The crackdown on cryptocurrencies is a sign of a maturing market, but policymakers should know when to hold fire, according to the chief executive of the world’s oldest crypto exchange.
Bitstamp chief Julian Sawyer issued a call for restraint in an interview with POLITICO, coming at a time when lawmakers and regulators are turning up the heat on a market that exploded in popularity over the pandemic.
Crypto started as a tech anarchist’s dream in 2009 with the birth of Bitcoin, which records transactions on a decentralized ledger that’s nearly impossible to manipulate. Bitstamp set up shop in Slovenia two years later. Crypto has since gone mainstream, boosted in part by the pandemic, which forced people indoors with little to do and excess savings sitting idle on their bank accounts.
The sector, which was valued at $191 billion at the start of 2020, peaked at over $3 trillion in November last year before dropping to around $1.7 trillion. That exponential growth is attracting attention from corporations as a new business avenue to explore, even though crypto assets have shown themselves to be just as vulnerable to market turmoil as stocks in recent days.
Policymakers, meanwhile, are fretting over the market’s bulging carbon footprint, lax safeguards against dirty money and speculative nature — while questioning the social benefits of the sector. Crypto’s gluttony for energy alone is enough to ban large swathes of the industry, according to the vice chair at the EU’s securities regulator.
Sawyer says this criticism is all part of a “maturing process.” Rhetoric over crypto’s detriment to society is questionable, he argues.
As he sees it, crypto offers important benefits: Cheaper and faster cross-border payments; a means to enhance the multibillion-dollar gaming industry; and an asset that diversifies investment portfolios. “You don’t tend to get innovation from regulation,” he added.
The 52-year-old Englishman is one of many who have made the jump from financial services to crypto. He helped co-found Starling Bank in the U.K. in 2014, serving as the lender’s chief operating officer for four and half years. He took the hot seat running Bitstamp in March 2021.
“We were the first exchange to be regulated in Europe,” he noted. “That means we understand risk and compliance. Having that inflow from people in financial services … is hugely beneficial to the industry.”
Bitstamp has benefitted from crypto’s boom together with other exchanges, such as market leader Binance, which offers up hundreds upon hundreds of cryptocurrencies. But Sawyer’s business instinct is also more cautious, servicing spot trades for around 50 selected cryptocurrencies for customers that have gone through due diligence checks. Bitstamp’s philosophy is safety first, opting against providing risky financial products that are speculative and highly leveraged.
That’s left the exchange in 53rd place in terms of trading volume, which reached $447 million in the last 24 hours. Binance, in comparison, handled $20 billion worth of spot transactions — less than a third of the size of its derivative trades.
But Bitstamp is a major force in the European market, where it collects between 60 percent and 70 percent of its revenues. While it may soon face fresh competition from Binance — which is now looking to make inroads across the continent — that won’t sway Sawyer’s careful approach. Prudence could pay off as authorities across the bloc crack down on advertising within the sector that scams unwitting investors.
What he’d like to avoid, in other words, is the publicity of the kind seen around U.S. reality TV star Kim Kardashian and boxing legend Floyd Mayweather, who face a lawsuit for promoting a cryptocurrency called EthereumMax last summer before its value crashed. That’s why market scrutiny, up to a point, is welcome, he says.
“A misleading advert [that says] you’re going to get super rich if you just buy this coin that no one’s heard of is wrong,” Sawyer said. “It will take some people out of the market, and if that protects customers, that’s a price that’s worth paying.”
Greening crypto
The green debate surrounding crypto has spread across the globe since China last year banned trading and the process of minting cryptocurrencies, which Beijing said jeopardizes the country’s efforts to reduce its carbon footprint.
China’s critics will point to Beijing’s efforts to suppress crypto assets as a way to favor its own state-run digital currency. But talk of issuing a ban is spreading in Europe, too. EU lawmakers are drafting a bill that would introduce investor safeguards and trading standards for the bloc’s markets in crypto assets — known as MiCA.
Green and left-leaning lawmakers, in particular, have blasted the huge amount of electricity that’s needed to power the specialized computers that help run the distributed ledger technology, or blockchain. These computers record trades in “blocks” of information by crunching complex equations, which the software rewards with a handful of digital assets if they get the answer right. This blockchain technology, called “Proof-of-Work,” underpins much of the crypto world.
The energy bills can be recouped if their cost is reflected in the price of digital assets that so-called miners are rewarded with. And crypto advocates argue that Proof-of-Work can be green if it’s plugged into a renewable energy source — although crypto critics say that’s not much of a solution if the appetite for renewables pushes up the price for green energy and encourages the rest of society to return to cheaper fossil fuels.
As Sawyer sees it, however, there are multiple ways for the crypto market to become greener, rebuffing the claims of regulators who want to ban much of the crypto market due to its intensive energy use.
One policy option is energy labels that can help investors make greener choices, he says.
“When you buy a fridge or a freezer, it has a sticker on the front, which has got green, amber, yellow, blue. And it will tell you where you are,” he pointed out. “That becomes really interesting [as a potential] strategy. It’s important that we can articulate clearly, what that means.”
He also highlighted plans from one of the market’s leading crypto platforms, Ethereum, to adopt blockchain-building technology called “Proof-of-Stake,” which the company says will decrease its energy use by 99.95 percent by dramatically reducing the electricity required. “I think that will be a deciding criterion that consumers will want to go and understand,” he said.
A ban, by contrast, would be a step too far “considering the size of the market,” in Sawyer’s view.
Demystifying crypto
Sawyer believes it’s key to demystify the market so that investors and regulators understand the different types of crypto assets that are available and how they can be used.
Cryptocurrencies like Bitcoin, whose value is driven in large by investor appetite, aren’t just an alternative investment that can diversify a portfolio. They can also be used as rewards for video gamers and simplify online payment for players who want to customize their in-game avatars — a multimillion-dollar market.
Then there are so-called stablecoins, which are tied to a basket of currencies or financial assets to reduce price volatility. This digital asset captured the attention of policymakers in 2019 when Facebook announced plans to launch a stablecoin called Libra with over two-dozen companies. The project was billed as means to help people send remittances to their families in poorer countries fast without high fees and foreign-exchange risk. Policymakers didn’t buy into it, fearing Facebook’s plans could undermine national currencies.
Facebook aside, the point stands in Sawyer’s eyes.
“Would I be happy to be paid in a stablecoin for my salary? Yes of course. Why not?” he said. “Do I want my salary paid in Bitcoin, as of today, right now? Probably not.”
He also pushed back against the argument, advanced by many policymakers, that bad actors are the chief beneficiaries of cryptocurrencies due to their prominence in black market transactions, aided by the exchanges that carry out few background checks. An investigation published by Reuters last week found Binance had carried out weak anti-money laundering checks on customers; acted against recommendations from its own compliance department; and withheld information from regulators. Binance strongly refuted the findings.
Sawyer points out that money laundering is a problem across the whole of the financial industry, as seen in a series of scandals since 2018 that have rocked the EU’s banking sector.
More important, he says, is that it’ll be more difficult for illicit financiers to use crypto for money laundering in Europe once legislators pass MiCA and other safeguards against dirty cash into EU law.
“What the industry wants is to get clear guidance from the regulators about what is possible and what is not possible,” he said. “That will take a little bit of time.”
https://bit.ly/3GblJNq January 25, 2022 at 09:53PM
Bjarke Smith-Meyer
