Cryptocurrency and its future

If you take a look at Coinmarketrate.com then you will see that there are hundreds of digital currencies (Ether, Ripple, LiteCoin, etc.). The most famous of them, Bitcoin, has become the main cryptocurrency, which is experiencing a boom in popularity among both individuals and large institutional investors. For example, the founder of the social network Twitter Jack Dorsey and the American rap icon and billionaire Jay Z decided to join forces to create a fund aimed at making Bitcoin the currency of the Internet.

Blockchain is at the origin of the creation of these digital assets, enshrined in EU norms. There are two categories of digital currencies.

The first is Bitcoin-type currencies, which can be private or even public if they are issued by central banks. The regulator gives the following definition:

“This is any digital representation of value that is not issued or guaranteed by a central bank or government agency, which is not necessarily tied to a legal tender, but which is accepted by individuals or legal entities as a means of exchange and which can be transferred, stored or exchanged electronically”.

The second category consists of tokens that are similar to financial instruments, and can sometimes be qualified as such.

Their definition reads:

“A token is any intangible asset that digitally represents one or more rights that can be issued, registered, stored or transferred using a common electronic recording device that allows you to directly or indirectly identify the owner of the asset.”

The current crisis of confidence has a particularly strong impact on the banking sector, and it is not surprising that Bitcoin and Ether, which are cryptocurrencies based on blockchain technology, generate truly independent and parallel monetary systems in relation to state and banking monetary systems.

Moreover, cryptocurrencies are no longer the object of simple speculation, but are increasingly becoming real currencies and long-term investments. It is this situation that seems to worry the top financial spheres, such as central banks and multinational corporations.

Former chairman of the US Federal Reserve Bank (Fed) Janet Yellen, in an interview published on February 23 in the New York Time newspaper, said that the Bitcoin cryptocurrency is a “highly speculative asset” and that she is “concerned about the potential losses that investors may incur.”

She further told Business Insider that she doesn’t think Bitcoin is widely used as a transaction mechanism, as it is often used for illegal financing. This is an extremely inefficient way to conduct transactions, and the amount of energy consumed to process these transactions is simply amazing.”

Regulation: a threat to the freedom and independence of cryptocurrencies?

Although cryptocurrencies are booming, and even their opponents recognize many advantages, the debate is about the regulation of these virtual currencies, which lack organizational structures.

In the Swiss newspaper Le Temps, French economist Benoit Coeur explained that “innovation should not be limited, and therefore there can be no question of banning these initiatives. But they should be regulated in such a way as to be reliable in the event of a financial crisis, protect personal data and prevent money laundering”.

Like other central bankers recently, the president of the European Central Bank, Christine Lagarde, is calling for Bitcoin regulation.

“Cryptocurrency is a speculative asset that has been used for strange transactions and some completely reprehensible money laundering activities,” she said at a conference organized by Reuters.

“There should be regulation. This must be ensured, and it must be agreed at the global level, because if there is a loophole, it will be used,” she continued.

In a market with a transitional economy and a high level of innovation, such as the digital economy, poorly thought-out regulation risks stifling innovation in the long run, instead of controlling it.

In the EU, the only legal tender is the euro. Therefore, cryptocurrencies cannot be imposed as payment, and they can be refused.

Bitcoin is used to buy goods and services from specialists who accept it.

One of the outstanding features of Bitcoin is that it allows transactions to be carried out anonymously. When using a traditional currency, transactions must go through a bank that knows the names and contact details of its customers, as well as the people and organizations with whom they make transactions. Bitcoin, on the other hand, operates in a decentralized system, and thanks to encryption keys (the blockchain principle), which do not require any identification.

In any case, it is impossible to regulate its release today. That is why the MTC is a challenge for legislators and other regulatory bodies, at least in terms of combating money laundering, or in terms of taxation.

Since the scope of banking and financial regulation is largely determined by its purpose (money and financial instruments), cryptocurrencies and the activities they support would naturally fall under it if these qualifications could be applied to them. However, this is not the case.

The category of financial instruments primarily includes assets related to personal rights in a broad sense: equity securities, debt securities and financial contracts. However, as it was noted with regard to Bitcoin, it does not correspond to any of these concepts, since it is generated automatically by a computer program, and does not grant any rights in relation to anyone specific

In addition, the lack of regulation allows various parties to the contract to accept or refuse payment with cryptocurrency. Indeed, since the BTC is not a currency like other regulated currencies such as the euro or the dollar, one party to the contract cannot require the other party to accept payment in Bitcoins. The lack of regulation of this cryptocurrency can pose a serious danger to contractual relations.

The ECB also points out various dangers associated with the use of Bitcoin: virtual value, since it is not backed by any real activity, high volatility, long transaction time and legal risk associated with its status as an unregulated currency, in particular, the fact that it is not accompanied by any legal guarantee of a refund at any time, and at face value.

Finally, the regulator notes that no authority ensures the security of electronic safes, and therefore holders have no legal remedies in case of theft by hackers.

He also emphasizes the random nature of the convertibility of Bitcoins into legal tender, since it is based on the principle of supply and demand, and, consequently, the risk of paralysis and collapse of the system if there are not enough buyers to exchange Bitcoins for currency.

The use of this innovation also means that the various parties to the transaction cannot be identified. This is a real danger for States.

However, the California platform Coinbase or the Electronic Frontier Foundation, an association for the protection of Internet freedoms, expressed their dissatisfaction with the plans to regulate these cryptocurrencies:

“These events are an attack on the freedom to conduct online transactions in private and an attempt to extend the scope of financial supervision of banking institutions to cryptocurrencies. The financial records that will now have to be disclosed contain a large amount of confidential information about people’s lives, their beliefs and connections.”

The response of financial institutions through the creation of competing virtual currencies

On the set of the show Quotidien, host Jan Barthez invited French businessman Xavier Niel to share his tips on creating wealth, and he explained:

“What has made me successful is the rapid use of new opportunities without hesitation. And now the main producer of money is a new program called Bitcoin. This is the only great opportunity to make quick money that I have seen in my entire life. I urge everyone to check it out before the banks ruin it”.

This situation forces national financial institutions to create virtual currency projects as a response.

Cryptocurrency is a form of virtual and digital currency that does not need to exist physically to be valuable. Cryptocurrencies are becoming increasingly popular thanks to decentralized peer-to-peer trading platforms that have been developed.

For example, on January 30, 2021, the Indian parliament prepared the ground for cryptocurrency regulation, which may go as far as banning the so-called “private” cryptocurrencies, which, in fact, they are calling for. This decision will be made in parallel with the introduction of the national electronic currency CBDC, supported and managed by the Central Bank of India.

Like India, many countries are working on launching state-owned digital currencies. The President of the European Central Bank, Christine Lagarde, mentioned the digital euro project, which can be launched within 2-4 years. This asset will be issued by the ECB, exchanged at a 1-to-1 parity with the euro, and will even replace cash.

A state-owned digital currency regulated by a Central bank and backed by a currency is, of course, safer than a private cryptocurrency. Moreover, the digitization of the Central Bank’s currency will allow in countries where cash is in decline to guarantee citizens’ access to Central Bank money.

In the United States, Fed Chairman Jerome Powell said in 2019 that his country had no desire or need to be the first in this area. He said,

that they already have the advantage of being the first, because the US dollar is a reserve currency, and then explained that it would take years, not months, to create an electronic dollar.

China, meanwhile, started creating a national cryptocurrency back in 2014. A project that is very well developed, and has become the reason for the ban of Bitcoin on its territory. The director of the Central Bank of China, Mu Changchun, said that this Chinese stablecoin should eventually replace the yuan.

In conclusion, it must be said that cryptocurrencies are a serious challenge for the financial system faced by governments, central banks and regulatory authorities.

The popularity of cryptocurrencies is unlikely to fade. However, it is obvious that regulation is a majority proposal. Most authorities offer a framework to protect the market and investors.