Crypto-assets and cryptocurrencies have soared in popularity since 2008, with more than 1,000 of the latter in existence today. Recently, large gains followed by steep declines led to intense media coverage and widespread interest. Crypto-assets have also featured prominently in recent work by the World Economic Forum's Global Future Council on Financial and Monetary Systems, which Cecilia Skingsley and I co-chair.
In particular, a report called “The Global Financial and Monetary System in 2030” argues that the increasing acceptance and adoption of cryptocurrencies will contribute to bringing markets, institutions and infrastructure together in a multi-polar, complex and interconnected world. This in turn will present a challenge to the conduct of monetary policy, and have implications for financial stability and financial crime prevention.
Regulators and supervisors have started to take greater interest, but are still debating how best to provide a framework for this new asset class. Treatment has been very diverse, ranging from outright bans (China), warnings (US, UK) and guidance (Singapore) to liberal permissive positions (Japan, Korea). Most recently, the Hong Kong Securities and Futures Commission (SFC) outlined its new regulatory framework for virtual asset portfolio managers, fund distributors and trading platform operators, aiming to bring them under its regulatory net.
Some regulators do not sufficiently distinguish between tokens used as a utility, and crypto-assets as a financial instrument based on securities. Distinguishing between the two is key, and education on the different types of tokenized assets is important. Not every virtual currency needs cryptography, nor has decentralized issuance. Not every digital token issued through an ICO is a cryptocurrency. It is important to understand what the underlying asset is.
The IMF and World Bank recently presented their Bali Fintech Agenda, with a set of 12 policy elements aimed at helping member countries harness the benefits and opportunities of rapid advances in financial technology, while managing the inherent risks. Regarding crypto-assets, the Bali agenda cautions that their rising spread may increase the complexity of assessing the drivers of financial interdependencies across borders. Likewise, the Financial Stability Board (FSB) noted in a recent paper that crypto-assets could have implications for financial stability in the future, should they continue to evolve, even though current risks were considered not material.
Which way forward?
At this stage, it is still very unclear whether cryptocurrencies will ever become a mainstream means of exchange. Technological shortcomings, such as processing capacity and the enormous energy consumption for their mining, may be solved. The potential KYC/AML concerns and requirements can be addressed so that cryptocurrencies are not used for breaking the law (e.g. with real-time transaction checks embedded on blockchain).
However, the main problem with cryptocurrencies is their inelastic supply. What supporters of cryptocurrencies consider their greatest advantage - their limited supply - is in fact their greatest disadvantage. With an inelastic supply, demand fluctuations will always result in fluctuations in value, which makes cryptocurrencies unsuitable to serve as money. In other words, cryptocurrencies lack a central bank.
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I am much more optimistic about the use of the blockchain as the main underlying technology. The potential benefits of blockchain are many. They range from real-time transactions allowing risk reduction and better capital management, to improved regulatory effectiveness, e.g. by using blockchain for Know-your-Customer or anti-money-laundering checks. I also see huge potential for integration with other emerging technologies, such as artificial intelligence and the Internet of Things, to implement the future of finance.
Mindful of the paradigm shift predicated by blockchain enthusiasts, banks and exchanges will need to make joint efforts, including cross-border collaboration within the blockchain ecosystem, and sharing of knowledge and experience with the wider blockchain community.
UBS recently cooperated with other banks on blockchain-based trade finance platform We.Trade, which allows bank customers to create trade orders easily online and manage the entire trade process from order to payment. Meanwhile, the financial infrastructure provider SIX has announced plans for a "SIX Digital Exchange", the first market infrastructure in the world to offer a fully integrated end-to-end trading, settlement and custody service for digital assets based on blockchain. It aims to launch in the first half of 2019, subject to regulatory approval. The service will provide a safe environment for issuing and trading digital assets, and enable the tokenization of existing securities and non-bankable assets to make previously untradeable assets tradeable.
I would encourage a consistent regulatory approach to cryptocurrencies by aligning national approaches, and moving regulation and supervision to the international level, to the G20 and the FSB. Regulators and supervisors should be guided by level playing field principles, and should protect consumers without restraining innovation.
As we are at the start of the journey, crypto-assets and blockchain will continue to feature prominently in the work of the Global Future Council on Financial and Monetary Systems. To facilitate workable solutions and informed debate, we see the need for a continued close dialogue between public and private sectors.