The cryptocurrency market is experiencing an unprecedented boom. Once a niche financial instrument, digital currencies like Bitcoin and Ethereum are now being widely accepted as a store of value and means of transaction. This article provides insights and information on the cryptocurrency market and legalities of cryptocurrencies. We look at how digital dollars will become mainstream, why this is good news for you, what the future of cryptocurrency looks like, what exactly is a cryptocurrency and what the risks are when investing in them.
Stewarts’ Marc Jones is a Partner in the Commercial Litigation, Fraud and Securities Litigation department. His areas of expertise include digital financial services and cryptocurrency.
We talked to Marc Jones, Partner for Commercial Litigation, Fraud, and Securities Litigation at Stewarts, about the future of money and how it looks set to change as the digital currency market becomes more mainstream and more complicated. The legal aspects associated with decentralised financial systems are Jones’ expertise.
A couple of the areas in which he focuses his practice are insolvency, contentious insolvency, fraud claims, and corporate and shareholder disputes.
In our interview, we asked him about how he sees this part of the global economy developing.
How would you describe the digital currency market at present?
Although it has a large and diverse user base and is widely adopted, it is still in its infancy. Until now, the main focus has been on currency trading, but increasingly innovative decentralised financial products and services are carving out new markets and serving a broader range of social needs. While the underlying technology advances rapidly, the legal and regulatory framework is lagging behind and in some aspects missing altogether.
Regulation is still patchy and minimal with some exceptions, but that will change. The defi marketplace’s core element, DAOs, are not governed by any legal system at all. DAO could face unexpected financial repercussions if that is incorrect. Bitcoin will go through some growing pains as it reaches its teenage years and these legal and regulatory gaps are filled.
In the next few months, how do you think cryptocurrency will develop/progress? How do you think digital currency will change in the future?
At both the national and international levels, there is definitely a rise in regulatory impetus and interest. In the UK at least, consumer protection is receiving increased attention.
The FCA banned the marketing of crypto-derivatives to consumers last year, and this has been followed by a crackdown on the advertising of these coins, over which it will soon exercise control. In addition, the FCA is consulting on whether to extend the financial promotion rules to crypto assets.
Due to the broader promotion regime than that which applies to regulated products, unregulated cryptoassets may be subject to the same rules as regulated financial products depending on the results of the consultation. The Financial Stability Board, the Basel Committee of Banking Supervision, and Iosco have all warned that cryptocurrencies are now systemic risks to the traditional financial system and that these risks could escalate rapidly.
There has been a debate about whether national rules can ever address the risks posed by an asset class with global reach, but which doesn’t exist anywhere, or whether international rules and possibly some form of supranational body will be needed to regulate crypto assets. Although these changes will not occur quickly, they should already affect those who operate in this field.
Why is this happening?
People are spending more time online as a result of the pandemic and lockdowns at the national level. In addition, the economic effect of the pandemic and the ease with which cryptocurrencies can be purchased and traded have led to an increase in crypto-uses over the last two years.
This area has also seen an increase in fraud. Together, these factors appear to have triggered calls to crack down on misleading crypto advertisements and better protect consumers. The rapid growth in size of the asset class in just a few years (now hovering around $3 trillion) has compelled regulators to pay attention on a systemic level.
As far as regulation of cryptocurrencies is concerned, only anti-money-laundering has seen anything resembling international convergence. Combined with the size of the asset class and the increasing nodes connecting cryptocurrency markets to traditional financial markets, regulators are concerned about the possibility of a crisis in one affecting the other.
Will fiat money be around in the future? Is it going away?
Probably not. Even a moderately-sized economy cannot give up the economic and political power that comes with issuing its own currency. One of these small economies, El Salvador, recently adopted Bitcoin as legal tender alongside the US dollar, replacing their own fiat currency. Is it possible that a country like that might eventually abandon fiat altogether and adopt cryptocurrencies? Possibly.
So far as fiat is concerned, the real question is whether states will issue central bank digital currencies. Nine countries have launched CBDCs, based on the Atlantic Council’s CBDC Tracker. CBDCs are being researched, developed or piloted by the world’s major economies. One of the fundamental questions that governments and central banks are grappling with is whether the launch of a CBDC will entirely replace the existing (largely credit-based) money supply or whether the two can coexist.
The global financial markets will be reshaped by three trends over the next few months.
The use of cryptocurrencies and other digital assets will continue to grow. Whether one looks at it from the perspective of the financial markets in major economies (eg a 2021 survey of 100 hedge funds found that executives expect to hold an average of 7.2 per cent of their assets in cryptocurrencies by 2026) or developing economies whose citizens have not been as well-served as more advanced economies by the existing global financial system and appear from some metrics (eg P2P trading volumes and number of crypto-users) to be much more open to adopting cryptocurrencies, the market looks set to continue to grow apace.
Increased regulation and arbitrage. The recent announcement by Binance that it has secured cryptoasset licences from Dubai and Bahrain, and its chief executives statement that this marks “a milestone in our journey to being fully licensed and regulated around the world” is the clearest example indicating that big market-players see the writing on the wall.
Not long ago the SEC invited crypto-business to voluntarily come into the regulators tent. Smart business will get in and help shape regulation. Staying outside will become less and less of an option. The choice will not be whether to be regulated, but where to be regulated.
Governed or ungoverned. Diem may have gone, but the battle it sowed remains. This is indeed a longer-term trend, but it is a big one, and everything that happens in the regulatory and legal sphere needs to be assessed in light of this central issue at all times. Will states really allow their citizens to ditch fiat currencies in favor of privately issued cryptocurrencies, or will they be forced to retain their monopoly through CBDCs, or simply by regulating cryptocurrencies away?
However, the recent executive order issued by President Biden was embraced positively by the crypto-community, but it was too vague beyond making clear that the USA intends to “reinforce US leadership in the global financial system” through means such as “the responsible development of payment innovations and digital assets” to really provide hope for the future.
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Author
Chris Munch is a professional cryptocurrency and blockchain writer with a background in software businesses, and has been involved in marketing within the cryptocurrency space. With a passion for innovation, Chris brings a unique and insightful perspective to the world of crypto and blockchain. Chris has a deep understanding of the economic, psychological, marketing and financial forces that drive the crypto market, and has made a number of accurate calls of major shifts in market trends. He is constantly researching and studying the latest trends and technologies, ensuring that he is always up-to-date on the latest developments in the industry. Chris’ writing is characterized by his ability to explain complex concepts in a clear and concise manner, making it accessible to a wide audience of readers.
