This is an editorial by Angus Brown, the co-CEO of South Africa-based merchant payment ecosystem Centbee. The original blog post can be found here.
Money is a fundamental part of the way any society operates, and governments have controlled how it is created and used. I have spent the majority of my professional life either working for, or building, banks. They are actually quite fragile financial entities, as the 2008 global financial crash reminded us. They pose systemic risk to the fabric of society, and historical bank crashes have set entire countries back by decades. Central banks were created to try and control these risks, however, like any government-run business, they have a patchy record.
I was a founding member of a team that launched eBucks.com, the world’s first bank-backed digital currency, in 2000. We were heavily influenced by the thoughts of “The Sovereign Individual” (Davidson & Rees-Mogg), “The Future of Money” (Lietaer), “Maverick” (Semler) and the books of Neal Stephenson. Our original vision was to create an entirely new digital currency that could be used to transact freely on the internet. We had some interesting conversations with the South African Reserve Bank about that! Years later, I was fascinated by Satoshi Nakamoto’s Bitcoin whitepaper as I recognised the same spirit and intentions. Bitcoin is one of the critical financial innovations of our time.
In 2016, I took a giant leap of faith and co-founded a Bitcoin payments startup, Centbee. We provide an app that makes Bitcoin the easiest way for people to pay each other. My co-founder, Lorien Gamaroff, and I have been invited regularly to provide advice and education to central banks across the world. We’re extremely fortunate to be based in South Africa, a nation that has one of the most robust and innovative banking systems in the world. We have a healthy relationship with the South African Reserve Bank, which has a relatively open view towards cryptocurrencies. In June 2018, I was invited to address the South African Reserve Bank (SARB) and it may have surprised some in the audience when I said, “The Reserve Bank is letting us all down by not providing enough regulation. ” Failure to regulate creates an opportunity for public abuse and deception. SARB have engaged constructively with many participants in the cryptocurrency ecosystem and recently published a Consultation Paper to which Centbee has submitted a detailed response.
People often think of regulation as meaning ‘establishing controls’, but it also means ‘to make regular’ – to bring order to a situation. Regulation helps to bring the chaotic to the mainstream. Although early adopters typically have a high risk appetite, most people shy away from disorder, especially when it is associated with illegal activity. For many, the word ‘crypto’ is largely synonymous with ‘hacking’ – and that’s not a good thing! If we truly want Bitcoin to succeed, it needs to be owned and used by hundreds of millions of people. To achieve that, Bitcoin has to be perceived as safe, easy-to-use and easily available. We must recognize that regulators, as the agents of government, are the gatekeepers.
In his book “The Great Degeneration”, historian Niall Ferguson noted that ‘highly regulated‘ is not always synonymous with a sound and safe financial system. New regulations always have some unintended consequences as the marketplace adapts. This is not to suggest that cryptocurrencies should be entirely unregulated, rather a call for regulation should be seen by policymakers as an ever-adapting process. Regulatory design should strive to have ‘anti-fragile’ outcomes (as coined by Nassim Nicholas Taleb) – where systems improve the more they are stressed.
Modern financial systems are possibly the most complex, non-deterministic creations of humankind. Governments are challenged by Bitcoin because they have a very limited ability to control the technology. They face a paradigm challenge whereby they license a specific product in a specific jurisdiction and must now deal with a technology that is borderless. Not only does this pose problems to regulators attempting to provide a harmonized national policy approach across different product types and fiscal domains, but they have to address the issue of services provided across borders. The market of cryptocurrency users is a global audience. Although some cryptocurrencies are currently viewed as alternative assets by speculators, it must be emphasized that the original vision (and likely longer-term outcome) is that Bitcoin is a protocol.
At Centbee, we believe it is more fruitful to regulate apps and use-cases than to attempt to control the cryptocurrencies themselves. When confronted with a paradigm-busting concept, it would be prudent to consider metaphors outside of financial services – perhaps to consider how digital music or photographs are created and shared? Interestingly, most customers today choose paid-for services like iTunes and Netflix over pirate sites.
When consulting with regulators, here are some of the points we make:
- A cryptocurrency address is not the same as a bank account: A fundamental attribute of cryptocurrency is that the technology platform is the ledger – it is not maintained and controlled by third parties. A cryptocurrency wallet provider (such as Centbee) does not exercise control over the address to the same degree that a bank does over an account. Non-custodial wallet providers have not actually accepted funds from the public. They are merely software service providers, performing some intermediary functions. They only exist because they perform a useful function – protecting customers and providing access to services.
- A cryptocurrency address is not the same as a bank account: A fundamental attribute of cryptocurrency is that the technology platform is the ledger – it is not maintained and controlled by third parties. A cryptocurrency wallet provider (such as Centbee) does not exercise control over the address to the same degree that a bank does over an account. Non-custodial wallet providers have not actually accepted funds from the public. They are merely software service providers, performing some intermediary functions. They only exist because they perform a useful function – protecting customers and providing access to services.
- Countries are not closed financial ecosystems: Central banks correctly identify the threat of cryptocurrency to their right to control the money supply. However, in reality every economy is tightly integrated into the global financial system. All entities in a country have access with differing degrees of freedom to global assets, where effective monetary policy is the aggregation of all actions by all central banks.
- The Role of the bitcoin payment processor: Merchants need assistance in accepting and processing cryptocurrency payments. These entities which I term the bitcoin payment processors are contracted to merchants and provide acceptance, settlement and reconciliation services for a fee. They remove the complexity of blockchain technology for the retail ecosystem and ensure that retailers receive fiat settlement safely and reliably. Standards (such as BIP21/70) have already been created by the cryptocurrency community to facilitate interoperability successfully and make Bitcoin payments operational. Bitcoin payment processors connect the cryptocurrency settlement mechanism to the national payment system.
- We need exchanges: All interaction between the fiat economy and cryptocurrency relies on crypto-fiat exchanges whose function should be segregated properly from Bitcoin payment processors and wallets themselves. In time, central banks may consider setting up cryptocurrency payments clearing houses (using the archaic term), where designated and licensed exchanges may agree operating mechanisms to reduce liquidity risk. As a central part of the payment system, they pose systemic risk to a country’s economy and should be regulated like other financial exchanges and marketplaces.
- Registration and licensing: We support the registration of cryptocurrency wallet providers, Bitcoin payment processors and exchanges with the local central bank. In recognition of this transparency we request that the central bank provide a ‘letter of no objection’ to all successfully registered entities and encourage the banking sector to not apply discriminatory practices against registered firms. The regulator should determine the most material ecosystem participants and establish a fit and proper assessment to operate as part of the national payments infrastructure. Existing regulations should be extended or clarified to encompass these entities. This would provide comfort to merchants and banks as to settlement finality.
- Pay your taxes: It is unrealistic to expect the state to help the needy and maintain base infrastructure without all citizens contributing as they are able. Dodging taxes is not just illegal but is effectively stealing from your fellow citizens. Any technology can be exploited to hide wealth however, we do poor service to Satoshi Nakamoto’s vision by avoiding our legally-owed taxes. Centbee is registered in the country where the founders live and we pay our taxes. We have also informed our tax authority that we will assist them if requested. We would turn away customers who intended to use Centbee’s services to avoid tax.
- Merchants are not police: Over time, a large portion of the effort in policing anti money laundering (AML) activities has been transferred to the private sector, specifically, the banks. Merchants are not directly regulated by central banks and it is not practical or feasible to expect merchants to monitor, police or report on cryptocurrency transactions.
- Legal tender clarification: Only central banks are mandated as the sole issuer of fiat national currency and designated legal tender. In the same manner that a central bank freely acknowledges the existence of foreign currency, we suggest that each central bank consider acknowledging cryptocurrency as a form of non-governmental foreign currency. There is a perception amongst retailers that accepting Bitcoin may be illegal, and that perception will hinder innovation in the payment system. We specifically request that the central bank clarify that merchants have the right, but not the obligation, to accept Bitcoin for goods and services.
- Know your customer (KYC): Privacy is a fundamental human right enshrined in most countries’ laws. Unfortunately, we’ve seen far too many accidental and profit-driven data leaks and the pseudonymous nature of Bitcoin provides some innate protection against that. The Financial Action Task Force (FATF), the global advisory body to combat money laundering, recommends clearly classifying any entity providing a money or value transfer service as a financial institution and imposes an obligation to combat money laundering. Each cryptocurrency provider is welcome to adopt their own approach towards customer identification. Centbee has decided that each customer will be uniquely identified via a device token, IP address, and / or a mobile phone number. This is an intrinsic part of the ability to easily send money between friends, and an appropriate, risk-based approach towards deterring money laundering. In cases where the customer simply moves cryptocurrency around between various addresses, we don’t believe that any further KYC data such as name, address or national identity document should be required. Where a cryptocurrency service provider (an exchange or wallet) facilitates the exchange of fiat currency for cryptocurrency, it is reasonable to require customers to undergo a more diligent KYC procedure. The specific KYC protocol of the jurisdiction where the customer resides should be applied. Simply purchasing or using cryptocurrency should not be considered a high-risk activity by itself.
- Fighting money laundering and terrorist financing: Bitcoin has some potential for money laundering and we recommend that AML transaction monitoring be conducted for all cryptocurrency transactions. Suspicious transactions should be reported to the local investigative agency. All cryptocurrency enthusiasts should support efforts to stamp out money laundering and terrorist financing. However, the effort and impact on customers should be proportionate to the actual risk posed, and we should note that it is impossible to completely deter all illicit activity.
- Fighting illicit activity: An important principle of money is that ‘taint does not transmit’, and that the consequences of an illicit act must flow to the person committing that act. We do not burn the money recovered from a theft – but return it to the bank to be lent out again. Centbee absolutely condemns illicit and illegal activity and will actively support regulators and police in prosecuting any such acts.
- Customer protection: Unfortunately, there have been cases of people being enticed into speculative or fraudulent investments in cryptocurrencies. In these cases, the fault generally lieswith human nature rather than the technology itself. Regulators can assist by providing warnings to the public, and establishing white-lists of reputable, registered cryptocurrency firms in their jurisdiction.
- Foreign exchange controls: As a developing nation, South Africa has a relatively fragile trade balance and the Rand is a highly liquid emerging market currency. Monitoring and control of capital movements out of the country are important to the fiscus and economic planning of the nation. Cryptocurrencies do pose a risk for illicit and unmonitored capital flows. These balances are effectively externalized the moment they are created, and as such, the effective border control mechanism is the point of conversion from fiat to cryptocurrency. Existing legislation typically empowers authorities to request detailed data from cryptocurrency firms to assist any investigation. At this time, I think it would be inappropriate to apply the conventional authorized foreign exchange dealers licensing framework and requirement on crypto exchanges.
- Innovation follows regulation: Regulators prefer to be technology neutral and often claim that they will regulate only after the innovation spark. However, we must recognize that in the financial domain, innovation without adoption is just an experiment and adoption is largely controlled by the incumbents. I believe that regulators need to take a more proactive stance towards innovation.
I am confident that a transparent and respectful approach towards regulators will help them develop enabling legislation. Regulation can help customers and existing financial institutions gain more comfort in cryptocurrencies and drive the adoption of Bitcoin. I welcome dialogue with my cryptocurrency colleagues across the world and recognize they may have different political and social views. They may also have had different experiences with regulators in their local jurisdictions. Part of Centbee’s vision is to make Bitcoin simple and easy. We welcome constructive criticism and look forward to driving debate and development in the cryptocurrency industry.
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