Connecting the Dots
Episode 37 - Should bitcoin be regulated ?
Guest writer Mark McKee is back again this week with a section titled Should bitcoin be regulated? If you missed Marks post from last week titled “How different is bitcoin from fiat money?, check it out HERE. If you want to do a guest writer slot, please reply to this email, were keen to collaborate with other market professionals/businesses/content creators.
Welcome to the new subscribers that have joined us over the last week. The aim of this newsletter is to help you navigate the world of crypto. There’s an incredible amount of information out there so we try to distil it into the things you MUST know this week.
For snippets and analysis on institutional crypto trading, give our Twitter a follow HERE.
As always, our only ask is that you share this newsletter with your colleagues, friends and family.
Onto the newsletter. Here’s what you’re getting this week:
Guest Writer: Should bitcoin be regulated? by Mark McKee.
Crypto Native News: Coinbase approved to be a Futures Commission Merchant, CME announces a collaboration with CF Benchmarks for Asia benchmarks and XRP is down after SEC appeal recent ruling.
Institutional News: Paypal temporarily pauses crypto purchases in the UK, the FCA gives more detail on the ‘travel rule’ and Mastercard announces partners for its CBDC programme.
Chart of the Week: Market depth on major exchanges falls.
Top Jobs in Crypto: Featuring HireChain, Wintermute, Keyrock, Visa, Copper, Ripple, Kraken and Checkout.com
Guest Writer - Should bitcoin be regulated? by Mark McKee
About the author: Mark McKee is a digital transformation consultant and technologist within the electronic trading functions of financial firms. He is also researching Bitcoin in the context of political philosophy, individual freedom, and the ontology of money at Birkbeck, University of London.
There are many people in the investment community and general public who are not using Bitcoin. For some this is due to risk appetite and for others it is just not on their radar and the concept sounds alien. Others who are not using Bitcoin and crypto in general may be coming from an altogether different perspective: not having informed consent. How do we solve the issue of helping people gain access to facts that allow them to understand the alternatives, risks, and benefits? This leads us to ask if the crypto market ought to be regulated. We’ll also explore whether regulations solve the problems they are intended to, and what would it solve for crypto as an asset class.
With the recent collapse of SVB and Credit Suisse and record fines still being issued to banks for manipulating prices across a range of assets, regulation has had a mixed career at best. Here are some examples:
· The credit card industry is a duopoly in Mastercard and Visa
· Switzerland now has only one major bank in UBS after the forced takeover of Credit Suisse in March 2023
· New entrants to the UK market for retail banking can only get a foothold with hundreds of millions of pounds of investor backing, as we have seen with challenger banks such as Revolut and Monzo
· Danske Bank was the bank of choice for the world’s largest-scale money laundering scandal when the story broke in 2018
In spite of these cases, it is still a fair question to explore if, in principle at least, Bitcoin should have some form of regulation to provide consumer protection. The Financial Services Compensation Scheme (FSCS) means that deposits are protected up to £85,000 in UK banks. However, if I buy an asset like gold, then I can expect no such protection if the vault I am storing my gold gets robbed. The same applies to my crypto holdings if I get digitally defrauded.
Bitcoin transactions are non-reversible, and privacy prevents me from knowing who the wallet owner is if I have sent my funds to the wrong wallet in error, meaning I have no recourse. This is why most digital wallets ask the user to confirm they know the address they are about to transmit funds to and stating that the transaction will not be reversible once approved for sending. Separately, if an exchange I have my funds parked in gets compromised (hacked, or it fails), I have to rely on the exchange agreeing to cover my losses, which may not be guaranteed. Due to the decentralised nature of Bitcoin, there is no authority I can appeal to if I am the victim of fraud.
With these examples in mind, there appear to be two responses: regulate or educate. With the former, this could mean a number of outcomes such as keeping funds with an exchange that obliges transactions to pass through its gates, however that undoes the nature of peer-to-peer transactions that Bitcoin was designed to avoid. With the latter, people would learn how to keep their private digital keys safe from theft and also ensuring they have the correct target wallet details to send peer-to-peer payments to.
We also need to bear in mind that those who make public statement in favour or against regulations are rarely speaking in the abstract about principles, and usually have some interest in the outcome they are advocating for.
What problems would be solved by regulation of crypto?
The UK’s Financial Conduct Authority (FCA) states on its website that, “We’re committed to protecting consumers, enhancing market integrity, and promoting competition in the interests of consumers.” These indeed are good objectives. Nobody wants consumers to be defrauded or for markets to be dishonest. Likewise, we don’t want to see monopolistic behaviour amongst dominant financial firms, or the manipulations of prices, as banks have done with gold, interest rates and currencies. Should banks and other institutions with large assets under management be required to declare their crypto holdings and not be allowed to own more than a small percentage of their overall balance sheet? This might ensure that no single player is cornering the market and would be similar to stockholders being required to declare holdings over 5% in publicly traded firm, to provide transparency in the market.
The response to these concerns is to state that crypto is not like other assets. Why? This is mainly due to it be designed outside the purview of any organisation or institution. Crypto operates in a decentralised manner, and it is only managed exchanges that are centralised, as all the other infrastructure is distributed across the Internet. You can’t turn off Bitcoin or stop the mining of new blocks. So, it begs the question, what jurisdiction does any national regulator have over an asset they don’t issue, manage, or control?
It also valid to ask why existing regulations, designed to prevent malfeasance, and promote competition, whilst not being perfect, should need to be extended. Nobody wants to see any financial institution abusing its power to disadvantage consumers or being allowed to act as a monopoly. Do the examples I cited earlier about monopoly, money laundering, etc., make us believe regulators are helping to protect consumers, improve market integrity and above all, promote competition? I don’t think so. Perhaps they may have prevented worse situations, but I don’t think anyone would call them a roaring success.
On balance, there appears to be a track record of good intentions but somewhat lacklustre results from regulators, so can we expect better results for crypto? In my view, this does not make for a compelling enough case to regulate crypto, especially if those who participate gain more informed consent through better education and access to the facts.
Native News
Key news from the crypto native space this week.
After applying for the license nearly 2 years ago, Coinbase secured approval from the National Futures Association (NFA) to operate a Futures Commission Merchant (FCM). The role of FCMs is to buy or sell futures contracts, similar to that of a market maker. Andrew Sears, Coinbase Financial Markets CEO said "Offering US investors access to secure and regulated crypto futures is key to unlocking growth and enabling broader participation in the crypto economy". Read the full announcement from Coinbase HERE.
CME Group announced today a new collaboration with crypto indexing firm CF Benchmarks to launch two new APAC-specific reference rates for bitcoin and ether. CME Group said that the two new reference rates — the CME CF Bitcoin Reference Rate APAC and CME CF Ether-Dollar Reference Rate APAC — will go live on 11 September and will provide a once-a-day rate, released at 4 p.m. Hong Kong time, in U.S. dollar terms for the two cryptocurrencies. Giovanni Vicioso, CME’s global head of cryptocurrency products said “Year-to-date, 37% of total crypto volume at CME Group has been traded during non-U.S. hours, with 11% of trades coming from the APAC region,” “As we continue to see more institutional clients use our Bitcoin and Ether futures products in active portfolios or structured products like ETFs, these APAC reference rates will allow market participants to more accurately and precisely hedge cryptocurrency price risk with timing more closely aligned to their portfolios."
Ripples XRP token has fallen around 20% this week (and around 40% off of Julys highs) after a count approving the US Securities and Exchange Commission's (SEC) request for an interlocutory appeal to the recent decision. The SEC's appeal was interlocutory, meaning the appeal happened when all aspects of the case are yet to be finalized and the trial is ongoing. The SEC has 24 hours to submit a motion to the US Court of Appeals for the Second Circuit. Beyond that, Ripple would have until September 1 to issue a response, which would in turn require a rebuttal within a week from the SEC. The SEC winning the motion would pave the way for a full-blown appeal of Judge Torres’s landmark ruling. Following the announcement almost $23 million XRP long positions was liquidated from the crypto market within the same day.
Institutional Corner
Top stories from the big institutions.
On Wednesday, payments firm PayPal said it will temporarily pause crypto purchases in the United Kingdom until early 2024. Paypal said customers who have previously purchased crypto assets through their PayPal account can keep them on the platform or sell them at any time. However, starting 1 October, the ability to make new purchases will be disabled. Paypal cited stricter crypto rules by the FCA as the reason for the pause. he Financial Conduct Authority (FCA), is introducing stricter measures against money laundering through the use of crypto to align with the Financial Action Task Force's "Travel Rule" on 1 September. The FCA will also introduce stricter rules for advertising crypto in the country later this year.
And on that topic, the FCA set out its expectations on how crypto businesses can comply with the upcoming Travel Rule for transparency in crypto transfers from 1 September. In new guidance published Thursday, the FCA’s expectations include crypto businesses taking "all reasonable steps" to comply with the rule when sending or receiving crypto transfers to a firm in the UK or any jurisdiction that has implemented it, even when using third-party suppliers. The high level expectations for firms are as follows:
Take all reasonable steps and exercise all due diligence to comply with the Travel Rule.
Firms remain responsible for achieving compliance with the Travel Rule, even when using third-party suppliers.
Fully comply with the Travel Rule when sending or receiving a cryptoasset transfer to a firm that is in the UK, or any jurisdiction that has implemented the Travel Rule.
Regularly review the implementation status of the Travel Rule in other jurisdictions and adapt business processes as appropriate.
Read the full release from the FCA HERE.
Global payment firm Mastercard announced on Thursday that it was forming a central bank digital currency program, with initial partners including Ripple and Consensys. Mastercard’s head of digital asset and blockchain Raj Dhamodharan said the new CBDC program is designed to “foster collaboration with key players in the space”. He added, “We believe in payment choice and that interoperability across different ways of making payments is an essential component of a flourishing economy. Read the full news release from Mastercard HERE.
Chart of the Week
Because charts are just as important as macro.
Falling market depth on crypto exchanges between Q1 and Q2, noticeable on the larger exchanges. Some of the smaller exchanges seeing marginal improvement in market depth.
Credit to Kaiko Data for the chart.
Top jobs in Crypto
Well, we all want to work in Crypto don’t we. Here’s a bit of help on your job search!
Senior Business Development Manager at HireChain
Investment Associate at Wintermute
Trading Operations Specialist at Keyrock
Head of Digital Authentication Solutions at Visa
Financial Risk Analyst at Ripple
Product Manager Financial Operations at Kraken
Senior Specialist Account Management Crypto at Checkout.com
DISCLAIMER: The content in this newsletter is not financial advice. This newsletter is strictly educational and is not investment advice or a recommendation to buy or sell any assets or to make any financial decisions. Crypto markets are volatile, please be careful and do your own research. The views of guest writers are purely the view of the writer and not necessarily that of London Crypto Club.