Cybercurrencies and the need for regulation

Anyone with a pulse and the money to cover legal fees can issue a cybercurrency.

Once the cybercurrency is created, however, brokers are needed to sell and make a market for it. Given cybercurrencies are an unregulated market, then there are few concerns over how much commission is paid to the broker. The bigger the commission, the greater incentive for the broker to sell and in an unregulated market any type of behaviour goes.

The process to issue a cybercurrency is called an Initial Coin Offering ICO.

The average amount of capital raised by a blockchain project through an ICO in 2017 was $13 million; by the third quarter of 2018 it was $25 million. The offering can be structured such that billions can be raised under the ICO: in 2018, 650 ICO were issued for a total ICO size of $16 billion.

As Bitcoin, the first cybercurrency celebrates its 10th year, what is the market like for investing in cybercurrencies. Looking at the top three, if you bought prior to January 2016 and held them your investment may be fine. If you acquired in January 2016 the chances are you could be well underwater. This is a volatile market. The top three cybercurrencies dropped a collective 84% by 2018. By comparison, the London Stock Exchange lost 13%.

The unregulated market coupled with extreme volatility makes cybercurrencies an unnatural companion for the staid, regulated banking industry.

The technology which Bitcoin introduced, Blockchain, does offer great potential for banks. One of the key characteristics of Blockchain is it removes the middlemen. While great for creating significant efficiencies across banking, the middlemen in currencies are the central bankers. Cybercurrencies have no central banker such as the Fed for the US dollar and the Bank of England for Sterling to maintain order. In addition the use of cybercurrencies in international payments processes can introduce Herstatt risk. (Not all payments synched)

Blockchain is changing its name to DLT (Distributed Ledger Technologies) so the technology can escape from being under the Bitcoin label.

There is a growing urgency to regulate cybercurrencies and several countries have initiated working groups to address the issues – at the very start of this year the European Banking Authority has called for the European Commission to investigate the need for regulation.

Others have taken unilateral action: in the UK, for example, some banks have blocked consumers from using credit cards to buy cybercurrencies.  A potential risk issue for the banks under consumer protection legislation in the event of a failure of the cybercurrency. Interestingly web sites that trade in cybercurrencies often ask for £250 upfront paid through Faster Payments. These payments are debits to the bank account and not covered by the same legislation as credit cards. If something goes wrong, the liability is with the customer.

Cybercurrencies are here and need regulation. Cybercurrencies are, like stocks and shares, only worth what people will pay for them. Stocks and shares are covered by legislation and can be bought with confidence and so should cybercurrencies. In the meantime, buyer beware as there is no safety net or anything for your cybercurrency “investment”.