Wed, Jun 27, 2018

Isolate, Integrate and Regulate - Exercising Caution During Jersey’s Crypto-Boom

Cryptocurrency.  Bitcoin.  Mining.  The world of virtual currencies has become an important factor in global funds transfers and is likely here to stay. This was further underscored by the recent choice of Binance, the cryptocurrency exchange, to set up in the island.

Following McKinsey’s strategic review of Jersey in 2017, two key challenges for the island are evident – Brexit and the digitization of financial services. Cryptocurrency forms a part of this digitization, and adapting to an increasingly digital world is key in remaining a competitive jurisdiction.
However, governments and regulators are struggling with the concept of how to regulate something very different from traditional asset classes. While some governments have taken a highly cautious approach to cryptocurrency or have outright banned it, Jersey is leading the way, demonstrated by the recent Memorandum of Understanding signed with Binance, the cryptocurrency exchange. The core concern of regulators is that the very characteristics that make cryptocurrency attractive (anonymity, speed, decentralization and global reach) make them potentially vulnerable to abuse by criminals and terrorists. Cryptocurrencies present a real challenge when it comes to balancing the Jersey Financial Services Commission’s (“JFSC”) guiding principles of protecting and enhancing the reputation of Jersey, safeguarding the island’s economic interests and countering financial crime. 

So, how can a regulator balance these competing priorities?

There are three broad regulatory approaches taken with regards to cryptocurrency: isolate (imposing loose guidelines to allow the industry to evolve without heavy regulation), integrate (by allowing cryptocurrencies to integrate into existing regulatory and economic frameworks) and regulate (via heavy participation of government and regulatory bodies).
Clearly, Jersey’s government and industry bodies need to work together to create a balance, and the island has certainly recognised this.  In 2014, the JFSC approved the launch of the world’s first regulated bitcoin investment fund and brought virtual currency exchanges into the regulatory framework in 2016. Smaller virtual exchanges will be able to operate in the safety of a regulatory sandbox to allow for innovation without overly burdensome regulation. The concepts of isolate, integrate and regulate are applied at different points of the development life-cycle and the public should be reminded of the speculative and risky nature of virtual currency as an investment.  However, for all the excitement of virtual currency, regulation of this area may look boringly similar to more traditional financial services firms.

Although entrepreneurs operating in the industry may argue increasing levels of regulation can slow speed to market, there are two incentives to taking a proactive approach as the industry evolves. First, it is only a matter of time before we see some form of enforcement activities against cryptocurrency businesses, which may tarnish the rest of the industry with the same brush.  Second, low barriers to entry achieved via low levels of regulation means a higher level of competition in the industry, and regulatory authorization to demonstrate controls to protect investors could be a powerful competitive advantage.
Whatever the approach, industry participants should work side by side with government agencies and regulators to ensure we remain one step ahead. Indeed, Jersey’s track record in the virtual currency space and the recent Binance announcement is evidence that this is taking place. The island is clearly embracing the world of virtual currency. Cautiously. 

This article first appeared in the Jersey Evening Post business pages on June 20, 2018

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