The question of the regulation of crypto-currencies has been at the heart of discussions since the beginning of the year. Although the idea of a legal framework for these virtual currencies finds agreement more and more within the managerial ranks, large divergences of opinion subsist regarding the means of its implementation. Frederic Hottinger, director of property investment company Sofibus and the EMBA NV holding company, is keenly interested in the rise of crypto-currencies. According to him, if the regulation of crypto-currencies becomes evident, it must be carried out in a pragmatic and flexible way so as not to restrain the economic potential of this technological and financial revolution.

Frédéric Hottinger: Which Approach for the Regulation of Crypto-Currencies?

The challenge of crypto-currencies has become inescapable

Virtual currencies generate contrasting opinions at the very least. Crypto-currencies are divisive, representing the money of the future for some and a “foolish wager” for others. To begin with, it is very useful to have a reminder of what we are talking about. Not an easy task. Didn’t the well-known American economist Paul Krugman, a Nobel prize-winner to boot, one day declare, regarding crypto-currencies, that “no-one really [understood] how they worked”?

Crypto-currencies are currencies which are 100% electronic and virtual. They are currencies without notes or coins, with no physical form whatsoever. This is their first characteristic. Their second is the most fundamental: crypto-currencies are exchanged peer-to-peer, with no intermediary. Owing to this, they escape any control by commercial banks and also the control of central banks and States,

One should therefore never lose sight of the fact that behind crypto-currencies there is an entire, profoundly libertarian ideology. The subjacent idea is to “decentralize” and “reduce” the role of the economy in order to free it from banks. Moreover, it is not by chance that the first and most well-known of these currencies, the Bitcoin, saw the light of day in 2009, in the days following the subprime crisis. In one sense, crypto-currencies are to currencies what open source software programs are to proprietary software programs.

These virtual currencies are created and exchanged on an entirely decentralized computerized network. This technology has a name: blockchain. Blockchain, a complex but reputedly inviolable encryption system, is the system whereby virtual currencies are stored and exchanged in a secure way. The blockchain network is decentralized in the sense that it is controlled neither by humans not by financial institutions, but by free software programs spread across computers worldwide.

This decentralized computer network acts as a central bank. It can be compared to a database, a register, a large, 100% virtual account book which lists and keeps a history of all transactions undertaken using crypto-currencies. Everyone has access to it and can consult it on the Internet. As Frédéric Hottinger stresses, contrary to popular belief, transactions in virtual currencies are traced and transparent.

At the current time, there are more than 1,000 crypto-currencies in existence. Their purchase, in exchange for legal tender, is carried out on exchange platforms which have been flourishing for some years. Bitcoin is by far the most well-known of these currencies. Created in 2009, it is used as a model for all the others, but it is market share is disintegrating with the development of new crypto-currencies (90% of market share in 2016, 56% in 2017). Among other virtual currencies in circulation are Ethereum, Ripple, Dash, Factom, Lisk, Solarcoin, Litecoin, Dogecoin, Namecoin, Peercoin, etc. The list is long… Today, crypto-currencies represent in themselves a capitalization equivalent to more than 100 billion dollars.

As Frederic Hottinger stresses, crypto-currencies and the subjacent blockchain technology are an opportunity for the world economy. They can be substantially applied in the financing sectors of international commerce, for example, the traceability of supply chains and the certification and storage of proof (storage of digital fingerprints). Blockchain technology is also starting to be used in management control activities and risk management. In the insurance sector, blockchain could be used in the management of proof and the management of electronic contracts. Paradoxically, even States have everything to gain from these new technologies. For example, for the management of carbon registers and carbon credits between sovereign States.

Crypto-currencies and blockchain are going to have a considerable impact on society, on economies and on future companies. Their potential is still largely under-exploited,
But to develop and inspire confidence in economic actors, henceforth crypto-currencies need a legal framework.

Also read,  Everything You Need To Know About Libra, Facebook’s New Cryptocurrency

Why States should (and are going to) regulate crypto-currencies

Virtual currencies and the question of their regulation have been at the forefront of discussions since 2017, the year which saw the value of Bitcoin really take off (+600%). On the whole, States are (almost) determined to regulate these alternative currencies.
However, the question of the regulation of crypto-currencies does not go without saying at first sight. It can appear very paradoxical. Isn’t the principle of virtual currencies precisely the fact that they escape any regulation? Won’t the regulation of crypto-currencies sign their death sentence at the same time?

We shouldn’t be naïve, however. There are very real risks associated with virtual currencies. In particular, the risks of capital loss for investors, linked to the great volatility of crypto-currency exchange rates and also piracy. We can all remember the hacking of the Mt.Gox exchange platform in 2014, during which more than 800,000 Bitcoin were purely and simply spirited away. Unfortunately, this is not an isolated case. Fund-raising campaigns using crypto-currencies (ICOs, Initial Coin Offering) are not without risk either.
Besides, the risk of the manipulation of these rates should not be neglected, which can today be carried out via the use of illegal practices such as spoofing, a practice which consists of first flooding the market with false orders before canceling them, thus creating artificial movements.

Furthermore, and this is the principal argument put forward by political decision-makers, crypto-currencies are now massively used for the purposes of money laundering, even the financing of illegal activities such as drug trafficking, mafias, terrorism, etc. as where the majority of virtual currencies, including Bitcoin, ensure the traceability of transactions, this is not the case with them all.


How should crypto-currencies be regulated? The various approaches

In Frederic Hottinger’s opinion, it is not only crypto-currencies which should be regulated as, although it is necessary, it also contributes to putting a brake on innovations. On the other hand, the goal of regulation must be to develop the use of these virtual currencies, to free innovations by reassuring the economic actors. Regulation means establishing a framework, a common framework. Regulation should not be synonymous with restraint. Today, Frederic Hottinger stresses, the approaches between stakeholders are fundamentally individualistic. However, the digital economy is based on the idea of sharing. It is or should be, collaborative in spirit. If the idea of each man for himself can benefit some, there’s nothing in it for society. According to Frederic Hottinger, a regulation of crypto-currencies would allow the harmonization of the practices of these market actors (platforms, in particular).

For the moment, the resolute line taken by political decision-makers is not accompanied by any other impact. He stumbles on the patent disagreements between the States and the central banks. Some actors, such as the central bank of Sweden, for example, show themselves to be even reticent at the idea of regulating the sector. As for China, it has decided to purely and simply prohibit the use of crypto-currencies in its territory. As for Japan, it recognized crypto-currencies as a means of payment in 2017. The United Kingdom privileges the “sand pit” strategy. The idea of this approach consists in not fixing rules for the actors as long as they are small, before submitting them to the regulations of common law from the time they reach a certain level of maturity. The inconvenience of this approach, according to Frederic Hottinger, is that it creates the illusion that there are no rules, without even mentioning the difficulties which the passage to common law might raise. Rather isolated, France is pleading for regulation at the international level, under the aegis of the IMF.

This can easily be understood and nothing much came from the Finance G20 of March 2018, in spite of the promises advertised. No common position has emerged. Each country appears to be waiting to see what its neighbor will do. Slowness and indecision are also attributed to the complexity of the brief. Today, no-one is able to understand all the issues and impact of this technological revolution.

Frederic Hottinger supports a pragmatic and non-ideologised approach to the question. According to him, the norm must be evolutive and flexible. The Sofibus boss defends an approach based on the search for common solutions, involving all stakeholders: the actors in this sector (including platforms) and the regulating agencies. Moreover, Frederic Hottinger is himself highly involved in the promotion of this approach and applies it concretely in his activities by integrating the regulators as far as possible to help them better understand the practical issues associated with virtual currencies. We can only agree with this pragmatic approach which has the merit of not throwing the baby out with the bath water. Once again, if regulation is necessary, it should be a force for the development of this new market which is both financial and technological. Will this way of thinking about the regulation of crypto-currencies be understood in time? Only time will tell.