Cryptocurrencies have, in an astonishingly short time in the World of currencies, disrupted and shaken up the market. In the digital World, where less than two decades ago Twitter did not exist and less than 10 years ago, Uber had not hit out phones, it is a relatively short time.
Arguably we should not be surprised – disrupting technologies come along and are adopted very quickly if they make sense to users. It is business at the speed of thought, as envisaged by Bill Gates. We should also not be surprised that the currency is not backed by anything tangible. Uber owns no taxis, Airbnb owns no real estate and the largest media companies, Twitter and Facebook do not own content. So a currency not backed by standards of gold, sterling or other tangible commodities is entirely reasonable.
Bitcoin created value in code which can be mined and traded in a way which is not much different to mining and trading gold. Like in California in 1848, there has been a rush by prospectors. Now instead of shovels and brawn, there are high powered processors and brains. Trading, whilst not fool-proof, is far more secure as the block-chain technologies which underpin the currencies creates a clear audit trail of transfers. The success for some has been tremendous and the value of cryptocurrencies has grown exponentially.
The transactions are lower cost, increasingly adopted by online retailers and the anonymity with which trades can be made with certain currencies has been attractive to many, as has the ease in which payments can be made from e-wallets. A very positive effect has been the adoption by hitherto ‘under-banked’ sections of societies.
Despite this, banks have been very wary, as have national regulators. Mark Carney, Governor of the Bank of England has made his view clear that trading in cryptocoin exchanges should be regulated, the USA and Japan have similar views.
Now Barclays have broken ranks with other UK banks and stuck their head over the parapets, announcing on 13 March this year that they had entered into a relationship with a major bitcoin exchange Coinbase – a start-up from San Fransisco.
So we reach a collision course. Cryptocoins are here to stay, increasingly so as we move to a cashless society. Countries will increasingly need to accept this and accommodations will need to be reached on both sides. A key requirement will be regulatory compliance in market which has been so far, unregulated.
A couple of months ago I posted a blog explaining concerns raised by the police and FCA about how cryptocurrencies can be, and are, used to launder money. The response surprised me. Ranging from the insulted to the outraged. I was accused of being stupid (amusingly by a man who was not sure when to use ‘your or you’re), of seeking to undermine cryptocurrencies and of having no understanding of blockchain and as such, should keep my mouth firmly shut. What should not be ignored are those feelings. They are very strong and there are protective feelings amongst proponents. The truth is, it is attractive to money launderers – preferable to cash, as it can easily be moved around the World far more easily, and with far less risk and cost, than gaffer-taping large quantities of cash around one’s torso. Blockchain’s purpose is to create an unassailable chain of transactions from the source of the mined cryptocoin to the most recent purchaser. It was not designed to assist authorities in identifying those who had made the transactions or the current owner. It preserves the integrity of the transfers not to the identities of the transferors. Indeed it has become an attraction to many, both honest dealers and those engaged in criminality, that they may enjoy the anonymity with which trades can be made.
However if cryptocoins are going to see firm integrations into national markets and to be used freely within banking systems, exchanges will need to establish clear, transparent and effective anti-money laundering systems. A key factor for those who handle and move money is knowing the client. Know Your Client or KYC checks, as they are known, have become a requirement for banks, foreign exchanges, finance providers, law firms, stock brokers and accountants. They are all audited to ensure effective checks are carried out and there are serious sanctions for failures.
The ability to identify clients and to know the source of money is critical in tackling money laundering, If one buys a house, expect the conveyancing solicitor to ask for a passport and proof of address. Also expect them to ask where you got the deposit from. If you provide the identification and show the deposit was from savings, there will be no issues. If you cannot prove your identity or seek to pay a large sum in cash, or in cryptocurrency, without good reason and an explanation of the source, then expect more questions or even a money laundering report to be made without your knowledge, to the National Crime Agency.
Why should cryptocurrencies avoid such scrutiny if they wish to become part of the mainstream financial system which can be readily used to pay deposits on houses? Simply, they cannot and will need to adopt anti-money laundering procedures.
Ironically, the technology underpinning cryptocurrencies is better suited to tackling money laundering than many other systems. Exchanges and even the digital wallets can be adapted to identify the identities of traders as a condition of use and then the users can be easily shown within blockchains.
Blockchains can be electronically monitored to identify when cryptocurrencies are traded unusually – for example suddenly large amounts being received – much as banks do. A check can then be made to establish if the reason for an unusually large sum is legitimate.
Likewise, as with banks, it may be flagged if sums are moved to a less compliant regime – for example in a country or to an exchange where there is a low standard of, or non-existent, regulation
Software can be implemented to identifying when traders seek to conceal sources of funds and identities. Identification verification tools are used extensively by law firms, banks and finance providers as part of the ‘Know Your Client’ checks. These can be incorporated into the trading of cryptocurrency.
All of this, if adopted, can then assist cryptocurrency to become integrated into the mainstream. Regulation has required a high standard of training to be adopted within the finance industry. These regulations can certainly be applied to cryptocurrencies and will give greater confidence and lead to increased stability of a hitherto volatile market.
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