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Business News of Thursday, 1 December 2022

Source: www.punchng.com

Industry players canvass crypto regulation to protect investors

Bitcoin (file photo) Bitcoin (file photo)

When the first cryptocurrency, Bitcoin, was launched in 2009, it was meant to change the financial world. It was also targeting to become the currency of the people.

Crypto was supposed to herald an era of decentralised finance, where people transacted directly with one another.

The White Paper that ushered in Bitcoin, the world’s first and most valuable cryptocurrency, said, “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

Crypto was meant to remove all the problems of banking. It was also meant to eliminate fund transfer restrictions, account hacking, and ensure there was no central point of failure for transactions.

As a digital payment system, crypto was supposed to rely on a peer-to-peer system that could enable anyone anywhere to send and receive payments.

The success of Bitcoin, also known as BTC, led to the birth of an ecosystem that was worth about $2tn at its peak in 2021. A report by the World Economic Forum revealed that there were 18,142 cryptocurrencies and 460 crypto exchanges in the world in early 2022. It further stated that about $91bn worth of cryptos were traded every 24 hours.

The increasing use of crypto soon became a national and corporate bug, with nations and companies exploring means to accept and legalise the digital currency. Companies like Visa and Mastercard soon launched schemes to allow crypto payment. Nations such as El Salvador and the Central African Republic raised the bar when they announced the acceptance of BTC as legal tender.

While some nations accepted crypto as a form of payment, others like Nigeria kicked against it and banned it outrightly from its formal financial system.

This didn’t stop crypto acceptance, with the global adoption reaching an all-time high in the second quarter of 2021 based on a report from Chainalysis. Nations like Nigeria spearheaded this adoption.

The continued growth in usage and acceptance was not lost on central banks across the world. Scared of an increasingly digital future, global central banks began to explore digital currencies tagged, ‘Central Bank Digital Currencies.’

Nigeria, with high crypto acceptance, soon launched its CBDC named e-naira.

Speaking on the increasing use of digital currencies, the International Monetary Fund said, “Of course, digital money has been developing for some time already.

“New technologies hope to democratise finance and broaden access to financial products and services. A main goal is to achieve much cheaper, instantaneous domestic and cross-border payments. The gains could be especially great for people in developing countries.”

At the time, people in the crypto industry were sceptical towards regulation. To them, a regulator in the crypto space was like a teacher on the playground, spoiling all the fun.

For the IMF, crypto assets were posing a risk to the financial system. It said, “The IMF’s mandate is to safeguard the stability of the international monetary and financial system, and crypto assets are changing the system profoundly.”

It added, “Crypto assets and associated products and services have grown rapidly in recent years. Furthermore, interlinkages with the regulated financial system are rising.

“Policymakers struggle to monitor risks from this evolving sector, in which many activities are unregulated. In fact, we think these financial stability risks could soon become systemic in some countries.”

While the IMF continued to advocate for global regulation, the crypto space began to unravel with major exchanges and coins going under. If the collapse of Luna was a wake-up call, the fall of FTX, the third largest crypto exchange, is a fire emergency.

This has led industry experts to also begin to lend their voices in favour of regulation in the wake of these collapses.

After FTX collapsed, the IMF said, “The collapse of the world’s third largest crypto exchange FTX, and subsequent plunge in the prices of Bitcoin, Ethereum, and other major crypto assets, is prompting renewed calls for greater consumer protection and regulation of the crypto industry.

“Regulating a highly volatile and decentralised system remains a challenge for most governments, requiring a balance between minimizing risk and maximising innovation. Only one-quarter of countries in sub-Saharan Africa formally regulate crypto.”

According to the IMF, Africa was one of the fastest-growing crypto markets in the world. Industry experts said it was time for crypto to walk the path of regulation on the continent.

The President of Stakeholders in Blockchain Technology Association of Nigeria and General Secretary of Blockchain Industry Coordinating Committee of Nigeria, Senator Ihenyen, said in a conversation with The PUNCH, “The FTX collapse, which happened recently, will mean many things for the industry from various angles whether from the angle of a player in the industry or from the government, as well as the angle of the regulator.

“I believe that the crypto industry, in terms of the future of the industry, is one that will be more regulated.

“So, I see an industry where rather than having a situation where exchanges only self-regulate themselves in an atmosphere where we do not have government regulation, what I expect is that we will begin to see regulatory frameworks being introduced in the crypto and digital asset industry generally.

“If you look at FTX, it was headquartered in the Bahamas and that is because, in the US, the firm didn’t think there was an adequate regulatory framework for crypto and digital asset businesses. The absence/ near absence of a regulatory framework pretty much led to the idea that these innovators could run their businesses, set up businesses outside the US, and just regulate themselves.

“So, they become their checks and they do all the balancing as well, which will not ensure accountability and transparency. I think that the future of the crypto industry is still bright. However, gloomy things might be because of the FTX collapse. I think the collapse should not be mistaken to be the collapse of the crypto industry or the collapse of blockchain technology.

“Outside of FTX, we still have players in the crypto industry who relatively have better corporate governance and risk management systems compared with what happened with FTX.”

According to him, the crypto space needed to be more regulated, transparent, and accountable. He further explained that the introduction of regulators or regulation in the crypto industry would not defeat the essence of decentralisation.

He said the space already operated a centralised form of finance with exchanges running the show, and helping individuals to keep their crypto.

Ihenyen added, “So, regulation will not impede on anything in that aspect of the crypto industry because that industry is already set that way, to be regulated. The introduction of a regulatory framework in this crypto industry will only have an impact on centralised finance. I do not see it affecting, significantly, decentralised finance.

“But, perhaps, decentralised exchanges may need to be regulated in terms of who designed them, and more. I think that is because we have seen a series of failed projects in the blockchain space, particularly in 2022, we have seen at least four virtual asset service providers fail.”

Weighing in, the founder and Coordinator, Blockchain Nigeria User Group, Chimezie Chuta, said, “I have been an advocate of regulation because it is key to market stabilisation and to ensuring a level-playing ground for all participants and also ensure that people who involve themselves in sharp practises are easily identified and appropriately penalised for doing that.

“The FTX failure incidence has, of course, raised the global call for regulation of the crypto environment. For me, I think exchanges must be regulated much more tightly than normal banks. You know banking service providers are usually very regulated. In fact there is watertight regulation for them. If you do anyhow, you would see anyhow. That is what banking supervision and regulation is all about.

“Much more than that is required for crypto exchanges because they are the banks of the crypto world. The kind of assets that are involved in crypto exchanges are borderless and fluid. This makes it even much more dangerous so you can imagine how FTX was able to operate for that long.”

According to him, regulation was key and would help to enforce corporate governance in institutions providing financial services or any public institution.

He stated that when entities were properly regulated, financial controllers would ensure that the companies followed due processes financially.

He added, “These are the things that regulation would ensure and until it comes in, we would keep seeing this kind of a ‘Wild Wild West’ that keeps giving crypto a bad name.

“This thing is technology, and because it is technology it needs to be treated in a way that is helpful to humans, not as an instrument that people who have desires to scam people can easily utilise and do whatever they want. No, it is not proper.”

A lot about crypto is unknown and cryptic, but it is clear as day that the initial plan for the creation of digital currencies has not been met.

While crypto aims to become a currency that is free for all, players seem to have forgotten that freedom comes with great responsibility, according to analysts.

Experts contend that regulation isn’t going to be a clip on the shoulders for crypto, rather, it would let it soar while protecting those it hopes to serve.