It is imperative that regulators strike the right balance when it comes to crypto regulation
The world is undergoing a financial revolution, with the advent of blockchain technology and cryptocurrency establishing a new monetary paradigm from which there is no turning back. This revolution has profound implications for the relationship between individuals and financial institutions & states. If effectively implemented and appropriately regulated, this technology has the potential to empower individuals with true financial freedom.
True financial freedom, which might also be called financial liberty, not only involves having few restrictions on one's spending, owning considerable liquid assets, and being cash-rich, but on top of this denotes the liberty from oversight or interference by intermediaries, whether central banks or governments.
The Building Blocks of the Future
The invention of Bitcoin was the breakthrough step in this journey. The first technology to successfully solve the 'double-spend' problem, enabling peer-to-peer transactions without the involvement of a financial institution, its fixed supply also served to demonstrate that a hard form of money and digital alternative to the gold standard could be instantiated outside the remit of a government or central bank.
For libertarians, Bitcoin represents a return to sound money, the path to a voluntary society, an opportunity to fight inflation, curtail the debt from inflation and reduce the scope of government.
However - though still in a nascent stage - Bitcoin's high volatility and comparatively low transaction speed means it is falling short across the three functions that money has traditionally performed: acting as store of value, a medium of exchange, and a unit of account.
Thankfully, Bitcoin's underlying blockchain technology means that cryptocurrency is not a zero-sum game, and countless coins are able to compete in the free market in an effort to fulfil these functions to best effect.
Blockchain technology is being used to create applications that go beyond just enabling a digital currency. Launched in July 2015, Ethereum is the largest and most well-established, open-ended decentralized software platform built on blockchain technology.
Ethereum enables the deployment of smart contracts and decentralized applications (dApps) to be built and run without any downtime, fraud, control, or interference from a third party. The Ethereum blockchain can even be utilized to build self-sufficient financial ecosystems, through which trading coins, stable coins, crypto exchanges, and payment applications are all made available on a single platform, as in the case of the recently launched Himalaya Exchange. In effect, such platforms provide a financial passport to anybody with access to an internet connection and a mobile phone.
The ultimate purpose of this is financial empowerment - the first step towards financial freedom - and not just for the rich elites with existing access to banks, stock markets, and other financial technologies. Crypto can empower the billions of people who remain unbanked and represents a future in which the individual's financial status is not at the constant mercy of monetary mismanagement, political seizure or state failure.
In a recent interview with CoinDesk, Garry Kasparov, the Russian chess grandmaster, and anti-Putin activist stated that his excitement about cryptocurrencies stems from his belief that "technology should help people fight back against the power of the state", going on to explain that "governments [have] unlimited opportunities to print money. And printing money is the most exquisite form of borrowing from us and from future generations."
Crypto is not about overthrowing the state but checking its power. It is not a replacement for fiat, but an alternative. It can help to hedge the against creeping inflation we are witnessing in rich Western countries, but more importantly, crypto represents a viable plan B to holding fiat money for citizens who cannot rely on their country's central planners to adopt responsible monetary policy.
In the economy of Venezuela, mired by hyperinflation and hemmed in by sanctions, where the majority of monthly salaries do not even pay for a day's groceries, citizens are using their pesos to buy cryptocurrencies which reliably store the value of their earnings and appreciate in value over time.
In war-torn countries such as Afghanistan, which has recently undergone a nationwide cash shortage, closed borders, a plunging currency, rapidly rising prices of basic goods, whose Central Bank is unable even to print cash, and where The Western Union has suspended all services including the centuries-old "hawala" system which facilitates cross-border transaction crypto represents the last available safeguard of an individual's savings and only financial connection with the outside world.
Even in economically advanced parts of the world, having a commercial bank account is not a sufficient condition for financial freedom. Evidence shows that Hong Kong's pro-Beijing administration is using its control over the city's financial system to penalize dissidents, with pro-democracy protesters losing access to their bank accounts.
The Regulatory Challenge
Though cryptocurrencies have only been around for 12 years, they already empower millions, and their rate of adoption is growing faster than that of the internet in its early years. Money is the ultimate "network good," which means that its value and usability increases with every user joining, and every user has the incentive to encourage others to take up their cryptocurrency of choice since it benefits them directly.
It is against this backdrop of unprecedented opportunity that we must rise to the regulatory challenges that cryptocurrencies undoubtedly give rise to, the most prominent of which are the need to clamp down on its use for funding criminal activity, online fraud, money laundering, sanctions evasion and even terrorism. These are challenges for the regulation of all financial assets, whether physical or digital, and cryptocurrency is no different.
The heavy-handed approaches taken in recent months by the Chinese and Indian governments are case studies in what not to do, and represent tragedies for their people, stripping them of the opportunity to partake in the greatest technological revolution since the advent of the internet.
Regulators should work with market participants to conceptualize, curate, and promote ideas for technological progress and regulatory frameworks that work symbiotically to the mutual benefit of each. Regulation must serve technology and creativity, rather than the other way around. The proper regulation of cryptocurrency represents the final frontier on the journey towards financial freedom.
William Je Founder & CEO, Hamilton Investment Management Ltd
Mr. JE is the Chief Executive Officer of Hamilton Investment Management Ltd, a global fund manager with multi-billion assets under management. His portfolio includes private equity investments in licensed banks, crypto exchange, payment systems, Fintech & blockchain companies, social media projects, and multi-strategy algorithmic trading funds.
Prior to that, Mr. Je was the Chairman of Equity Capital Markets, Greater China at the Macquarie Banking Group for 10 years, managing its Greater China capital markets and principal investment activities. Prior to Macquarie, Mr. Je served as the joint venture partner and managing director of China Merchant Securities (Hong Kong) Limited, help building its business in Hong Kong from scratch. Mr. Je also served as an Executive Director at Credit Agricole Indosuez and a Board member of its securities arm, Indosuez W.I. CarrSecurities; Director & Head of Business Development at Dresdner Kleinwort Wasserstein and a Vice President at NatWest Markets.