In the early 1990s, the rise of the internet coincided with the fall of communism and the Soviet Empire. It’s not a coincidence that as the internet grew in popularity and usefulness, democracies flourished around the world. The potential of the internet transcended borders and helped to change the world’s geopolitical structure.
However, as internet adoption proliferated, a number of negative uses cases emerged, sparking consumer protection concerns amongst regulators and governments. This isn’t much different from the early days of virtual currency when bitcoin was associated with drugs, guns and Silk Road.
In the case of the internet, officials and activists began calling for a blanket ban, not understanding the key role it would play in building a global community. Luckily, collaboration between countries and the World Wide Web Consortium (W3C) led to the creation of a global framework for electronic commerce in 1997, paving the way for internet adoption and growth.
People realized that a ban on the internet would have choked innovation and made the world less connected. Unfortunately, if the loudest naysayers of virtual currency get their way, that’s exactly what will happen.
Exploding onto the scene
Consumer interest in virtual currencies and the “distributed ledger” technology that powers them exploded in 2017, pushing prices to all-time highs, spurring increased consumer interest — and new concerns — amongst regulators.
This culminated in the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) testifying before Congress. In Europe, France and Germany have called for the G20 to consider a global regulatory framework for virtual currency. In Asia, South Korea has advocated for international coordination, while China has banned almost all forms of virtual currency activity.
The time is now to build that global regulatory framework and prevent any more blanket bans from taking hold. A global framework governing virtual currency activity should:
- Avoid a “one-size-fits-all” approach and recognize that certain virtual currencies have unique use cases, and
- Acknowledge the different risks associated with consumer versus enterprise use of virtual currencies.
Building this framework should be a collaborative effort between regulators, central banks, financial institutions and technologists. If done right, it will set a new foundation to help solve some the world’s biggest financial problems and renovate old, antiquated payments systems.
The most active participants and users of virtual currency to date have been consumers. Given the risks associated with unregulated virtual currency markets, strong consumer protection measures, similar to those available in regulated markets today, are essential and necessary.
For an example of how virtual currency regulation can protect consumers, look no further than Japan. Since 2017, Virtual currency exchanges operating in Japan have been subject to regulatory oversight and capital control requirements. Following a recent hacker theft from a registered virtual currency exchange, the Japanese Financial Services Agency took immediate action, which resulted in the exchange announcing that it would reimburse its customers.
The Japanese model works because it does three things really well. It safeguards against abusive practices; it has anti-money laundering requirements and reporting; and in the area of safety and soundness, it has provisions on capital requirements, cybersecurity and system risk management.
Emerging enterprise use cases
History has shown that technology breakthroughs invariably emerge as technology matures. While consumer use of virtual currency has led the way, enterprise use isn’t far behind.
Virtual currencies, referred to as digital assets in the enterprise setting, have broad applications, far more than just an alternative to fiat currencies (like the U.S. dollar or euro). For instance, financial institutions can use cryptocurrency as a bridging tool to streamline liquidity provisions for foreign exchange transactions. Instead of replacing fiat currency, it helps financial institutions connect different fiat currency across borders. ,This lowers costs and speeds up global payments, which benefits both financial institutions and their customers.
We encourage regulators to focus on how digital assets are used and the benefits they can provide to both people and businesses rather than applying inflexible, blanket regulation.
Virtual currencies are already changing the world in new and amazing ways. They’re a tool for financial inclusion — connecting some of the most remote and poor areas of the world. They’re integrating into the global payments system — making it easier for someone using a money transfer service like MoneyGram to quickly send money back to their family in another country.
Killing such innovations won’t just do this generation a disservice, it will halt progress for generations to come. This is our “ban the internet” moment, so let’s choose our path wisely.
Antoinette O’Gorman is the chief compliance officer at Ripple, an enterprise blockchain company that uses XRP, the third largest virtual currency by market capitalization.