There are growing <a href="http://www.wired.co.uk/article/six-ways-to-regulate-cryptocurrency-without-destroying-its-future" target="_blank" rel="noopener">calls</a> for regulation of the cryptocurrency market, which is rapidly approaching a market capitalisation of <a href="https://www.cnbc.com/2017/12/18/cryptocurrencies-could-be-worth-1-trillion-in-2018-blockchain-ceo.html" target="_blank" rel="noopener">$1 trillion</a>. But there’s little agreement about the forms this should take.
If the case for government regulation is strong, the case for a clear, coordinated regulatory approach is even stronger. It would increase the flow of institutional capital into cryptocurrency markets. And that would further strengthen corporate governance in cryptocurrency companies.
The trick for regulators is to balance investor protection and systemic stability with the need to protect innovation and encourage capital formation in different legal systems.
At present the regulatory environment is a muddle because there’s rapid divergence in the regulation of cryptocurrencies across jurisdictions. Countries like Japan, while thorough, have a more open approach. China is more strict.
Sovereign governments need to develop coherent frameworks for cryptocurrency oversight. But solutions will only be found through international cooperation in this cross-border market.
<a href="http://www.forbesafrica.com/cover-story/2017/09/04/bitcoin-blockchain-billions/" target="_blank" rel="noopener">READ MORE: Bitcoin, Blockchain And Billions</a>
<h2>Growing concerns</h2>
Cryptocurrencies <a href="https://cointelegraph.com/bitcoin-for-beginners/what-are-cryptocurrencies" target="_blank" rel="noopener">originated</a> as an alternative payment mechanism to traditional currencies. But they are now also traded on spot exchanges as highly speculative investment assets.
Recent spin-off crowd funding opportunities such as <a href="http://bitcoinafrica.io/2017/09/08/sarb-says-no-protection-for-ico-investors/" target="_blank" rel="noopener">initial coin offerings</a> have become a particular cause of concern. These involve start-up cryptocurrency companies offering initial investment stakes in new token issues. China and Vietnam have <a href="https://www.ft.com/content/05b2748c-c903-11e7-aa33-c63fdc9b8c6c" target="_blank" rel="noopener">banned</a> them. Japan has taken a friendlier <a href="https://www.wsj.com/articles/regulators-are-looking-at-cryptocurrency-1516836363" target="_blank" rel="noopener">attitude</a> while the UK and the US have adopted a wait and see approach. South Africa, like many other developing countries, offers zero protection to investors in initial coin offerings.
These different responses are due to different legal definitions of cryptocurrencies. The rapidly evolving technology behind them doesn’t help the situation either.
The precise nature of an initial coin offerings depends on its structure as well as its context which can change quickly and have hybrid characteristics of financial instruments.
The definition, and hence legal treatment, of the tokens issued under an initial coin offering can be as diverse as a currency, commodity, security, property, loan, deposit, derivative or forex contract. Agreeing a taxonomy of cryptocurrencies defined by how they’re used is clearly one of the most urgent tasks facing regulators.
<a href="http://www.forbesafrica.com/lists/2018/02/08/forbes-first-list-cryptocurrencys-richest-people-meet-secretive-freaks-geeks-visionaries/" target="_blank" rel="noopener">READ MORE: Forbes&#8217; First List Of Cryptocurrency&#8217;s Richest People: Meet The Secretive Freaks, Geeks And Visionaries</a>
<h2>Towards a taxonomy of cryptocurrencies</h2>
Cryptocurrency expert <a href="https://new.innovatefinance.com/news/lawrence-wintermeyer-steps-ceo-innovate-finance/" target="_blank" rel="noopener">Lawrence Wintermeyer</a> has argued that distributed ledger technology powered digital assets could be organised into three potential buckets: cryptocurrencies, cryptocommodities, and <a href="https://www.forbes.com/sites/lawrencewintermeyer/2018/01/07/my-2018-crypto-predictions/#6294e3976b71" target="_blank" rel="noopener">cryptotokens</a>.
But the lack of harmonisation across jurisdictions is a wider problem than nomenclature.
Cryptocurrency companies sometimes use the distributed nature of these assets – which sit on digital ledgers held by multiple token holders – to argue that there is no issuer. They also sometimes argue that these assets are not securities, and that they should therefore not be subjected to a particular jurisdiction’s securities laws.
There are also clear cross border regulatory <a href="https://www.ft.com/content/32315636-cb01-11e7-ab18-7a9fb7d6163e" target="_blank" rel="noopener">gaps</a>. What makes it difficult to reconcile these is that the assets can easily be transferred and their origins are difficult to trace. Tokens could be issued in a more token-friendly jurisdiction like Japan. The same tokens could land up in the hands of unassuming retail investors in stricter jurisdictions such as the US.
<a href="http://www.forbesafrica.com/focus/2018/01/17/bitcoin-mining-uses-much-power-ireland-heres-thats-not-problem/" target="_blank" rel="noopener">READ MORE: Bitcoin Mining Uses As Much Power As Ireland. Here&#8217;s Why That&#8217;s Not A Problem</a>
<h2>Avoiding money laundering and financial crime</h2>
This cross border confusion allows token companies to pick and choose jurisdictions with favourable rules. This could make money laundering easier.
There are a few steps governments can take to close these gaps.
They should support investment in technology that makes the provenance of tokens clearer while preserving their encryption. Regulators could then enforce an “indicator of origin” as a standard. This would make it less easy for the assets to be transferred illegally.
Offshore centres like Jersey <a href="https://www.ft.com/content/e591541e-007e-11e6-99cb-83242733f755" target="_blank" rel="noopener">have got a lot of bad press</a> in recent the backlash against international financial centres. But there’s a great deal to learn from well-regulated offshore jurisdictions. They are beginning to take the lead with potential applications of international best practice and corporate governance for cryptocurrencies. They offer investors in digital assets an extra set of gatekeepers’ eyes, and potentially, a more calculated risk.
In jurisdictions like Jersey issuers of initial coin offerings have to jump through quite a few hoops. This includes using a regulated service provider which has to make an application to the Jersey companies registry for a consent. The service provider is among a number of <a href="https://www.gov.je/News/2017/Pages/InitialCoinOfferings.aspx" target="_blank" rel="noopener">requirements</a> that provide checks in relation to anti-money laundering and countering the financing of terrorism.
<a href="http://www.forbesafrica.com/cover-story/2017/09/04/emperors-new-coins/" target="_blank" rel="noopener">READ MORE: The Emperor&#8217;s New Coins</a>
<h2>Current frameworks and global co-ordination</h2>
But what could a coordinated global regulatory approach to cryptocurrencies look like?
Harmonisation via a code of conduct or voluntary signatory to a global compact could certainly stop token companies from cherry picking jurisdictions to their advantage. Not being signatories to the codes would place token companies outside the market.
A multilateral code of conduct or global convention or compact, such as those administered by the inter-governmental <a href="http://www.fatf-gafi.org/" target="_blank" rel="noopener">Financial Action Task Force on Money Laundering</a>, or a United Nations co-ordinated approach could be model solutions.
Standard regulatory codes are particularly critical for some pockets of the investment community. For example, there has been a significant <a href="https://cointelegraph.com/news/institutional-investors-will-bet-big-on-cryptocurrencies-in-2018" target="_blank" rel="noopener">surge</a> in the establishment of investment funds looking to invest in initial coin offerings on behalf of sophisticated investors.
Standard codes for institutional investors in the first instance, could help both regulation as well as innovation. Institutional investors, unlike retail investors, can withstand, and even benefit from, the upside of volatility over time.
For now, the poorly regulated speculative hoarding of cryptocurrencies reduces the potential of assets like this to become a public good. This ultimately affects the potential value of the tokens by amplifying volatility.
Paying attention to this is important for investors and regulators as well as issuers. There will also have to be a degree of self regulation by issuers as global regulators get up to speed. &#8211; Written by <a href="https://theconversation.com/profiles/desne-masie-252408" target="_blank" rel="noopener">Desné Masie</a>, Visiting Researcher in International Political Economy, <a href="http://theconversation.com/institutions/university-of-the-witwatersrand-894" target="_blank" rel="noopener">Univers</a><a href="http://theconversation.com/institutions/university-of-the-witwatersrand-894" target="_blank" rel="noopener">ity</a><a href="http://theconversation.com/institutions/university-of-the-witwatersrand-894" target="_blank" rel="noopener"> of the Witwatersrand</a>
This article was originally published on <a href="http://theconversation.com" target="_blank" rel="noopener">The Conversation</a>.
<img loading="lazy" decoding="async" src="https://counter.theconversation.com/content/91168/count.gif?distributor=republish-lightbox-advanced" alt="The Conversation" width="1" height="1" />

Why it’s in everybody’s interests to regulate cryptocurrencies

Modernization, mechanization and regulation are some of the key aspects that need to be looked at for South Africa to build a globally competitive and sustainable mining industry.
Earlier this year, the mining sector experienced a five-month crippling wage strike. It follows the 2012 unprotected wage strike outside Lonmin’s Marikana mine, where 34 miners demanding a wage increase, were shot dead by police. Strikes pose risk and uncertainty for investors. It is often perceived, when long protracted strikes take place, that conversations about mechanization comes to the fore.
Mechanizing mines is seen as a solution to securing a steady stream of revenue and could cut significant costs for mining companies.
Speaking at the Joburg Indaba on mining, Mineral Resources Minister Ngoako Ramatlhodi says strikes are not a uniquely South African phenomenon.
“But when they run into periods exceeding five months; that should raise attention to all stakeholders. It puts the efficacy of regulatory institutions into question,” says Ramatlhodi.
“The cost to the industry and economy has been beyond words with recent figures revealing that in the first quarter, sales of total minerals declined by 24.7 percent. This narrowed to 9.6 percent in the
second quarter.”
He says the cost to the industry and economy has been beyond imaginable proportions.
Chairman of Anglo American Platinum, Valli Moosa, says that the recent strikes in South Africa are more of a major social uprising and revolt than purely labor relations disputes.
“We can say that it was a result of educators from the ultra-left influencing workers… but workers would not have gone on a five-month strike without pay, unless they wanted to send us a serious message. I feel ashamed that miners did that,” says Moosa.
“Workers want a fundamental change of what is happening in this industry. They didn’t achieve that much in as far as their demands are concerned.”
Moosa added that there needs to be a fundamental change and questioned whether mechanization could be the silver bullet to drive the future of South Africa’s mining industry. He believes that the country needs to move to a higher degree of modernization because it will improve productivity.
The rest of the world has experienced unprecedented growth of their economies following mechanization.
“We should not take ourselves back to the dark ages. Technology will be the biggest driver of growth in South Africa in the foreseeable future,” says Moosa.
The Chief Executive of diversified miner, Exxaro Resources, Sipho Nkosi, agrees but notes that education is critical.
“We need to go back to educate our people in the correct areas. And if you look at technological areas around the world, its mind boggling,” he says.
Industry experts say that the mining sector is a sunset industry, but Nkosi says that we cannot focus on that. He believes that government must be clear on its policy and that the industry needs to know what its role is in helping to grow the economy.
But trade unions fear that mechanizing the mines will result in massive job losses. Moosa believes that where there’s a reduction in the labor force, mining bosses have a responsibility.
“We have a moral responsibility for that. Unless we take responsibility we will not get to where we want,” says Moosa.
Norman Mbazima, Chief Executive of Kumba Iron Ore, says mechanization does not necessarily result in job losses as perceived by many, especially labor unions.
“Unlike before, when we solely relied on labor, now due to mechanization we rely more on planners who might incorporate even injured miners,” says Mbazima.
Chief Executive of Lonmin, Ben Magara, in support of Mbazima, says unlike what is generally perceived, no mine could retrofit as every mineral deposit had an appropriate method.
“If we achieve mechanization within 10 years, we could have achieved it in the shortest term possible, 20 years would be medium term and 30 years long term,” says Magara.
To have a stable economy, South Africa needs to grow at 6%. In September, the International Monetary Fund lowered this year’s growth to a mere 1.4%.
All stakeholders must come together and find solutions that make sense.

Machines OVER MEN?

What is it?
A set of reforms to improve regulation, supervision and risk management in the banking sector.
Why do we need it?
The financial system is regulated to protect investors, ensure the solvency and soundness of financial institutions, keep efficiency and transparency in the markets as well as ensure a stable financial system. Regulators are there to reduce the risk of failure and contain any situations that occur. Micro-prudential regulation aims to limit the risks within intermediaries in order to reduce the possibility of an individual institution’s failure. This is the traditional regulation used before the 2007-2009 crisis, but failed to prevent systemic risks.
The financial crisis showed that not all institutions held sufficient capital and that the quality of the capital was sometimes poor and not available to absorb losses as they materialized.
Macro-prudential regulation aims to make institutions internalize the costs that their behavior imposes on others. It is now the focus of global regulators. Capital requirements may vary according to the intermediary’s contribution to systemic risk or with the business cycle—with a higher requirement in upswings to create a capital buffer against shocks. Institutions may also be required to take out extra insurance or to issue contingent convertible bonds. Due to macro-prudential regulation, some progress has been made in moving the world’s over the counter (OTC) derivatives markets to a centralized infrastructure.
Where does it come from? Capital requirements monitor a bank’s balance sheet by requiring that they hold a minimum level of capital and restricting the types of assets a bank can hold. The idea is that the capital buffer will help institutions absorb shocks and losses without going insolvent. Under the risk-based capital requirements of the Basel accord of 1988, minimum capital standards were linked to off-balance-sheet activities such as loan commitments and trading positions in futures and options. The Basel accord required that banks hold capital of at least 8% of their risk-weighted assets (RWA). Basel II tweaked the capital requirement to be based on the assets held by the individual bank. It however didn’t place enough importance on macro-prudential and systemic risk.
What changes does it bring?
The reforms in Basel III include a new definition of capital. The revisions made to raise Tier 1 capital’s quality and quantity (now 6%) should help prevent financial institution insolvency. Those in Tier 2, simplifying and reducing it to 2% of RWA, will help make sure depositors and senior creditors are repaid should failure occur. Tier 3 capital was removed all together. Aside from increased capital requirements, Basel III introduces stressed value-at-risk capital requirements for re-securitization; the introduction of a capital charge for potential mark-to-market losses and higher capital requirements for OTC derivatives.
The introduction of a leverage ratio, to be used in addition to the risk-based capital framework of Basel II, will be up to individual regulatory bodies to apply at their discretion.  The proposed new global liquidity standard entails a liquidity coverage ratio that requires the availability of high-quality and highly-liquid assets to exceed the net cash outflows of the next 30 days. This is to ensure that institutions can survive strain that may last up to 30 days. The other component of the new standard is the net stable funding ratio, requiring long-term financial resources to exceed long-term commitments.
Instability arises when banks have used short-term liabilities to finance long-term assets—resulting in what we call a liquidity and maturity mismatch—and market liquidity dries up due to a shock, such as a sudden reversal in capital flow. Banks will then be forced to sell off assets, leading to downward movements in prices. This places the entire system at risk.
Basel III will also introduce two new capital buffers: a 2.5% capital conservation buffer and a countercyclical buffer of 0-2.5%.
What happens next?
Global regulators have yet to agree on a way to deal with the “too big to fail” institutions. The “too big to fail” concept refers to the largest institutions, who’s failure would surely lead to the entire financial system crumbling. After the recent crisis, some of these banks consolidated to create even bigger ones. Since they know that they will not be allowed to fail they feel like they can take greater risks.
The implementation deadline for Basel III is 2019.   FL

Tag: Regulation

FORBES AFRICA SOCIAL MEDIA

Why it’s in everybody’s interests to regulate cryptocurrencies

Machines OVER MEN?

Basel III