09 December 2019

The most entrepreneurial regulator for crypto assets

Yara Ainsworth

Yara Ainsworth

Head of Marketing and Communications at Crypto Finance AG

About the author

Source: Allnews (from the original article in French)  |   Author: Cyril Gomez

Switzerland understood the importance of a transparent and demanding regulatory framework for crypto assets early on: in discussion with Patrick Heusser, Senior Trade at Crypto Broker AG.

Since bitcoin’s (BTC) remarkable 15% rebound on October 26, it has declined again by more than 25% (as of December 3) to just over 7,200 USD. At the end of October, the president of China, Xi Jinping, urged his country to “see the blockchain as an important breakthrough for independent innovation in core technologies.” This was then hastily interpreted by the markets as a buy signal for cryptocurrencies.

The momentum was short-lived, similar to the period between December 2017 and January 2018. Investors effectively understood that Beijing is actually only in favour of blockchains and not cryptocurrencies. The Chinese central bank reminded the markets of their strong aversion to cryptocurrency trading within their borders.

“We will continue to maintain a high-pressure situation, and adopt monitoring measures such as interviews, inspections, and bans to identify institutions involved in virtual currency activities in order to resolve the associated risks in a timely manner,” confirmed the monetary institute a few days ago.

“It is important to distinguish between cryptocurrencies on the one hand, and digital currencies and electronic payments on the other.”

“The Chinese have never been in favour of cryptocurrencies,” explains Patrick Heusser, Senior Trader at Crypto Broker AG, a subsidiary of the Zug-based holding company Crypto Finance AG. “It is important to distinguish between cryptocurrencies on the one hand, and digital currencies and electronic payments on the other,” stated Patrick Heusser further in an interview with Allnews. He commented that for some years now, China has been supporting the process of digitising its national currency, the Renminbi.

“At the end of October, Beijing simply pointed out that it is indeed in favour of blockchain, but it is not in favour of cryptocurrencies,” noted Patrick Heusser. “And if you dig deeper into these statements, you will realise that even with the blockchain, China does not even consider the possibility of blockchains without permission, rather only licensed or private blockchains, such as the R3 Corda architecture.”

In effect, a public blockchain such as Ethereum does not require a proof of identity, so that transactions can remain anonymous. “In my opinion, China fully grasps the advantages of licensed blockchains that can be used with a digital Renminbi, which would allow it to better supervise or control its currency,” commented the Senior Trader at Crypto Broker.

That said, China is far from being the only influence on the adoption of cryptocurrencies and crypto assets in general. In their study published at the beginning of November, SEBA Bank, which obtained a banking licence from FINMA in August of this year, identifies at least three fundamental elements characterising a crypto market environment that is favourable for institutional investors – elements that do not differ significantly from those that characterise traditional financial markets.

First and foremost, they cite infrastructure quality. This means the presence of actors offering regulated and sophisticated services, such as trading, custody, and lending services. Regulation follows, to “establish clear rules for navigation”. And finally, based largely on these first two elements, the third element is public awareness and interest, from which demand should flow. In this sense, SEBA Bank considers Switzerland to be “at the top of the list of countries offering the highest degree of regulatory certainty and transparency”.

Indeed, the future of crypto asset trading depends largely on the identification of parties, a sine qua non for the very possibility of viable regulation. “In order to comply with the Travel Rule formulated by the Financial Action Task Force (FATF) regarding transfers between a virtual asset service provider (VASP) and the applicant entity, certain details must be disclosed,” Patrick Heusser emphasised.

“Do we need all these cryptocurrencies? Not really…”

“The name, account number, physical address, national identity number, or customer identification number, as well as the date of birth and account number of the beneficiary must be known and confirmed with the regulator in order to meet regulatory reporting requirements”, states the trader. In terms of infrastructure, there are more than 300 crypto exchanges in the world and all are far from meeting the criteria for institutional investors.

This does not mean that unregulated exchanges will necessarily disappear. “In traditional finance, there are two categories of exchanges: those dedicated to institutional investors and those targeted at private investors. They can coexist. It is possible that these platforms will consolidate in the long term, both for institutional and private investors.”

On the other hand, Patrick Heusser considers it unlikely that all cryptocurrencies, which currently number more than 1500, will survive long-term. “Do we need all these cryptocurrencies? Not really… Most of the coins that are not in the top 50 have insufficient liquidity,” observes the Swiss trader.

It is worth noting that a significant number of cryptocurrencies are highly correlated, so that they do not provide any diversification effect between them, although they may offer diversification compared to other asset classes. “It is up to each investor to analyse and to judge the eligibility for each asset within a portfolio. This applies to both for institutional and private investors,” Patrick Heusser insists.

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