G20 Working Toward the Effective Management of Crypto-Assets

18 October 2018 Information Management Publication

Everyone knows that bitcoin and the other 1600-plus cryptocurrencies thrive on the fact that they are an unregulated Internet-based currency. The lack of regulation, though has some governments worried.

The Group of Twenty (G20) has decided that cryptocurrencies need regulation to control global anti-money laundering and counter terrorist financing. At an August 2018 meeting in Argentina the G20 continued its on-going discussion about the digital economy which highlighted an “absolute consensus.”

What’s the G20?

Before 1999 the Group of Seven (G7) represented the world leading economic leaders and included Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. Then in 1999 the G7 finance ministers and central bank governors saw the need for a larger more inclusive body to deal with world financial challenges. So the G20 was born which today represents about 85 percent of the global economic output, 66 percent of the population, 75 percent of the international trade, and 80 percent of global investment.

The countries that make up the G20 are as follows: Argentina, Australia, Brazil, Canada, China, Germany, France, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States.

So given the size of the G20 it is no wonder that they decided that it was time for cryptocurrencies to have some oversight and regulation.

The G20 has teamed up with the Financial Action Task Force (FATF) which is an inter-governmental body established in 1989 which the objectives to:

…set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. The FATF is therefore a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.

In July 2018 the Financial Action Task Force (FATF) issued a Communiqué to the G20 Financial Ministers and Central Bank Governors which among other things reported that currently only 3 countries have prohibitions from the use of virtual currencies and crypto-assets. Those countries are China, India, and Indonesia.

At the same time the US and 6 other countries use regulation of intermediaries or exchanges for virtual currencies and crypto-assets. Those 6 countries are Australia, France, Germany, Italy, Japan, and Switzerland.

So what’s the G20’s plan?

Reporting that crypto-assets only account for 1% of global GDP, the G20 does not see crypto-assets as a risk to the global financial system. It is the pseudo-anonymous nature of cryptocurrencies, and its ability to launder money or finance terrorism, that concerns the G20.

In the same July 2018 Communiqué, the G20 stated:

Technological innovations, including those underlying crypto-assets, can deliver significant benefits to the financial system and the broader economy. Crypto-assets do, however, raise issues with respect to consumer and investor protection, market integrity, tax evasion, money laundering and terrorist financing. Crypto-assets lack the key attributes of sovereign currencies. While crypto-assets do not at this point pose a global financial stability risk, we remain vigilant.

Thus, at this point, the G20 has staked a position as monitor, not enforcer.

Without the G20, or another multinational body, regulating crypto-assets, the flow of crypto-assets cannot be controlled. If the U.S. implements regulation, the currency can flow to Switzerland. If Switzerland starts regulating, the money can flow to Viet Nam. Playing regulatory “whack-a-mole” will inevitably leave crypto-currency in a state of instability.

How will this impact cryptocurrencies?

The question many are asking is how the G20 could control or regulate crypto-assets? Countries that have attempted regulation have focused primarily on currency exchanges. Exchanges serve as a central source of trading, providing everything from simple currency conversion to full-fledged “day trading” platforms with tools to track trends, short currencies, and other features a stock trader would expect. Since these exchanges have a self-interest, they are willing to work with regulators.

Of course other entities also have a self-interest. While traders and investors may flock to the exchanges, those who wish to avoid government regulation can still trade person-to-person. It is not only criminal organizations that look to circumvent regulation. The initial impetus for crypto-currency was from those wishing to remove the “sovereign” or banking establishment from acting as a middle-man, adding fees and complexity to transactions. It is likely these same anti-establishment individuals will seek to skirt any regulation.

How will the G20 impact blockchain?

Blockchain is the distributed data management technology that allows cryptocurrencies to function and is based on patents going back to 1979. The headline news surrounding cryptocurrencies have impacted businesses around the world that are now exploring how blockchain can be used for other applications including to name just a few areas:

  • Managing healthcare records
  • Supply chain management
  • Real property title

Potentially the G20 will expand regulation of blockchain uses beyond just cryptocurrencies.

It is clear that country-by-country regulation is happening. The G20 may be best suited to harmonize those regulations across the global financial system. No one knows, though, the cutoff the G20 will use to determine it is time to weigh in or whether crypto-currencies even have the capability to increase past 1 percent of global GDP. But the greater expansion to regulate Blockchain is likely to have a greater impact than the mere 1percentof global GDP.

This article was originally published on Information-Management.com.

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