We’ve done a lot of reporting on emerging cryptocurrency regulations, including our recent one, which looks at some of these developments as well as the risks and rewards of this next iteration of digital transformation.
In a recent webinar titled, I spoke with one of the report’s authors, Todd Ehret, senior regulatory intelligence expert for Thomson Reuters Regulatory Intelligence; and Gabe Hidalgo, Managing Director of K2 Integrity.
Here are some of the questions from the webinar along with the panelists’ responses.
1. How many countries have adopted cryptocurrency as legal tender?
Ehret: On June 8, 2021, Salvadoran Congress voted in favor of President Nayib Bukele’s proposal to make bitcoin legal tender in the country. With 62 of 84 possible votes from lawmakers, El Salvador became the first and still the only country to officially adopt cryptocurrency as legal tender. Bitcoin will become legal tender, alongside the US dollar, on September 7, 2021.
Although several political leaders around the world have expressed their support for El Salvador’s decision and that cryptocurrencies such as bitcoin are widely used and accepted as a means of payment in many countries, no other has taken any action. official measures to adopt it as legal tender. Many countries are also at various stages of research or work on their own central bank-backed digital currencies.
Gabe Hidalgo from K2 Integrity
Close. Bukele touted the benefits of bitcoin, tweeting: “It will bring financial inclusion, investment, tourism, innovation and economic development to our country.” Perhaps he is correct that it will probably be easier for Salvadorans living abroad to send funds home.
The country is very dependent on the money sent by workers abroad. Remittances to the country total about $ 6 billion, or about 20% of the country’s GDP, which is one of the highest ratios in the world. Because of this dependence on foreign remittances, El Salvador finds itself in a somewhat unique situation.
Close. Bukele also urged bitcoin miners to move to the country to take advantage of cheap, clean, and renewable geothermal energy from volcanoes to power mining platforms. It remains to be seen whether El Salvador will become a hub for bitcoin mining and innovation, prompting other countries to follow in its footsteps.
Adopting bitcoin as legal tender is not without its challenges and risks, as inflation is a problem in El Salvador and nearly 70% of the population is â€œunbankedâ€. Requiring every business to accept bitcoin for goods and services can be a challenge.
The International Monetary Fund (IMF) warned El Salvador in a blog post that its actions were “a step too far.” The IMF said, â€œSome countries may be tempted by a shortcut: adopt cryptoassets as national currencies. Many are indeed secure, easy to access and inexpensive to process. We believe, however, that in most cases the risks and costs outweigh the potential benefits. “
El Salvador will be a very interesting test case and is being watched closely by other governments around the world as well as by the crypto community.
2. How can crypto-prices be protected from the hype on social media?
Ehret: Global financial regulators, such as the United States Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), have regulations that prohibit manipulative business practices and various activities under anti-fraud rules . Since cryptocurrencies like bitcoin are not directly regulated by the SEC and CFTC, they exist in a somewhat gray area.
SEC Rule 10b-5 prohibits “the use of any device, scheme or artifice to defraud”. The rule also applies to inaccuracies or omissions of material facts. To complicate matters further, many online social media comments can be considered free speech. The lack of a 10b-5 rule for cryptos is a loophole that regulators will need to fill. Enforcing such rules regarding manipulative commerce and online hype will also be a challenge.
3. Any recommendations for a financial institution that sees its customers using their bank accounts to buy cryptocurrency?
Hidalgo: In institutions where customers use their accounts to buy cryptocurrency, there will be telltale signs. Obviously, a deposit or withdrawal to a recognized exchange will take the information from the exchange about the transaction with it. However, in some cases, smaller or relatively unfamiliar exchanges will use corporate shells to facilitate trade. Financial institutions should screen their transactions for unknown business entities and ask the client what the purpose of the transfer is when they cannot locate information through proprietary or open sources.
Todd Ehret of Thomson Reuters Regulatory Intelligence
It is up to each institution to establish an appropriate risk tolerance and monitoring program. If the institution does not wish to fund cryptocurrency purchases or receive crypto-based income, it must configure its transaction monitoring system to detect known exchanges and query transfers to possible shell entities including the only one. purpose is to facilitate crypto-based transactions.
4. How can you mitigate the risk associated with cryptocurrencies and cross-border transactions?
Hidalgo: Mitigation depends on the type of institution you are a part of. Banks will handle the fiduciary part of transactions, so they will not be able to see cross-border transactions using crypto. Instead, they rely on the Virtual Asset Service Provider (VASP) client to implement a robust transaction monitoring program. For a VASP, monitoring and mitigating self-hosted wallets is a political decision. The VASP will need to decide whether it will accept transfers of portfolios that have not been identified by their clients as their own portfolios.
Unknown third-party wallets will present additional challenges to a VASP for monitoring, and therefore, a VASP should hire a blockchain mining product provided by the vendor to attempt to assess the risk of the self-hosted third-party wallet. In this way, the VASP can determine whether this wallet presents higher risk activity from the Dark Web or from identified illicit parties.
5. Should developing countries adopt cryptocurrency as legal tender?
Hidalgo: Each country should decide for itself whether it is ready to adopt a cryptocurrency as legal tender. The problem with cryptocurrencies that would pose problems for any country seeking to make them legal tender, is that the price volatility set by the market would cause values â€‹â€‹to move rapidly. For example, today a loaf of bread costs one unit of crypto-coin and tomorrow, based on market valuations, that same loaf of bread may cost three units of that same crypto-coin.
Consider instead a stable currency which is linked to a well-regarded reserve fiat currency where the underlying reserves of the stablecoin are transparently reported and audited to ensure that for every unit of that stablecoin created there is a corresponding fiat unit at a recognized depository institution and regulated.
When it comes to regulatory frameworks, many countries are still trying to figure out how best to regulate this asset class and in some cases they apply Money Service Business regulatory frameworks to all crypto related products and services. . Overall, however, volatility would emanate from fluctuations in market prices for unstable cryptocurrencies; and regulations would only strengthen consumer protection and mitigation as well as monitoring of transaction flows for potential illicit activities.
The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the principles of trust, is committed to respecting integrity, independence and freedom from bias. Thomson Reuters Institute is owned by Thomson Reuters and operates independently of Reuters News.