Jonathan M. Padilla is a scholar of Schwarzman at Tsinghua University where he wrote the dissertation "New regulations for the new economy: a proposal for the G20 on the regulation of cryptocurrency", from which this article has been adapted.
advised major e-commerce companies and natural resources on blockchain integration and has a background in government and politics.
In March of this year, central bankers and G20 finance ministers met in Buenos Aires to discuss everything from international trade to global infrastructure investments. Among the topics discussed was the regulation of cryptocurrency, which has attracted the growing attention of government regulators and political actors, while the adoption of blockchain becomes more widespread and the cryptocurrency markets gain a wider following.
Since then, the G20 has begun to intensively study ways to de-risk the cryptocurrency markets and the regulation of craftsmanship that will not stifle the innovative potential of the blockchain. While many entrepreneurs and investors in this space fear that compliance with the government will hinder future growth, the reality is that committed cooperation offers the best possible path to a potential turning point that accelerates the adoption of blockchain technology by of the major enterprise users and far away major institutional investors.
With central bankers and finance ministers to discuss cryptocurrency this summer in Argentina and with the entire G20 to meet in late November, action or inaction here will have an impact on the cryptocurrency markets. How the blockchain community chooses to engage from one moment to another has the potential to set the tone of how governments and entrepreneurs develop a long-term relationship.
As Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability of the G20 Board, disclosed in March 2018, blockchain has "the potential to improve the efficiency and inclusion of both the system financial economy ", but to release this potential will require substantial work.
An ideal forum
The G20 was originally formed as a forum for finance ministers and central bank governors after the 1997 Asian debt crisis. Since then it has become a body of cooperation between heads of state to address the difficult economic issues of the time.
In the wake of the Great Recession, the G20 created the Financial Stability Board to better coordinate prevention and consistent responses to financial instability. Since its inception, the FSB has been instrumental in improving banking regulation through the Basel Accords, an opt-in transnational framework designed to strengthen the resilience of global financial systems and to promote good economic governance policies.
The G20, together with the FSB offers the best opportunities for a global regulatory framework as it 1) calls the most relevant stakeholders and decision makers, 2) can create a transnational framework and 3) is already studying cryptocurrencies and their impact on a number of different fields.
Any regulatory framework will require the cooperation of heads of government who possess the political power to shift legislation and balance internal considerations, from financial and economic ministers who have the technical ability to develop a good policy and execute central laws and bankers that they have a huge impact on the regulation of commercial banks in their respective states.
Adding from a geographical point of view, the G20 can ensure that any framework taken into consideration is of a transnational nature as issues such as tax evasion, money laundering and investor protection transcend borders. This framework would also minimize the risk posed by regulatory arbitrage to countries where companies can exploit loopholes to gain geography-based benefits.
Finally, with the G20 member states and the FSB staff already working on these issues, there is attention, focus, and the desire to create a policy that does not stifle innovation .
Different countries have adopted different approaches to the regulation of cryptocurrencies and related fields. While a complete picture is probably years away, there are some key points that stand out in creating a regulatory configuration.
The simplest problem that the G20 and the FSB can mediate is to decide an operational definition of cryptocurrency. Several nations such as Switzerland through FINMA and Israel through the Israeli Securities Agency have taken steps to do so in a way that classifies the cryptocurrency into payment tokens, utility tokens and security tokens.
Clarity on this front will not be easy but defining the cryptocurrency will allow entrepreneurs and investors a much more stable terrain on which to build projects and governments more guidance on how to regulate
Accept that all the information needed to regulate do not exist yet it's another important point. This thinking lends support to the creation of sandboxes such as the one that the UK Financial Conduct Authority is doing on fintech that will provide both flexibility and ability to evolve to meet the demands of the industry with its maturation.
In trade, the leadership shown by Japan, with the licensing and financial services agency working with self-regulating organizations (SROs) to help the police in space and in the mainstream cryptocurrency should be praised.
The exchanges will be fundamental to understand how the banks interact with cryptocurrency and how the taxes will eventually be collected. Increasing the value of the cryptocurrency market will increase the focus on compliance with know-your-customer (KYC) and anti-money laundering (LAM).
Impact on Industry
Overall, some of the above issues could be woven together to reflect the efforts of the G20 on banking regulation. An agreement by Zug or Valletta, comparable to that of Basel, could create an opt-in framework in which nations agree on the basic principles for the regulation of cryptocurrency with inputs active from industry.
The increase in regulation, however, does not mean that the blockchain and cryptocurrency projects die. On the contrary, the increase in regulation, provided that it is done with the cooperation of the players in the sector and with the aim of reducing the risk of a wider market, will accelerate the adoption of blockchains by of large corporate users and will reassure institutional investors.
Numerous large companies have already started exploring blockchain applications and potential use cases to streamline costs and gain competitive advantage with their peers. With a regulatory framework in place, it is possible to meet the internal and external compliance requirements of publicly traded companies and start the real growth phase of the traditional S-curve.
Working with regulatory authorities, industry stakeholders can help craft rules in which both entrepreneurs and governments win. This G20 framework could only be the action needed to help free long-term creative potential and the promise of the blockchain
Image of the G20 flag through Shutterstock.