Cryptocurrencies – If You Can’t Beat Them, Regulate Them | Barnea Jaffa Lande & Co.

The continued growth of the cryptocurrency and NFT sector is making many people nervous. Among them is Israeli Finance Minister Avigdor Lieberman, who recently publicly addressed his concerns. The main concern is the implications of these mechanisms on the global war against money laundering and, of course, on activities in the institutional financial system.

These concerns are justified. These new technologies, all based on blockchain, enable the creation of transferable digital currencies independent of a central third party (some would say centralized) that organizes and monitors the mechanism.

Imagine you bought a ticket to a football game via the internet. The vendor sends you the ticket as a JPG or PDF file by email. The file contains a barcode, which the guard scans at the entrance to the stadium. This allows entry to the holder of the printed file. If you wanted to, you could print the ticket dozens of times, for free. Later, you could sell it to an unlimited number of people. After the guard (the third party) scans the barcode, the first person to come to the gate with a printed ticket is allowed entry to the game. The rest of the ticket buyers are stuck with worthless pieces of paper.

Blockchain technology prevents this kind of deception. The role of the guard is superfluous. In fact, Bitcoin is a digital currency of value that can only be transferred to one person at a time. Two people can’t hold the same Bitcoin simultaneously. And there is no need for a third party to approve or prevent its transfer between interested parties. Rather, the “community,” i.e., the computers participating in the Bitcoin network, approves transfers and ownership.

Ubiquitous Digital Wallets  

This parallel system also makes bank accounts superfluous. Instead, people buy, sell, and transfer cryptocurrencies through digital wallets. These wallets can contain a fortune. This capital is invested in cryptocurrencies and other products in the virtual financial world, instead of in the conventional financial system. The limited volume of money held in such wallets is increasing from year to year. Currently, the crypto industry is considered a disruptor. The industry views this term as a compliment, because it implies the alternative sector will goad the institutional sector to improve and become more technologically advanced to remain competitive. However, as volumes continue to rise, the crypto industry will no longer be a disruptor but a real threat. Cryptocurrencies and their derivatives may pose a horizontal systemic risk to the global economy.

Another risk people frequently “associate” with the crypto industry is money laundering. This risk is not unique to the blockchain industry. However, the conventional system operates under international regulations and standards for identifying and monitoring the flow of capital within the system. These regulations’ aim is to reduce as much as possible the ability of criminal entities to inject criminally generated money into the system while obfuscating its shady origins. Many digital wallets and platforms do not operate within these regulatory frameworks, hence the problem. 

Technology Awaits

However, there are not just risks here. We need to recognize that the cryptocurrency sector offers enormous technological-economic advantages. This new technology can radically change the way the financial system operates, and thus affect each of our lives. Instead of holding a shekel bank account and a foreign currency account to save dollars (and pay fees), instead of opening a new account to trade securities, instead of stocking up on local currency for every trip abroad (to eliminate the fees for paying with credit or withdrawing cash from an ATM abroad), we can, already in the near future, hold a single digital wallet that will contain any currency we want and will support any banking or financial transaction we want to make, in Israel or abroad, immediately and safely. This is not a distant dream. The technology is already here waiting for regulation to support it. 

Prevention of Money Laundering 

When it comes to preventing money laundering, blockchain technology can provide the solution to this problem. Blockchain technology tracks the movement of any cryptographic coin, even anonymously. It is like receiving a cash bill with a printed record of all of the bill’s stops and locations before it reached us. This technology can make it very difficult for money launderers, and in a way that protects the privacy of the coin holder.

To date, banks are treating funds originating from cryptocurrency with suspicion. This suspicion will persist as long as concerns about money laundering are widespread, or as long as service providers in this sector operate without supervision. Currently, it appears the only supervision regulatory authorities are employing is aggressive enforcement or a blanket ban. This turns small investors, who don’t want any trouble and merely want to withdraw their money, into potential criminals. This is not the development the sector is seeking. 

“Bottom-Up” Initiatives

Surprisingly, leaders of the crypto industry picked up the gauntlet. Coinbase, a digital currency exchange traded on the NASDAQ, announced in February 2022 that it was leading a group of 18 major, well-known companies in the industry, including Kraken, Robinhood, Fidelity, and others, in the opening of a new platform. This platform will enable service providers in the sector to comply with the international requirements and standards regarding the prohibition of money laundering during transfers of digital assets. This is an important first step in harnessing this technology to resolve one of the most troubling problems in the crypto sector.

The regulatory vacuum is being filled with “bottom-up” initiatives. We expect this particular initiative to expand to countries in the Far East and Europe. The more companies join the platform, the more they will push out blockchain players who can’t or don’t want to comply with the new criteria.

Today, it’s the regulatory authorities’ turn to take action more than ever before. The first stage of their measures should be to lead the integration of the crypto industry into conventional economic activities. The second stage should be to improve both of these systems for the benefit of the general public.

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