The idea of a version of S&P or Moody's stamping their approval on digital assets shows how far crypto has come from the anarchic days of the original die-hards. But those ideological days are over, says Ryan Zagone of San Francisco-based Ripple Labs Inc., who urges a focus on consumer protection, anti-money laundering and risk management. His firm, which holds about 60 per cent of the currency XRP, is among those lobbying U.S. lawmakers.
"Regulation is, in fact, a betrayal of the origins of bitcoin, which was built around anonymity and skirting government oversight," said Zagone, the digital money transfer company's director of regulatory relations. "This philosophy is unrealistic and immature."
An established crypto player who says regulation can't come soon enough is Obi Nwosu, who plans to cut jobs at the London bitcoin exchange he runs -- Coinfloor, which says it's the U.K.'s oldest. He has been asking the Financial Conduct Authority to regulate Coinfloor and the broader industry since 2013.
"Institutional players bring large volumes as well as liquidity and credibility," Nwosu said. That will "make other people that don't necessarily have the resources to do due diligence on crypto, and have read some negative headlines, say 'if its OK for these guys, maybe it's OK for me.'"
While he has yet to persuade the FCA, Nwosu said he's encouraged by UK policymakers' recent statements. Chancellor of the Exchequer Philip Hammond said earlier this month that he wants Britain to lead global efforts to design a regulatory approach to crypto assets and distributed ledger technology. In the meantime, Coinfloor this month won approval to operate in the British overseas territory of Gibraltar, an offshore hub that has sought crypto firms. That could facilitate business with institutions that are prohibited from trading with unregulated entities.
The clamour for big government to step in shows just how immature the crash-chastened market still is, said Kyle Asman, co-founder of crypto advisory firm BX3 Capital.
"If you heard someone from a bank asking for more regulation, you would think you were reading a headline from The Onion," said New York-based Asman, referring to the satirical news website. "But people don't have confidence that crypto markets are not manipulated."
New York's attorney general warned last month that the industry has largely failed to adopt serious measures to detect suspicious trading. U.S. authorities have taken a hard line on market manipulation, with the Justice Department opening a probe into suspected illegal practices. One piece of good news for crypto bulls came from the Securities and Exchange Commission, which has said neither bitcoin nor Ethereum are subject to federal securities rules.
More enthusiastic jurisdictions include Switzerland, which has encouraged the creation of "crypto valley" in the canton of Zug. The Swiss have extended regulatory recognition to former UBS Group banker Jan Brzezek and a unit of his crypto startup, putting him on an equal standing as a fund manager to his counterparts in traditional assets. Brzezek, though, says crypto needs to spread quickly to the financial industry's established players.
"If you come from institutional finance, there is no way you would ever trade with or store your cryptos or your clients' with a small startup, because of the counterparty risk," said Brzezek, co-founder of Zug-based Crypto Finance.
In Asia, Hong Kong regulators recently said they're considering experimenting with different approaches to crypto. Japan has welcomed digital currencies, but China has issued an outright ban on exchanges and initial coin offerings. In between is Singapore, where regulators said this month that they're willing to help cryptocurrency firms set up local bank accounts, but don't plan to loosen rules to lure more startups. Tony Mackay, the former chief of exchanges Chi-X Europe and Chi-X Global, is building a crypto exchange in the city-state.
A big name who is betting that crypto is ready for regulatory prime time is former hedge funder Michael Novogratz, who says big institutional money could turn the crypto price drop around, possibly in the first half of 2019. Most digital asset firms are already operating to standards equivalent to those in stock or currency markets, while waiting for greater clarity from regulators, he said last week on Bloomberg Television.
Some observers with experience of the compliance world are taking a jaded view of the rush to be regulated. Authorities should look first to see how existing rules protecting investors can apply, rather than creating an untested new framework from scratch as some crypto professionals might prefer, said Eoin O'Shea, a former compliance chief at Credit Suisse Group who now runs Temple Grange Partners, a consultancy.
O'Shea's views chime with those of an advisory group for the European Securities and Markets Authority, which said this month that virtual currencies should be governed under existing rules for financial instruments.
"An industry that thrives on the idea that it's selling something unique would be foolish not to look to commercially benefit from regulatory action," said O'Shea.
- Bloomberg
