The role of regulators in the future of money

In the 2014 publication, The Future of Money, the experts at the Future Trends Forum said: “We can walk towards a disintermediated world but that will provoke a strong reaction in regulators and everything that happens in the future with money will depend largely on what they decide.”

Regulatory challenges include protecting consumers and investors, complying with Securities Market law, European Regulations and Directives or enforcing anti-money laundering requirements.

Sand boxes

Among the initiatives that could accelerate the adoption of cryptocurrencies and Blockchain solutions in general, is the push of regulators in the creation of specific “Sand boxes”.   They are the so-called “Crypto Regulatory Sandboxes”, which are real test environments, but isolated and controlled, which is used to ensure regulatory compliance and security controls for financial operations, including cryptocurrencies and Blockchain-based systems.

In June 2018, the UK’s Financial Conduct Authority (FCA) granted 11 companies related to Blockchain technology and DLTs in general access to its regulatory sandbox service. In July 2018, Mick Mulvaney, acting director of the Consumer Financial Protection Bureau (CFPB) announced the launch of a regulatory sandbox to encourage cryptocurrencies and Blockchain technology in the US. In April 2019, the South African Reserve Bank made a call for proposals for companies working with Blockchain technology and cryptocurrencies to be part of its regulatory sandbox. Currently, there are about thirty countries with regulatory sanboxes, most of them in Asia.

In Spain, the inforeact law for the constitution of a regulatory sandbox, inspired by the British case, and which will be coordinated by the General Secretariat of the Treasury in collaboration with the Bank of Spain, the CNMV and the General Directorate of Insurance,  it is pending review by the Courts to be processed as a bill. Despite the political unanimity of its benefits, the project is being delayed due to the lack of government.

Regarding the concern of regulators about the appearance of Libra, suffice it to say that it has been a topic included in the last meetings of the G7 and Ecofin. On September 18, 2019, the deputy governor of the Bank of Spain, Margarita Delgado, urged regulators and supervisors to monitor and act to determine the effects that Libra, Facebook’s currency, may have on the global economy and the financial sector.

The role of regulators

Paola Subacchi, an expert at the Future Trends Forum, thinks that the key for regulators, and also their dilemma, is how to regulate without constraining innovation.

Regarding the rise of cryptocurrencies like Libra, Paola tells us that the big concern of regulators is economic and financial stability.  If the ‘low volatility’ assets backing Libra are no longer suitable to be exchanged for pounds in circulation, who will be responsible for providing liquidity to the monetary system? Until now, this has been the task of central banks. For example, when there has been a liquidity crisis in the US, it was the Fed that made the decision to provide liquidity to the system.

On the other hand, Paola is concerned about the fact that a currency is issued by a private corporation rather than by central banks of democratic countries that have very demanding requirements of transparency and control. Anonymity and lax regulation will make Libra an instrument for money laundering, tax evasion, and international crime and terrorism.

For his part, the expert Jerry Brito is committed to a regulation that is as close as possible to the regulation of paper money, that is, that the policies of anti-money laundering and consumer protection are not harsher than those applied to paper money. In his opinion, a tightening of regulation can undermine individual freedom and increase the control of citizens. Regarding Libra, Jerry sees concern that it is advertised as a “StableCoin” that will have a value based on a basket of assets.      and it is not emphasized that the consortium itself has the power to change the composition of said basket as it deems appropriate, and may therefore increase uncertainty about its value over time.

The extreme volatility of the prices of bitcoin and other cryptocurrencies is a major obstacle to their adoption as a medium of exchange or store of value. But Libra has not just closed the circle of stability by leaving the composition of the basket in the hands of a few private companies.

“If Blockchain is set to become the catalyst for innovation, jobs and economic growth in the EU that many expect, then there is no doubt that a key element will be a predictable legal and regulatory framework for Blockchain,” they state from the European Union Blockchain Observatory & Forum in a recent report.

At the European level, the report has just been published from the European Union Blockchain Observatory & Forum: LEGAL AND REGULATORY FRAMEWORK OF BLOCKCHAINS AND SMART CONTRACTS.  It says: “If Blockchain is set to become the catalyst for innovation, jobs and economic growth in the EU that many expect, then there is no doubt that a key element will be a predictable legal and regulatory framework for Blockchain.” In the report, the Observatory’s experts make eight general recommendations on how regulators could address this legal and regulatory framework.

For Almudena de la Mata, the key thing is for regulators to know the technologies and their possibilities. So creating regulatory sandboxes seems like a good way for them to get involved from the start. Regulators have a difficult mission not to be a brake on innovation while making sure they protect citizens ‘ rights.  both in their individual role (protection of honor, personal and family privacy and self-image) and in their role as consumer and investor.

The legal and regulatory system is created for a centralized environment and today the interpretation of the rules is not clear when it comes to applying to distributed and decentralized environments. Hence the importance that Almudena gives to the creation of spaces where joint reflection between jurists, politicians, regulatory bodies, engineers and entrepreneurs is encouraged.