As cryptocurrency and blockchain become mainstream terms there are many views on these relatively new concepts including those of governments, authorities and regulators. So, what’s the real story? Is cryptocurrency a safe investment, and should businesses use blockchain technology?
Cryptocurrency, in short, is digital currency which is traded and operates separately from the traditional banking system. The best known form of cryptocurrency is Bitcoin. There has been much debate over whether cryptocurrency is regulated and, if not, whether it should be. The House of Commons Treasury Committee recently published a report on cryptocurrency
, stating that:
• Generally, cryptocurrency is not regulated by the Financial Conduct Authority (FCA).
• The Treasury Committee welcomes regulation of cryptocurrency to ensure consumers are protected. Cryptocurrency can be particularly volatile, and consumers could potentially lose a lot of money by investing. There are also concerns around money laundering, as the names of those purchasing cryptocurrency is not always disclosed.
• If the UK regulates cryptocurrency, then the cryptocurrency market should become more mature, which should encourage it to grow.
However, the Financial Stability Board (which monitors vulnerabilities in the global financial system) also published a report
stating that cryptocurrency does not pose a material risk to global financial stability. If we look across the pond to the situation in the US, the US Securities and Exchange Commission (the SEC) is expanding its crackdown on initial coin offerings of cryptocurrency and blockchain start-up companies, and many firms have now ‘quietly agreed’ to pay fines and refund money to investors, instead of becoming compliant with the regulatory framework.
It has been suggested that the SEC will not be looking to prepare new rules to deal with cryptocurrency. Instead, the SEC is expected to apply the same rules that they currently have for stocks and bonds to everything else, including crypto. Indeed, the International Monetary Fund (IMF) has said it will continue to research cryptocurrency and blockchain and will consider any future policy it may deliver on upcoming and new technologies.
This is particularly topical following news that $125 million worth of Stellar (another cryptocurrency) is being given away for free to 30 million people
to encourage it become a ‘more mainstream form of payment’ and to allow users to fully understand how cryptocurrency is used.
Blockchain is a digital record. It allows digital information to be distributed but not copied. It was initially linked to cryptocurrency, but it has evolved to provide different usages to businesses. When used in combination with cryptocurrency the transactions are recorded in order and are publicly available. The ‘blocks’ store information about transactions and who is participating in them (using a digital signature).
When a block stores new data, it is added to a ‘blockchain’, made up of several blocks threaded together. Once the block is added to the blockchain, it becomes publicly available. The issue with blockchain, other than being incredibly complex to understand, which leads to issues particularly with retail investors, is again the lack of regulatory oversight. This means that scams and market manipulation can be common, leading particularly to things like Ponzi schemes.
So, where are we now?
Cryptocurrency and blockchain technology were initially established to revolutionise the way that money is governed by the government and central authorities. However, for this to happen, the government itself would need to accept cryptocurrency as a way of paying for things, such as taxes, and they are unlikely to do this at any stage without a central bank or authority regulating the currency.
Cryptocurrency on the whole is fairly volatile and is not easy to understand. This is why regulators are concerned – it is when investments are overly complex, but available to retail investors, that there can be incidences of regular people losing money.
The issue is that regulators don’t yet know how to regulate it, and it’s completely different from anything seen before. Before investing in any form of cryptocurrency or blockchain technology, please ensure you fully research and understand the investment, and know what you are getting yourself into.