It took 300 years to build up the financial system we have today.
And if we’re looking at publicly traded financial assets - it’s actually closer to 420 years when you factor in the first stock to be publicly offered by the Dutch East India Trading company.
There’s a lot of mistakes, successes, momentum, and history behind the current financial system and the way governments regulate it.
Since the launch of the Bitcoin blockchain, the cryptocurrency ecosystem has generated an estimated $250B in network value. It’s a tiny sum when you consider the overall global market, but still nothing to scoff at.
It’s this hyper-growth that has caught the attention of financial institutions and governments worldwide. After sitting down and working with various players (I’ve worked with the OECD, G7, G20, and others) here are the key aspects I believe we should all be aware of, and where the next year is likely headed.
It’s not all about the technology
This seems counter-intuitive at first glance. And sure, others may disagree. But the technology, while an undoubtedly remarkable innovation, is not the solution in and of itself. Blockchain technology can do amazing things, it can solve problems yes, but the change of systems is not possible without people and processes behind it.
One of the primary misconceptions is that blockchain can “solve all problems.” The reality is it can’t. It’s very good for very narrow use cases. And even then we need to have the right people - both innovators and regulators - behind it.
Just as we - developers and innovators - write rules, protocols and regulation for how our applications and systems will work with the technology, so too do financial regulators need to develop the same for the overall system. Again, it’s not just about the technology.
How this affects crypto-assets and exchanges
Right now we have different countries going in different directions:
- Japan - has defined cryptocurrency as an actual currency.
- USA - has defined cryptocurrency as NOT an actual currency, but maybe, sometimes, depending on the nature of the asset, it could possibly, potentially be a security. Yes, it’s still confusing.
- Bermuda - has defined cryptocurrency as not currency, but more of a commodity.
And while many countries are starting to set their own regulations, groups like the OECD (a collection of 36 members including G7 and G20 nations) are looking to standardize a solution.
On the one hand we’ll start to see countries taking an independent approach to how exchanges operate, how crypto assets are classified, and what will happen on a financial regulation perspective.
On the other hand, a growing number of nations will start to embrace standardization. In the next year, you can expect to see 13 to 15 countries with near symmetrical legislation.
Understanding the motivation behind exchanges and crypto-asset regulation
Ensuring interoperability between digital solutions and traditional systems is vital. More on this in a moment.
From my experience, when it comes to exchanges and crypto assets, financial regulators and governments are very concerned about two important perspectives:
- KYC - A Know Your Customer perspective
- AML - Anti-Money Laundering perspective
This ties to interoperability which is vital, and sort of shapes where we can expect the next year to go.
Every country wants to ensure they have a good due-diligence system in place for crypto assets and exchanges. Why? Because when it comes to the extreme cases of terrorism, money laundering on a massive scale, or fraud on a massive scale, other countries will be looking to see if the country that allowed the transaction - think through crypto assets or a crypto exchange - did everything they could to stop it.
If the country where the transaction took place didn’t - well then they can get blacklisted from the global community financially or face sanctions as an example. These negatively affect the lives of millions of citizens, and is exactly the type of problem a country wants to avoid.
The future
This is why interoperability is so vital. Because each country needs to have the ability to say “we did everything we could do, and we followed the standards” - and at the same time have innovation flourish.
Moving forward we will undoubtedly see the standardization of regulations. Bermuda is a great example of how this may play out. They’re a Commonwealth country, a member of the OECD, and have helped lead the charge in this direction.
I expect we’ll all see 13 to 15 countries rolling out near universal regulation in the next year.
About the author: Joseph Weinberg is the CEO of Paycase Financial – visit his author page for more information.