Given the recent government pushback against Libra by both France and Germany, investors are worried of a mass action by world governments to ban crypto. We decided to conduct an interview with an expert in the legal field and how it pertains to the crypto landscape, Felix Shipkevich. Felix is a Principal of Shipkevich PLLC, a global law firm specializing in legal and regulatory matters within the digital currency and fintech industries.
How and why are so many governments around the world restricting cryptocurrencies?
Cryptocurrency has the power to change the world for the better. Governments today are restricting and even banning some cryptocurrencies because they are afraid of the effect that a private company can have over monetary sovereignty across Europe. With Libra, Facebook could potentially manipulate economies across the world. That’s why Germany and France– the two countries that were the catalyst for forming the EU back in the 1950s–want to ban Libra.When it comes to regulating fiscal economies, crypto or virtual currencies may result in less demand for the countries’ own local currencies. Governments prefer to regulate their own currencies. Cryptocurrencies’ use growth by consumers may eventually result in reducing the control some governments have over their economies, and particularly over the reserves and inventory of their cash supplies. There will be less ability to collect taxes, prevent fraud from taking place, and regulate financial transactions.
If there’s one thing that any government that wants to control over its own currency. It wants to control its own currency before anything else, including human rights, business issues and legal systems. Without the ability to control its own currency, the transactions within the countries and cross-border payments, governments will become weak. This is their ultimate fear.
Some experts have expressed warnings that cryptocurrencies such as Facebook’s Libra would shift control of the economy from governments and their central banks, to large corporations. Save for blocking the cryptocurrency, what measures should be implemented to ensure this shift does not transpire?
The short answer is, countries need to decide if they will prohibit crypto or accept it by properly regulating crypto usage and trading activities. If the country accepts it, they are forced to work with other nations to create a harmonious legal and regulatory environment to support the use of crypto. If you’re willing to allow products like Libra to be used amongst your own citizens and residents, you need the appropriate regulatory environment in place to decide the parameters of transactions — without it, you’re doomed to fail.
Right now, Germany and France are taking measures to prohibit cryptocurrency in its current form. To increase acceptance of cryptocurrency, countries need to enter into treaties with other countries to ensure there is no cross-border regulatory arbitrage or money laundering, and to ensure proper oversight for all users.
The question also comes down to whether the coin is used by the public who buys it as an asset or as a payment instrument. Libra is a Stablecoin, pegged to low volatility assets, designed to eliminate the volatility in other currencies. Bitcoin was created to be a payment instrument. Unfortunately, contrary to its intended purpose, today Bitcoin has become more of an asset class. If the objective of a coin is to be a payment instrument, meaning to pay for things and used as regular currency, it should be governed as such; this is the objective of Libra. If the objective is to grow in value, for the buyer to profit, it should be viewed as a security and subject to different rules.
A further concern specifically regarding Facebook’s Libra is the risk the crypto could potentially pose for consumers. In the wake of the Cambridge Analytica scandal, what legislative and legal measures should be taken to protect consumers’ data?
Consumer data should be of utmost priority to all groups working in cryptocurrency today. Trust is the number one priority. Even though the nature of the blockchain is anonymous, and Bitcoin provides a degree of both anonymity and security–not all cryptocurrency industry players are as rigorous. When you look at other crypto baskets, you’d be surprised how much privacy can be lost. The industry is still highly misunderstood. At the end of the day, cryptocurrency is an application and it’s code, meaning that the data is vulnerable like any other data. Companies need to take extra measures to protect it. In a world where consumer data leaks are common, consumers increasingly value the privacy and discretion that is at the heart of cryptocurrency and blockchain offerings.
How would you describe the current environment for cryptocurrencies from a regulatory and legal standpoint?
It is a fascinating time to be in this sector because the regulatory landscape is only now taking form in the US and numerous jurisdictions around the world. There is still a lot of ambiguity and lack of clarity around cryptocurrency regulations, as well as the variations between crypto and tokens. For instance, some tokens may not necessarily be issued for the purpose of raising capital and investment opportunity. But because they could fluctuate in value, they may look more like a security. This could be a deterrent to financial innovation because complying with the U.S. securities laws can get expensive.
Both in the US and worldwide, there isn’t a very clear distinction around whether some tokens should be classified as payment instruments or securities. In progressive locales like Bermuda, Malta and Switzerland, regulators have made it easier to distinguish between payment instrument tokens and security tokens. But you’re still limited to the regulatory environments of those areas.
Switzerland has differentiated between payment instrument tokens and security tokens. In Switzerland, utility tokens are not generally viewed as security tokens, contrary to the U.S. That arbitrage could create an opportunity to profit from issuing these tokens in Switzerland.
Once you get into the United States’ regulatory environment, particularly securities laws, you are playing in a new and very expensive territory. Lawyers are not cheap; a firm would need to hire legal counsel, auditors and accountants, and thus it becomes a very expensive project. In Switzerland, the process is less arduous than in the US, less bureaucratic, and more clear from a reg point of view.
When we think of how the wealthy historically had “Swiss bank accounts”, in part that is still true today. What’s interesting is that Switzerland has been arguably the most clear, progressive and appealing for many crypto issuers and exchanges. Because of the more lenient terrain, Facebook went straight to FINMA– the Swiss Financial Market Supervisory Authority– to roll out their new Libra cryptocurrency. FINMA wasn’t impressed.
Given the present climate, where do you see the future of cryptocurrencies as globally accepted currencies?
With its ability to increase economic empowerment, accessibility and convenience for all, the future of cryptocurrency is bright. I think that cryptocurrencies are already globally accepted in certain places, though the form of digital currency may look somewhat different in the future. Depending on how harmonious the cross-border regulations become, and depending on the outlook between major financial centers in Europe, Asia and around the world, digital currencies are not going away. They will likely take a different shape over the years.
When you digitize currencies, you can trace transactions between individuals whether in the country or across borders. A cashless society gives the government easy access to monitor payments as long as governments have such an ability to do so. They can more easily go after individuals, businesses or anyone else avoiding taxes or showing income. Governments want to see where the money is going. That’s part of the reason France and Germany are banning crypto in its current form.
Payments of the future will be digital, but I don’t think phones have been successful in being the instruments for transacting. Tomorrow’s payments will hinge on stores’ ability to innovate. There are currently stores where you don’t scan. Stores of the future will likely use facial recognition and automatic payments. With that in mind, governments need to do a better job of protecting consumer privacy and data.
Moving forward, what should developers of cryptocurrencies specifically do to alleviate concerns surrounding crypto?
Hire a good attorney who is trained in cryptocurrency issues. Developers and issuers need to be more proactive in defending consumer rights and privacy as they develop new coins, products, services and applications. Whether they are doing it through a consortium or unilaterally, there is no global industry association currently that has articulated the minimum standards required. Software and IT developers need to think about these issues as well. As an industry, we need to educate our regulators and the public about cryptocurrency, its risks, its promise and how it will change the world.
Consumer adoption will come through trust. People may find cryptocurrencies interesting, but how do you build trust when you can potentially lose your investment as a result of exchange rates or other factors? When the e-commerce business took off in around 1995, it took nearly a decade before consumers felt comfortable buying things online. This is a very similar issue.
One major way trust may be developed is when banks, regulated banks small and large, offer the ability to hold your money in crypto. The banks in the US are not nimble enough in a changing world. I should be able to easily move money from Bitcoin to a US Dollar in a bank. I need to trust that my money is in a bank that is regulated. Consumers are reluctant to have their money in too many places, and it’s the trust factor that’s missing. If big banks wanted to make things easy for the consumer– allowing one to hold dollars, crypto, whatever currency– adoption would increase. But the retail banking industry has shunned away from crypto- at least until now. It’s even hard for legitimate cryptocurrency businesses to open bank accounts. You can’t close your eyes on innovation.
What gave us the trust factor in the ecommerce business? Amazon and eBay, who were the first sites to be truly user-friendly, easy to navigate and offered guarantees of quality. It took a long time to be widely accepted but by 2021, a quarter of the world’s population– over 2.14 billion people– are anticipated to buy things online.
The same kind of adoption– slow and steady– will take place with crypto. By the time our kids reach our age, it will be society’s main form of currency.