Throwing the FinTech baby out with the Crypto-bathwater

Stephen Fisher - Wednesday, January 10, 2018
I remember walking back from a conference at the European Central Bank in late 2008 accompanied by the then Head of Risk Management for the ECB.  We discussed what the long-term impact of the Global Financial Crisis that we were experiencing was likely to be.  My comment was that regulation would take centre stage post-crisis, particularly since the major private financial institutions had both sought and been granted support from their regulators.  My prediction proved correct as, in fact, the banking business has been beaten up and dumbed down by the regulators post-GFC.  The banking community has been fined and restructured almost out of existence, forced to 'pay the piper' or lose its future...

As the phenomenon that is Crypto rages around us, I cannot help but reflect on that conversation.  It's only a matter of time before the gravity-defying Crypto bubble collapses back to the fair-value price of the electrons that these assets are actually worth.  In the meantime, great quantities of wealth will have been redistributed from one socio-economic group to another.  The winners, those who substituted their electrons for worldly riches, will live large but remain largely silent through fear of retribution. The losers, those who traded their families' means of existence for a handful of electrons (at least Jack traded his for a handful of magic beans!), will shout loudly and for a long time...and they will naturally turn to the Government for compensation.

Irrespective of what one's view is of the value of a crypto-currency, the innovation shares features with the FinTech world which have brought benefits to the financial sector. Crypto related FinTech benefits include (i) the Blockchain which has potential to cut transaction costs for every investor, (ii) the fact that regulators have been forced to review their securities laws and (iii) the electronic issuance of new crypto related securities such as 'Asset-backed tokens' and 'Stapled-tokens' may well lead to efficiencies in the IPO markets generally.  But if Governments are convinced to step in to avert a 'systemic crisis' during a Crypto-crash then the easiest reaction is to shut the whole thing down.  Regulators already have their fingers on the trigger and it would be a shame if the whole FinTech sector was punished for the excesses of a few. 

Throwing the FinTech baby out with the Crypto bathwater is a real risk if regulators are forced to write cheques to those who suffer losses in the impending Crypto-bust.  Moreover, if the regulators shut the whole thing down, Cryptoland will never be able to regenerate itself in the way that the more intelligent use of the internet grew out of the dotcom bust.

The lesson from the GFC for Crypto-land is don't put your hand out for support when the fuse blows. Shut up and die like a motherboard.

Danny commented on 20-Jan-2018 04:10 PM
Given the decentralized nature of blockchains generally, it will be difficult for governments to shut the whole thing down, especially the bitcoin blockchain. Others blockchains may be less decentralised and so more prone to intervention (like Ripple). China has already tried to shut bitcoin down (3 times no less!) and failed; China did manage to put restrictions on services like Facebook, Gmail, Whatsapp but it has not been successful in shutting down bitcoin. China can force Google to shut down its servers in country, but it cannot enforce a shut down of a network of more than 100 million machines, spread out throughout the globe, that are running the bitcoin protocol; unless China wants to shut down the internet...
It is difficult for governments to enforce a ban on the ownership of an asset which is controlled by a private key in the format of a code: these strings of characters fit on medium that can easily be memorized, hidden or key secure.
I think governments are now facing an even bigger issue; consider South Koreans, who are protesting against their government's proposed intervention. The people see bitcoin/blockchain as a censorship-resistant, wealth enhancing value transfer mechanism, whilst the government sees it as a bubble drvien ponzi scheme, and so wants to "protect" its citizen against bad actors. Money is a social construct and value is assigned based on social agreements, conventional use, law, tradition and perception. I predict governments will have a hard time with this one.

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