By Johann Olivera
Bitcoin has gone quiet. At least it has in the mainstream media, despite the fact that the cryptocurrency’s value is almost 50% higher than it was during the heady days of late 2013. It was then that Bitcoin ceased being a secret known only to the initiated and became a worldwide phenomenon that everyone wanted to buy into.
Fast forward to 2017 and cryptocurrencies have withdrawn from the glare of publicity but that doesn’t mean that people have lost interest. In fact, the most important thing to have happened over the last few years has been the move away from a focus on Bitcoin and towards an examination of the blockchain, the technology that underpins all cryptocurrencies.
A diversity of possibilities
It is the blockchain that excites most people in the field and no sector more than in FinTech. Blockchain’s potential to revolutionise a range of systems is now commonly understood to be the real prize that was originally hidden behind all that initial enthusiasm for Bitcoin.
As with many transformative technologies, blockchain doesn’t sound particularly fascinating to the layman. At its core, it provides a means to create a ledger, public or private, that cannot be changed or modified without others being able to see what has happened. Whilst sounding quite simple, this is actually a powerful force with much potential that remains undeveloped.
Channing Flynn, EY Global Technology Sector Leader defines that shift in thinking and potential: ‘To date, blockchain has transformed only people’s thinking. We don’t yet even know all the questions blockchain technology will raise, much less the answers. But waiting for the technology to take hold is too late. Now is the time to start defining the questions and influencing policy that will lead to answers.”
Institutions as venerable as the IMF, Swift and most internationally renowned banks have, however been experimenting with different applications for blockchain. Most recently Swift, the platform that underpins the global interbanking system, has developed a proof of concept trial that aims to use blockchain technology to enable real-time reconciliation of cross-border payments. Where once the banking industry saw only threats, it is now beginning to see opportunity for greater efficiency and more effective service delivery.
A regulatory matter
Bitcoin and other public blockchains have often been unwisely dismissed by business because they fear the reputation of an historical association with transactions on the dark web or because of the lack of control/ability to govern the network by regulatory-sensitive organizations. There have also been questions about the viability of Bitcoin as a currency with seemingly little practical use in many current regulatory environments. However, keep in mind that, from a purely technological standpoint, Bitcoin was an attempt to completely disrupt peer-to-peer payments. It completely changed the fee structure for moving money giving anyone with an internet connection the power to store and transfer financial value from a mobile phone. This is technological disruption made real.
As a globally-renowned international finance centre, Gibraltar has an opportunity to leverage the benefits of embracing and leading this disruption.
Whilst it is the virtual currency element of the blockchain that most immediately lends itself to our existing skill sets there is so much more to be gained from exploring potential. The Digital Currency Summit being held this month at the University of Gibraltar should be the beginning of that relationship and not a brief, unfulfilling, dalliance. It is an excellent example of our ability to engage with blockchain and influence its development.
With its focus on regulation, the Summit has chosen to explore one of the most widely debated elements of the cryptocurrency world.
Since Bitcoin first moved out of the tech underground and into the mainstream, regulators and other authorities have questioned whether cryptocurrencies need to be regulated and, if they do, how is effective regulation best achieved?
Globally, there is no set attitude towards virtual currencies. Some jurisdictions like Bangladesh and Bolivia have banned all trading in Bitcoin and its peers. Others, including China, have banned financial institutions from trading in or processing cryptocurrencies.
At the other end of the spectrum, there has been something of a scramble by jurisdictions keen to make the most of the emerging technology, to provide some element of a legal and regulatory framework. Singapore and Canada were both early in giving cryptocurrencies their blessing by at least acknowledging their legitimacy as a token of exchange. The USA has adopted a relatively piecemeal approach to the official recognition of Bitcoin.
Putting Gibraltar in the picture
Locally, the Gibraltar government has been cautiously supportive of blockchain enabled business, including cryptocurrency related businesses. In a world in which reputation means so much, it’s understandable that Gibraltar wants to put itself in a position to make the most of developments in this space, whilst not exposing itself to reputational risk.
Risk or not opportunities exist. For example, Bitcoin’s utility as a currency is limited in the current regulatory environment, a limitation born of a failure to comprehend the shift that accepts a separation between two key aspects: the sending of value and the identities associated with the parties involved. Bitcoin allows the sending of value instantaneously in a peer-to-peer fashion whilst we continue to define its relationship to identity in simple terms that require passports and birth Certificates.
Angus Champion de Crespigny, Financial Services Blockchain Leader at EY, defines the landscape in stark form: ‘Assuming that Bitcoin and other cryptocurrencies will never be effective for compliance reasons assumes that the regulatory environment will always look the same. This regulatory environment changes significantly when a reliable digital identity can be established’.
So where next?
de Crespigny regards this new regulatory challenge as an opportunity that cannot be ignored: ‘Blockchain has become an increasingly visible part of the financial ecosystem, and even organizations that decide not to make it part of their service lineup will need to compete with organizations that do’.
Our government will launch a public consultation on the regulation of firms engaging in activities not otherwise subject to regulation and that use distributed ledger technology (blockchain) for the transmission or storage of value belonging to others, at the Digital Currency Summit on May 9th. Such a move is welcomed by the business sector because we know that blockchain has enormous potential and could play a key role in the development of Gibraltar’s economy in the coming post-Brexit years.
Johann Olivera is a Partner at EY