The Swiss-based Bank for International Settlements — often described as “the bank for central banks” — likes order, technocracy and not rocking the boat. Given Bitcoin’s tumbling price and evaporating trading volumes, its 24-page report on the digital currency was always going to be withering.
But amid all the righteous indignation, there was something missing: What exactly does BIS suggest we should do about regulating crypto?
The shrill warning about Bitcoin “breaking the internet” certainly makes for great copy. But to reach that point, demand for the digital currency would need to match that of mainstream payment systems. That won’t happen anytime soon.
More important is the very immediate danger of fraud and criminality. That was summed up pretty well by BIS chief Agustin Carstens back in February, when he described Bitcoin as “a combination of a bubble, a Ponzi scheme and an environmental disaster.” The word Ponzi is repeated in the BIS report to describe the fraudulent Initial Coin Offerings (ICOs) that proliferated in 2017.
Despite a clear analysis of the threat, central bankers seem conflicted about what to do. A global cryptocurrency really needs global supervision to avoid regulatory arbitrage across borders. But policymakers are pulling in different directions, with China banning digital currencies, Japan embracing them and Europe somewhere in between.
The G20’s attempt to find common cause hasn’t moved things forward much. A communique earlier this year warned of tax evasion and money-laundering risks, but could only muster a limp call for more “monitoring” and responses “as needed.”
The BIS report goes into some detail on why it’s so hard to regulate this market. Finance laws and regulations were crafted for yesterday’s world. Crypto-assets can fall between the stools of different regulators: A paid-for video game that uses the blockchain and digital currencies, for example, might be a securities offering, a consumer product and a money-laundering risk all at the same time. When there’s no central authority, it’s hard to regulate.
What’s the answer? BIS has some ideas, but none will keep the crypto-cowboys up at night. Global coordination is one, although we’ve seen how well that’s been going. Policing of central points of contact such as crypto-exchanges is another, but that would demand extra staffing.
It also talks about properly monitoring the intersection between digital currencies and real world payment infrastructures, although again this would depend on cross-border collaboration. The BIS is right to call for a big expansion of scrutiny, but it won’t be easy to find the extra investment for what is still a relatively small market internationally.
The best way of looking at the BIS report is as a cry for help on what to do about Bitcoin. It needs to be heard, and not just for the slightly overblown talk of an internet meltdown. That’s far less urgent than supervision of a market that has reinvigorated scammers. Better monitoring would be a start, of course. But without cross-border help, serious action on fraud and adequate resources, this central banker lament will go unanswered.
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