Crypto Has Left Cypherpunk Roots to Mimic Traditional Finance, Says UK Regulator

How worried should international regulators be about the cryptocurrency industry? Not overly, a British financial crime expert has claimed.

Therese Chambers — director of retail and regulatory investigations at the United Kingdom’s Financial Conduct Authority — made the argument at the New York University School of Law on March 5, in a speech entitled “The Advancement of Digital Assets and Addressing Financial Crime Risk.”

No longer radical?

In her address, Chambers acknowledged that the premise of blockchain “comes from a libertarian strand of ideology which eschews identity checks and advocates digital privacy.” 

Regulators like the FCA, she continued, thus expect compliance with Anti-Money Laundering (AML) regulation to be “met with resistance” from the industry.

Given the timing of the Bitcoin white paper coinciding with the global 2008 economic crisis, she continued, regulators can infer that cryptocurrency was not “just another attempt to create a digital dollar or launch a FinTech app, but instead something far more radical.” 

Agencies traditionally have the power to regulate identifiable intermediaries in the financial system, not currencies per se. They thus rely on the very structure that Bitcoin sought to dismantle. 

This may seem to suggest a zero-sum game between oversight and innovation. Yet Chambers argued that, on the contrary, while the crypto-asset market may have its roots in the libertarian cypherpunk movement:

“The way the market has developed over the past decade now mimics several hallmarks of traditional financial services.”

Digital self-sovereignty and disintermediation are less of an issue for regulators, she noted, in a market where recent estimates have pointed to 90% of economic activity occurring on centralized custodial exchanges.

The Financial Action Task Force (FATF) guidance for crypto-asset regulation — set to take effect in June — recognizes this by placing the onus of AML compliance on “Virtual Asset Service Providers (VASPs),” typically exchanges or wallets.

Moreover, Chambers said, rather than Bitcoin’s intended use case as peer-to-peer digital cash, the FCA’s consumer research has found the majority of respondents see crypto assets as an alternative investment instrument — something more akin to traditional financial services.

The crypto industry has grown from “being measured in millions to billions” — and Chambers took stock of the increased risks and scope for financial crime this poses. 

Yet she focused the rest of her speech to detailing the national and international measures that are eminently viable for industry regulation — among them sandboxes and international cooperation that can prevent jurisdictional arbitrage in a seemingly borderless digital industry.

Purity or accommodation? 

Last fall, Cointelegraph analyzed the challenges still facing decentralized exchanges (DEX) — a non-custodial platform model advocated by libertarians. Among the most famous (or notorious) of these, John McAfee summarized their potential as follows:

“SEC says as long as we follow AML and KYC procedures the http://McAfeedex.com exchange is OK. But we don't follow either and why should we even if we could? We are just a window into the blockchain where people trade. This is for the people, not the Government. F*ck them.”