Legalities of Crypto, Digital Dollars, and the Future of Fiat
As the digital currency market becomes both more mainstream and more complicated, we spoke to Mark JonesPartner, Commercial Litigation, Fraud and Securities Litigation, Stewarts, about the future of money in the world and how it looks set to change. Jones is an expert on the legalities associated with the decentralized finance space.
His areas of practice include banking and financial services litigation, securities litigation, corporate and shareholder litigation, professional negligence, insurance litigation, contentious insolvency, fraud claims and research. of assets.
We picked his brain to find out how he sees this part of the global economy unfolding.
How would you define the digital currency market today?
Despite its size, variety and breadth of adoption, it is still in its infancy. So far, the focus has been on currency trading, but increasingly innovative decentralized financial products and services are creating new markets and meeting more diverse social needs. While the underlying technology advances, the legal and regulatory framework lags behind and, in some fundamental respects, completely absent. With a few exceptions, regulation is still minimal and uneven, but that will change. And one of the key elements of the defi market, DAOs, claim to stand outside any legal system. This is incorrect, which could have unexpected financial implications for those involved with DAO. As cryptocurrencies reach their teenage years and these legal and regulatory gaps are closed, cryptocurrencies will experience growing pains.
How do you think cryptocurrency will develop/progress over the next few months? What are the major changes happening in the digital currency market right now?
There is certainly an increase in regulatory momentum and interest both nationally and internationally. At national level, at least in the UK, the focus is increasingly on consumer protection. Last year, the FCA banned the marketing of crypto-derivative products to consumers, and this was followed by a crackdown on the advertising of these crypto-assets that the FCA will soon take control of. The FCA is also consulting on extending financial promotion rules to crypto-assets.
The promotion regime is broader than that which applies to regulated products, so depending on the outcome of the consultation, even unregulated crypto-assets could be subject to the same promotion rules that apply to all other financial products . Internationally, there has been an outpouring of warnings from international bodies such as the Financial Stability Board, Basel Banking Supervisory Board, and Iosco that cryptocurrencies now pose systemic risks to the traditional financial system and that these risks could escalate rapidly. This has given rise to a debate on whether national rules alone can deal with these risks created by an asset class that has a global reach but does not exist anywhere or whether international rules and even some form of supranational body will be needed to regulate crypto-assets. . These changes won’t happen quickly, but they should already affect the outlook for anyone operating in this field.
What are the influences behind these changes?
Nationally, there is little doubt that the pandemic and lockdowns are driving people to spend more time online. This, combined with the financial difficulties caused by the economic effects of the pandemic and the increasing ease with which it is possible to buy and trade cryptocurrencies, has led to a significant increase in the uses of cryptocurrencies during of the past two years. There have also been reports of an increase in the level of fraud in this area. Taken together, this appears to have been the catalyst for demands to clamp down on misleading crypto advertisements and better protect consumers. At the macro level, the rapid increase in the size of the asset class in just a few years (now hovering around the $3 trillion mark) has forced regulators to pay attention to the systemic level. To date, the only area that has seen anything resembling international convergence in cryptocurrency regulation is anti-money laundering. Now, the size of the asset class combined with the increase in nodes connecting cryptocurrency markets to traditional financial markets, and therefore the risk of a crisis affecting one another, worries regulators.
What is the future of fiat currency? Will it be deleted?
In short, no. I don’t even see a mid-sized economy giving up the economic and political power that comes with issuing its own currency. A few smaller economies have ditched their own fiat currencies and adopted the US dollar, and one of these – El Salvador – recently adopted Bitcoin as legal tender alongside the US dollar. So, could a country like this end up going all the way and completely abandoning fiat in favor of a cryptocurrency? Perhaps. The real issue with fiat is whether states will issue central bank digital currencies. According to the Atlantic Council’s CBDC Tracker, nine countries have launched CBDCs. The major economies of the world are all in the process of researching, developing or piloting CBDCs. In each case, the question of whether launching a CBDC would entirely replace the existing (largely credit-based) money supply (which raises existential issues for the traditional banking system) or whether the two can coexist is one of the fundamental issues that governments and central banks grapple with.
Name three trends that will reshape global financial markets in the coming months.
Wider adoption of cryptocurrencies and digital assets. Look at it from the perspective of financial markets in major economies (for example, a 2021 survey of 100 hedge funds found that executives expect to hold an average of 7.2% of their assets in crypto -currencies by 2026) or developing economies whose citizens have not been as well served as more advanced economies by the existing global financial system and appear, by some measures (e.g., volumes of P2P transactions and the number of crypto users) to be much more open to the adoption of cryptocurrencies, the market looks set to continue growing at a pace.
Increased regulation and arbitration. Binance’s recent announcement that it has secured crypto-asset licenses from Dubai and Bahrain, and the statement from its managing directors that this marks “an important step in our journey towards full licensing and regulation in the world” is the clearest example that the big players in the market see the writing on the wall. Not so long ago, the SEC invited crypto firms to enter the regulators’ tent voluntarily. Smart companies will come in and help shape the regulations. Staying outside will become less and less of an option. The choice will not be whether to be regulated, but where.
Public money against private money. Diem may be gone, but the battle he started is here to stay. This is certainly a longer-term trend, but it is the most important and, in my opinion, everything that happens in the regulatory and legal sphere must be examined at all times in the context of this question. central. Will states really allow their citizens to ditch fiat currencies in favor of private cryptocurrencies, or will states be forced to retain their monopoly through CBDCs, or simply by regulating the threat posed by crypto? -currencies? The recent executive order issued by President Biden was positively taken by the crypto community, but beyond clarifying that the United States intended to “enhance American leadership in the global financial system” by means including “ the responsible development of payment innovations and digital assets”. the statement was too vague to truly reassure what the future holds.