By Salvatore Ferraraon, January 23, 2018
Over the festive season one or more relatives may well have mentioned a fantastical investment opportunity with returns too good to be true. Bitcoin has been a topic on everybody’s lips, if not any one of the other 1000+ virtual currencies or tokens currently available on exchange.
Following Bitcoin’s and other virtual currencies’ meteoric rise in 2017, largely fuelled by small retail investors gaining ever greater exposure, regulators from the EU and across the globe have become increasingly concerned.
While the rapid increase in the value of virtual currencies has certainly caught the attention of regulators, the first developments to draw stark warnings came following the explosion in so-called initial coin offers or ICOs. In brief, an ICO is a method of raising funds through selling coins or tokens in exchange for fiat or other virtual currencies, and is mainly used by start-ups.
The issue here is that start-ups could raise millions overnight on nothing more than a paper outlining their future business; many had not yet even begun developing their products.
The European Securities and Markets Authority (ESMA) consequently saw fit to warn investors of the risks of ICOs in November 2017, stating there was a high risk of losing “all their invested capital.” Regulators from around the globe have also issued their own warnings – the US SEC, Japan’s FSE and the International Organisation of Securities Commissions – while others such as China and South Korea have gone as far as banning ICOs outright.
The European Commission has also sounded the alarm with regard to the pricing of virtual currencies, in December 2017. This, following Bitcoin’s near twenty thousand dollar peak. Valdis Dombrovskis, the EU’s financial services Commissioner wrote directly to the chairs of the European Supervisory Authorities (ESAs) asking them to issue fresh warnings to investors that would discourage the ‘mania’ around virtual currencies. Additionally, he requested the supervisors assess further the current EU regulatory framework and its applicability to virtual currencies.
Beyond the more obvious threat of an economic bubble, virtual currencies also pose a less apparent danger in their potential use for criminal money-laundering. Regonising this, the EU has for the first time defined virtual currencies as “obliged entities” and will subject them to anti-money laundering (AML) requirements under the fifth AML Directive.
Before any more comprehensive regulation can be drafted, let alone implemented, a more fundamental question presents itself. How can regulators contain or control an ‘asset’ that only exists in the digital sphere?
Joachim Wuermeling, a member of the Executive Board of Germany’s Bundesbank responsible for Information Technology summarises the issue: “Effective regulation of virtual currencies would therefore only be achievable through the greatest possible international cooperation because the regulatory power of nation-states is obviously limited.”
Blockchain enthusiasts however will no doubt hope that the apparent “bubble” apparent in the price of many virtual currencies, and the threat of new regulation, will not diminish enthusiasm for the underlying technology that still has almost limitless potential.
After all, it is worth noting that despite the short-term damage caused by the infamous “dotcom bubble” of the early 2000s, those companies and technologies that survived have eventually come to play a central role in our everyday lives.
In any case and despite a potentially rosy future, the virtual currencies space will be one that legislators are sure to monitor closely, with stringent regulation or even complete banning a distinct possibility. However whether any potential measures can tame the 21st century’s ‘Digital Wild West’ is yet to be seen.