Regulating the Digital Currency Market: A Future Perspective
Abstract
The recent developments in the financial landscape call for greater scrutiny by governments and policy directions. Significant shifts in the payment industry, the increase in private digital currencies (cryptocurrencies, stablecoins), and the declining use of cash have triggered the transformation. In addition, central banks in many jurisdictions have investigated the possibility of issuing their own Central Bank Digital Currency (CBDC). The potential benefits of CBDCs are manifold. They include a risk-free digital payment means, the preservation of monetary sovereignty, increased competition on bank deposits, a strengthened transmission of monetary policy, and privacy protection with digital payments. This research highlights the current developments and potential regulatory developments in this space.
Introduction
Over the last few years, it has become evident that cryptocurrencies asset prices are hugely sensitive to regulatory announcements. They are also influenced by the government policies designed to control mining, forcing digital assets into fitting within incumbent financial frameworks. While the crypto-asset market is small relative to the size of the global financial system, banks’ exposures to crypto-assets are currently limited. Yet, its absolute size is meaningful. Moreover, the rapid developments with increased attention from a broad range of stakeholders raised concerns about whether the issuance of consumer tokens can be viewed as “securities” subject to securities exchange oversight.
A consultation paper released by the Basel Committee on Banking Supervision (2021) on the prudential treatment of crypto-asset exposures notes that the continued growth and innovation in crypto-assets and related services, coupled with the heightened interest of some banks, if not addressed carefully, could increase global financial stability concerns and risks to the banking system. The existing banking and financial systems are built on the importance of deposits as a funding source for banks, much of which is tied to the payment activities that could be affected by the CBDC. Therefore, the focus of the central banks and policymakers has shifted to assessing the benefits of technology and mitigating its risks. They acknowledge the risks associated with the new technology and its evolution as cryptocurrencies (including digital currencies) are no exception. The rest of this study provides a discussion on the potential regulation of digital currencies.
Discussion
Cryptocurrencies An increase in the volume of cryptoassets has raised concerns about consumer protection, money laundering, terrorist financing, and their carbon footprint. There have also been signals that regulatory scrutiny is likely to escalate. The recent clampdown by China on illegal Bitcoin mining in the Mongolian region (Tang, 2021) and an SEC statement are examples of enhanced scrutiny. They also imply that the Bitcoin Exchange Traded Funds (ETTs) are less likely in the near term (The Division of Investment Management, 2018).
The People’s Bank of China (PBOC) banned financial institutions from handling Bitcoin transactions in 2013 and banned ICOs and domestic cryptocurrency exchanges in 2017. In justifying the ban, PBOC described ICO financing (that raises virtual currencies like Bitcoin or Ethereum via the irregular sale and circulation of tokens) as public financing without approval, illegal under Chinese law.
