checks and other regulations and anonymously purchasing illegal commodities on so-called ‘dark market’ websites.
Those concerns may have increased since last week’s launch of bitcoin futures on the Chicago Mercantile Exchange, the world’s largest futures exchange, which brought it nearer to mainstream investment.
The CME launch swiftly followed that of the Chicago Board Options Exchange, which became the first to offer investors the opportunity to speculate on the future price of bitcoin – typically over a one, two or three-month period.
“We’re not endorsing bitcoin, but what we wanted to do was bring transparency to an industry where there was interest”, CBOE’s chief executive Ed Tilly told the BBC:
On the G20 agenda
France’s finance minister, Bruno Le Maire, wants more though. He announced that he wants representatives of the world’s leading economies, the G20, to include bitcoin on the agenda for discussion when they next meet in April.
Le Maire said that the meeting, to be held in Argentina, should focus on the risk of speculation in the cryptocurrency. “We need to consider and examine this and see how…with all the other G20 members we can regulate bitcoin,” he said.
The minister is supported by the chairman of UBS Bank and former Bundesbank head Axel Weber. Warning that “Bitcoin is not money,” he said the growing investor interest in digital currencies required regulatory intervention.
China, which has always been wary of bitcoin, introduced a crackdown in September on trading. Concerned by the potential for major financial risk from unregulated markets, the People’s Bank of China halted operations for digital currency platforms in Beijing and Shanghai.
South Korea’s Financial Supervisory Service has followed Beijing’s hard line, stating that it doesn’t consider bitcoin and other cryptocurrencies to be currencies of any kind.
Russia’s president, Vladimir Putin, is also not a fan. According to him, bitcoin and other cryptocurrencies create “opportunities to launder funds acquired through criminal activities, tax evasion, even terrorism financing, as well as the spread of fraud schemes.”
The Central Bank of Russia voiced similar distrust. “We have seen how Bitcoin has transformed a payment unit into an asset, which is bought in order to obtain a high yield in a short period of time,” it commented. “This is the definition of a pyramid.”
Not everyone believes that bitcoin will attain creator Satoshi Nakamoto’s goal of it becoming the world’s premier “peer-to-peer electronic cash system”, or that there’s any need for regulators to get involved.
Among the sceptics is ING Bank’s chief economist, Teunis Brosens, who believes that bitcoin will ultimately return to “being a niche product for a select group of enthusiasts.”
He points out that more widespread use will inevitably mean regulators getting more involved and demanding “know your customer” checks. That would see the cryptocurrency – whose blockchain technology base allows owners to remain anonymous – lose much of its appeal by “greatly reducing the supposed privacy issues of using bitcoin.”
Will regulation work?
The big unanswered question is whether a united global effort to regulate bitcoin has any chance of success, rather than the current approach ranging from laissez-faire in parts of the world to highly restrictive in others.
The United States has adopted a smaller-scale, localised approach so far. New York State requires bitcoin-related businesses to hold a “BitLicence” and applies specific rules for employee vetting and identification.
The UK Treasury has signed up to an EU-wide plan to regulate bitcoin and other cryptocurrencies so they adhere to anti-money laundering (AML) and counter-terrorism financial legislation. Traders will be required to disclose their identities, ending the anonymity that has seen the currency used for drug dealing and other illegal activities.
Under the plan, online bitcoin trading platforms will be required to carry out due diligence on customers and report suspicious transactions. The UK government is negotiating amendments to the AML directive so that national authorities oversee firms’ activities.
A harder crackdown
Any greater regulatory ambitions run up against the challenge posed by bitcoin being a decentralised cryptocurrency, not linked to any specific territory or financial institution. Nor does the blockchain technology on which it is built depend on any single institution to operate it.
With no central location that can be shut down and the prospect of more exchanges following the CME and CBOE in launching bitcoin futures, a co-ordinated global approach appears the only way of clipping bitcoin’s wings.
Yet as one commentator notes: “Governments and regulatory bodies have shown they lack understanding of technological topics – and bitcoin is one of the most complex.”