Overview
Karsten Wenzlaff, Advisor
August 26th, 2025
Karsten Wenzlaff is a Crowdfunding and Fintech Expert from Germany. He is Secretary-General of Digit[...]
Category Archives: Blockchain, Crypto, Digital Assets Regulations
Crypto in Canada: Where are we today, and where are we heading?
Cointelegraph | Desiree Smith | Jun 24, 2021
An exploration into the country’s crypto landscape today and what it means for the future of the digital asset industry in Canada.
Digital currencies are quickly becoming more mainstream within the Canadian financial landscape. Alongside this increased adoption, Canada has been relatively successful at creating a stable regulatory environment. In 2014, Canada established itself as a leader in the global digital asset space when the Canadian Parliament became the first government in the world to pass a national law on digital currencies. Since then, Canadian regulators have remained fairly proactive in their approach toward cryptocurrency, taking a cautious-yet-optimistic stance in an attempt to promote innovation while still protecting investor interests.
Regulatory support for digital asset innovation
Especially in comparison to other international jurisdictions, which either impose stricter policies or harbor a more laissez-faire attitude, Canada’s supportive environment to cryptocurrency is reflected in some of the options offered to startups experimenting with digital asset technology.
See: WEF Insight Report: Digital Assets, Distributed Ledger Technology, and the Future of Capital Markets
For example, the Canadian Security Association’s (CSA) sandbox initiative supports financial technology (fintech) businesses seeking to offer innovative products by carefully vetting business models in live-testing environments. Similarly, the Ontario Securities Commission (OSC) LaunchPad works with financial service businesses to keep regulation aligned with digital innovation and encourage the development of products, services and applications that meet compliance standards required by securities laws.
In addition to these services aimed at innovators looking to collaborate directly with financial authorities in the context of their specific business model, regulators have also published broad, but comprehensive, guidance on navigating applicable legislative frameworks.
Canadian regulatory trends in 2021
When it comes to the integration of crypto into traditional investing, Canada has been remarkably advanced with its sanctioning of Bitcoin (BTC) and Ether (ETH) exchange-traded funds in 2021, allowing more mainstream investors the opportunity to have digital asset exposure through their investment accounts, including tax-advantaged registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).
Canada also surpassed the United States by allowing digital asset exchange-traded funds (ETFs), setting a precedent of wanting to be competitive in the sector. In February, Purpose Financial LP’s Bitcoin ETF accumulated over $400 million assets under management within its first two days and went on to cross the $1 billion mark within two months post-launch.
The Canada Revenue Agency has characterized cryptocurrency as a commodity and stated that the use of cryptocurrency to pay for goods or services should be treated as a barter transaction. Because cryptocurrency is treated as a commodity, it has prevented the unfavorable misreporting of taxes as a result. However, the landscape is constantly evolving, so regulators must remain ahead of the game to avoid crypto enthusiasts looking at the United States, Europe or Asia as alternative playgrounds, draining Canada of both its talent and its investment.
See: Bank of Canada to become new regulator of fintech companies doing payments processing
Finally, there is potential for Canadian digital asset companies to not just offer trading but also own and operate crypto mining facilities. Canada offers a safe haven for miners coming from politically and financially unstable environments to carry out operations within a relaxed framework, putting the country at the forefront of the digital currency revolution. Miners from previously heavy crypto quarries like China are on the lookout for favorable pastures with less hostile regulations and are now looking at Canada as a lucrative alternative.
Historically, authoritarian governments — where hostile and unstable rule-making induces a net negative to their economy — are more likely to impose stricter measures on digital assets, which could inevitably force industry participants to move to countries like Canada that offer relatively favorable conditions. Digital asset companies will continue to move to wherever they are most welcome, and the countries that facilitate these moves will be much better positioned to reap the benefits of the digital asset industry as it continues to grow and threaten traditional finance.
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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S.Africa crypto exchange, Africrypt, brothers disappear after $3.6 billion client cash vanishes, lawyers say
Reuters | Tim Cocks | Jun 26, 2021
JOHANNESBURG, June 25 (Reuters) - Lawyers for investors in a cryptocurrency exchange in South Africa, which told clients in April their accounts had been hacked, say $3.6 billion has disappeared from the platform and that the two brothers who ran it cannot be traced.
If confirmed, Africrypt's losses would rank among the biggest crypto losses yet. For the whole of 2020, losses in the crypto sector through fraud and other crime were $1.9 billion, down from a record of $4.5 billion in 2019, according to crypto intelligence company CipherTrace. read more
See: Bitcoin rises as UK financial watchdog bans Binance cryptocurrency exchange
Africrypt COO Ameer Cajee said in a letter to clients, dated April 13, that client accounts had all been compromised due to a recent breach in its system.
The letter, reviewed by Reuters, said Africrypt had halted operations and had "begun the process of attempting to retrieve stolen funds."
It gave no details of how much money was missing and warned clients that trying to get their money back using lawyers would "only delay the recovery process."
Hanekom Attorneys, a law firm hired by some of those who say they have lost money, told Reuters in a statement their investigations had so far found a total of $3.6 billion had vanished from Africrypt. The firm did not immediately respond to a request for comment on how it reached that figure.
Reuters could not reach Africrypt for comment. Calls to Cajee's mobile phone went to voicemail and he did not respond to text messages. The exchanges's website is offline.
Darren Hanekom, a lawyer representing the investors, said that Cajee and his brother and co-founder Raess had been untraceable since the April 13 letter and that he had referred the matter to South Africa's specialist anti-corruption police, nicknamed the Hawks, on April 16.
See: With Cyberattacks on the Rise, Revolut Explains why Cyber Insurance is Necessary
Philani Nkwalase, spokesman for the Hawks, said they had so far been unable to open the case because Hanekom Attorneys is based in Western Cape and those seeking to recover their money are in other provinces.
"We advised those individuals to please open cases where they are," he said by telephone. "Go to the nearest police station."
Zakira Laher, Cajee's cousin, who said she was an Africrypt director until she quit in 2019, told Reuters the brothers had been missing since April.
"I say this on behalf of the whole family that we have no idea where they are," she said by telephone. "Around about mid-April, they just stopped talking to us. They're not responding to us in WhatsApp."
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Bitcoin rises as UK financial watchdog bans Binance cryptocurrency exchange
Yahoo Finance | | Jun 28, 2021
The cryptocurrency market has shrugged off news of Britain’s financial watchdog banning one of the world’s largest Bitcoin (BTC-USD) exchanges from operating in the country.
Over the weekend the Financial Conduct Authority (FCA) ordered Binance Markets to remove all advertising and financial promotions by Wednesday 30 June. In one of the most significant moves by a regulator to date, the FCA said that the firm must not carry out any regulated activities in Britain without prior consent.
Binance, which was founded by Canadian-Chinese developer Changpeng Zhao, is now required to make clear on its website, social media platforms, and all other communications that it is no longer permitted to operate in the UK.
Despite the ban, Bitcoin rose more than 5% on Monday to $35,017 (£25,188), although it is still lower than at the start of the month following China’s recent crackdown on bitcoin miners.
See: Binance Under the Microscope: Former FBI Agent Discusses Possible Investigation of World’s Largest Crypto Exchange
The wider cryptocurrency market also pushed ahead, with ethereum (ETH-USD), the world’s second largest coin, up 10% as average transaction fees on the coin dropped to their lowest since December 2020. Elon Musk-favourite dogecoin (DOGE-USD) also climbed 3.4%.
According to CoinGecko, the broad crypto space was up around 8% to $1.43tn on Monday morning.
“We’re seeing the $30,000 level on bitcoin being defended quite well with a number of tests at that level over the past month,” Vijay Ayyar, head of Asia-Pacific at crypto exchange Luno Pte, told Bloomberg.
“We saw a lot of downward pressure on prices being defended, so this looks quite bullish at this point.”
It comes amid a crackdown on the cryptocurrency sector as money laundering and fraud cases rise globally. It also comes just days after the Japanese financial regulator issued a consumer warning against Binance.
US and German regulators have also raised concerns over the firm’s activities in the past.
See: FCA Speech: Levelling the playing field – innovation in the service of consumers and the market
Since the start of this year, crypto-related businesses must register with the FCA before doing business in the UK, however, most firms have been granted “temporary registration” until July. Earlier this month, the watchdog said that just five firms had registered, and that the majority were not yet compliant.
On Sunday, Binance said on Twitter: “Binance Markets 'does not offer any products or services via the Binance.com website'. The Binance Group acquired BML May 2020 and has not yet launched its UK business or used its FCA regulatory permissions.”
Binance Group is currently based in the Cayman Islands, while Binance Markets Limited is an affiliate firm based in London.
"First and foremost is the potential for consumer harm, both through fraudulent activity and from losses sustained from crypto trading," Laith Khalaf, financial analyst at AJ Bell, said.
"FCA data released last week showed that over two million Britons now hold crypto, and while the majority appeared to be taking a sensible and measured approach, 14% had borrowed money to fund their investment, leaving them at high risk of suffering losses and being saddled with a nasty debt hangover."
He added: "Financial watchdogs will also be keeping an eye on systemic risks that might emerge from crypto markets. The financial crisis was a wake-up call to governments across the world that even with considerable oversight, financial markets can build up a head of steam that leaves them hurtling towards a cliff edge.
Continue to the full article --> here
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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10 Highlights From Goldman Sachs’ June 2021 Digital Asset Thought Piece
Lou Kerner on Medium | Jun 20, 2021
In its June cryptocurrency report entitled “Digital Assets: Beauty Is Not in the Eye of the Beholder,” Goldman Sachs’ Investment Strategy Group opined for 60 pages on the cryptocurrency ecosystem with the purpose of providing “ … an objective and balanced view on the role of cryptocurrencies in a portfolio.”
While the authors of the Goldman Sachs report believe that “It is likely that blockchain technology will be as high impact in the future as the internet has been over the past several decades,” they see a much more uncertain future for cryptocurrencies and how it will be used by their clients.
For all the disappointment, I applaud the effort, and assume they’ll get it right over time. So I suggest serious crypto investors read the entire report. But recognizing that most people won’t read it, here are the 10 points made in the report that I found most telling:
1. Goldman Report Highlights A Wide Spectrum Of Thoughts On The Crypto Ecosystem
At one end of the spectrum are proponents whose basic premise is that the U.S. government is on an inexorable march to currency debasement. Hence, the the world needs trusted alternatives like Bitcoin.
See: Goldman Sachs Reconsiders Whether Bitcoin is Legitimate Asset
At the other end of the spectrum are naysayers who dismiss cryptocurrencies as having no tangible value as discerned via traditional valuation methods.
Unfortunately, Goldman Sachs is very much in the latter camp, and the report’s authors state that proponents ignore that “ … the reserve currency status of the US dollar is arrived at by world consensus and backed by a $21 trillion economy.”
3. Goldman: ‘Of the three roles that Bitcoin was purported to play in the real world, we believe that none has materialized,’ including store of value
Goldman’s report noted that the original objective of Bitcoin was a peer-to-peer payment system (i.e. a currency). However, the digital currency is too slow, and its throughput is too limited, to serve that purpose. Goldman also stated that Bitcoin is too volatile to be a medium of exchange. Its volatility also precludes the cryptocurrency from being a unit of measurement for pricing goods like crude oil.
See: ‘Last year we saw about a 300% increase in transactions just using cryptocurrency’: Coinpayments CEO
Most notably, the authors of the report don’t believe that Bitcoin’s a long-term store of value or an investable asset class for diversified portfolios. Interestingly enough, Goldman Sachs has stated before that it doesn’t believe gold to be an investable asset class either. So claiming that Bitcoin is “digital gold” doesn’t confer any value to the digital currency.
3. Goldman On The Bitcoin Blockchain: ‘Its greatest success has been in inspiring the development of blockchains with faster transaction speeds and far greater functionality’
Goldman highlighted Ethereum’s enablement of decentralized applications (DApps) on its blockchain, built to use smart contracts, which allow computer programs to be executed on the blockchain. Goldman highlighted these six blockchains but Goldman gave no insight as to why these six blockchains were highlighted, while others, like Cardano, Hedera, Stellar, Casper, and Avalanche, were not. The first section of the report (Understanding the Digital Assets Ecosystem: Bitcoin, Blockchains and Web 3.0) finishes with “Use Cases of Blockchain Technology,” with only a brief discussion of DeFi.
4. Goldman: “We do not believe that cryptocurrencies are a strategic asset class that adds value to our clients’ portfolios”
The Goldman Sachs report describes Bitcoin as “the oldest and has the largest market capitalization among cryptocurrencies.” Bitcoin was not the first cryptocurrency, as various parties worked on cryptocurrencies before the first units of bitcoin were mined in 2009. The second claim made in the report, that bitcoin is the largest cryptocurrency by market value, was true at the time of this report, according to CoinDesk data.
See: BuyProperly Raises $2M to Bring Accessible Real Estate Investing to Canada and the US
Due to bitcoin’s prominence in the word of digital currencies, Goldman focused on this particular digital asset to present the analysis that crypto is not an investable asset, as it does not meet at least 3 of the 5 criteria:
- Generate steady, reliable cash flow on a contractual basis, like bonds
- Generate earnings through exposure to economic growth, like equities
- Provide consistent and reliable diversification benefits to a portfolio
- Dampen volatility
- Provide consistent and reliable evidence of hedging inflation or deflation as a store of value
According to Goldman’s “robust optimization model,” given it’s volatility, risk premium, and Sharpe ratio, Bitcoin would need to return 165% per annum to strategically allocate 1% of a moderate-risk portfolio to Bitcoin. Since January 2014, Bitcoin has provided an annualized return of 69%, far from the levels Goldman would need to justify an allocation.
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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BIS Research: CBDCs beyond borders: results from a survey of central banks
BIS | Raphael Auer, Codruta Boar, Giulio Cornelli, Jon Frost, Henry Holden and Andreas Wehrli | Jun 24, 2021
CBDCs offer an opportunity to rethink some key features of cross-border payments. Central banks could ease current frictions by factoring an international dimension into their CBDC designs from the outset.
For front-end retail uses, CBDCs could allow for use by non-residents in a jurisdiction, or abroad, if central banks permit this option and the transacting parties agree on using the CBDC as means of payment. Some CBDC designs could allow for transfers that are as frictionless as digital messages. Account-based CBDCs that link balances to identification could bring efficiency while mitigating any key risks that digital cash may otherwise entail (Carstens (2021a)).
See: Stablecoins: What’s old is new again – speech by Christina Segal-Knowles
An alternative option is for various mCBDC arrangements, which are generally focused on wholesale uses. At least three models exist in principle to facilitate cross- border payments in this way, involving successively greater integration and policy coordination.
Our survey finds that central banks are actively considering these cross-border issues around CBDCs. While a slight majority of central banks have not yet come to any firm conclusion on whether non-residents would have access to a (future) domestic CBDC, slightly more than a quarter of respondents say that they would allow such access, and almost 20% would consider this at a later stage. Fewer central banks would allow for use abroad by non-residents. Central banks are aware of the risks entailed by such cross-border usage of their own CBDC, or usage in their jurisdiction of foreign CBDCs. Tax avoidance, loss of oversight and a range of concerns associated with “digital dollarisation” were mentioned prominently in the survey responses. While most central banks do not currently report restrictions on the use of foreign currencies for transactions in their jurisdiction, about a third may reconsider such restrictions if a foreign CBDC (or stablecoin or cryptocurrency) were to become widely used. Nonetheless, where a central bank is considering only retail or only wholesale CBDC, they frequently responded that aspects covering the other area are undecided.
On the wholesale front, the survey results show that central banks are considering a variety of mCBDC arrangements. Some central banks are even contemplating multiple CBDCs run on a single system. Meanwhile, some central banks are considering novel operational roles for the central bank in FX conversion. Overall, the responses show active consideration of cross-border issues and a strong interest in international peer learning.
See: Should the State or the Market Provide Digital Currency?
This brief overview has laid out a number of open issues for both policy and economic research. In particular, the discussion of both retail and wholesale use underscores the importance of early policy coordination on CBDC design, so as to promote coherence and to reduce future policy spillovers. From a research perspective, there is a clear need to better understand how CBDCs compare with other potential policy interventions, such as retail fast payment systems, and what the longer-term implications of issuance for the international monetary system may be. Beyond currency substitution, the broader macroeconomic implications of CBDCs also need to be understood, not least for monetary policy transmission and cross- border capital flows. Further research on CBDC design could help to inform efforts to reduce the risk of international spillovers. All these are relevant areas where research and policy can fruitfully enrich one another.
Download the full 22 page PDF report --> here
BIS | Jun 23, 2021
CBDCs: an opportunity for the monetary system
Key takeaways
• Central bank digital currencies (CBDCs) offer in digital form the unique advantages of central bank money: settlement finality, liquidity and integrity. They are an advanced representation of money for the digital economy.
• Digital money should be designed with the public interest in mind. Like the latest generation of instant retail payment systems, retail CBDCs could ensure open payment platforms and a competitive level playing field that is conducive to innovation.
See: BIS digital currency paper predicts money will be unbundled
• The ultimate benefits of adopting a new payment technology will depend on the competitive structure of the underlying payment system and data governance arrangements. The same technology that can encourage a virtuous circle of greater access, lower costs and better services might equally induce a vicious circle of data silos, market power and anti-competitive practices. CBDCs and open platforms are the most conducive to a virtuous circle.
• CBDCs built on digital identification could improve cross-border payments, and limit the risks of currency substitution. Multi-CBDC arrangements could surmount the hurdles of sharing digital IDs across borders, but will require international cooperation.
Download the 31 page PDF report --> here
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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SEC v. Ripple: Implications of Ripple’s Fair Notice Defense
Crowdfund Insider | Chris Sloan | Jun 17, 2021
In December 2020, the Securities and Exchange Commission (SEC) filed a complaint in a New York federal court against Ripple Labs, Inc. and two of its executives alleging that Ripple had sold $1.3 billion in XRP cryptocurrency tokens in a series of unregistered securities offerings. Because of the potentially monumental impact of this case, almost anyone with an interest in cryptocurrency or blockchain has been following this case closely. A key issue in the case, which recently came to light in a filing by Ripple, is Ripple’s assertion of a defense known as “fair notice.” The court’s ruling on Ripple’s fair notice defense could have far-reaching implications.
Why XRP and not Bitcoin?
XRP (and other similar cryptocurrencies) differ from Bitcoin, Ether, and other such cryptocurrencies in ways that are critical from a securities law standpoint. The SEC has publicly acknowledged that Bitcoin and Ether are not securities because of the fact that those networks are entirely decentralized and not controlled or regulated by any one party whose efforts are critical to the value of the tokens.
See: Ripple’s XRP Set To Launch Their Initial Public Offering
XRP’s, on the other hand, are tightly controlled by Ripple and not decentralized to the same degree as Bitcoin and Ether. One of the factors in determining whether something is a security is whether its value is directly derived from the efforts of others; for XRP, the SEC argues, Ripple’s control over the network is a key element of XRP’s value, as opposed to Bitcoin and Ether, which are entirely decentralized.
Ripple’s Fair Notice Defense
Ripple has asserted (among several other defenses, chief among them its assertion that XRP is not a security) that it did not have fair notice as to whether its sales of XRP cryptocurrency were securities offerings. The SEC has moved to strike that defense; essentially, the SEC is asserting that it is so clear that they will win on this issue, the court should throw it out as a matter of law. It is very difficult to win a motion to strike; more than likely, Ripple will have the opportunity to present evidence and argue the fair notice defense throughout most or all of the case.
Ripple’s argument stems from the case of Upton v SEC, which applied the fair notice defense to SEC regulations under the statutes governing securities broker-dealers. In that case, the court determined that the SEC’s interpretation of the statute was entitled to deference, but not in a situation where an individual could be penalized without fair notice that their conduct violated the law. The SEC, in response, has asserted that (1) Ripple had ample notice based on the numerous other cases that the SEC has pursued against companies for issuance of cryptocurrencies, and (2) the Upton case has never been applied to a purely statutory enforcement action (Upton was based on regulations interpreting the statute, not on the statute itself).
See: Ripple Wins Access to SEC Internal Documents on Bitcoin, Ether, and Other Cryptocurrencies
What’s at Stake?
Although many commentators believe Ripple’s defense that XRP is not a security is the stronger argument, the potential implications of a court ruling on Ripple’s Fair Notice defense are more far-reaching. If Ripple wins on that issue, that ruling will create a precedent that will make it extremely difficult – perhaps impossible – for the SEC to pursue similar actions against other cryptocurrencies and similar blockchain-based tokens, at least without a change in the law. If Ripple’s win comes from an appellate court, the precedential value would be even stronger.
A decisive victory by the SEC, on the other hand, would raise significant securities law compliance questions about other cryptocurrencies and similar tokens that are not entirely decentralized; likely, many of those would lose significant value, shut down, or face similar enforcement actions from the SEC.
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Stablecoins: What’s old is new again – speech by Christina Segal-Knowles
Bank of England | Christina Segal-Knowles | Jun 10, 2021
Overview
Christina Segal-Knowles, Executive Director for Financial Markets Infrastructure (FMI) at the Bank of England, talks about . She looks at how they could be regulated, if they are used as a form of payment. She says, with the right regulation, digital money like stablecoins could have benefits - including cheaper payments with more functionality. And they could potentially have benefits for financial stability. But that requires regulation to hold new forms of money to the same standards we expect of the money we use today.
A regulatory framework
Earlier this week, the Bank of England published a Discussion Paper that examines the implications of stablecoins for its financial and monetary stability mandate. In it we present an illustrative scenario to examine the implications of the emergence of stablecoins and other new forms of digital money. The discussion paper models what would happen if a large number of households and businesses moved their deposits from banks and into a stablecoin or Central Bank Digital Currency (CBDC). Contrary to some press headlines, even such a dramatic shift does not inherently constitute a financial stability risk as long as it happens in an orderly manner. In fact findings show that the implications of this in the long term for the ability of households and businesses to get a loan are relatively modest – although there is considerable uncertainty around this result.
See: Canadian researchers develop CBDC digital currency proposal for Bank of Canada
As such, while other risks may arise during a transitionary phase, the most significant risk arises from the potential for stablecoins in particular to undermine confidence in money and payments, and hence in the wider financial system.
As we discussed a few minutes ago, the risk of a loss of confidence in the credibility and stability of private money is not theoretical. Loss of confidence in private money can be a major threat to financial stability.
But it is equally true that private money can be made acceptable as a widespread means of payment – indeed, as I covered earlier, the vast majority of money held for transactions in the United Kingdom is already private. So, with the right regulation, a stablecoin could potentially be made safe for wide-scale use.
Our existing regulatory framework seeks to ensure that the public is able to trust the reliability and stability of the money it uses every day. Banks are subject to extensive rules and requirements to ensure that consumers can use privately-issued money with confidence and interchangeably with cash. These core rules and requirements were developed over time – in many cases via trial and error, with new rules introduced following financial crises.
Financial market infrastructure firms are also regulated to ensure that the assets they use for settlement – the underpinnings of our financial transactions, whether we’re buying milk or clearing a derivative – are public money issued by a central bank wherever possible. Where that’s not possible they are permitted to settle in money deemed to be a close substitute – commercial bank money.
FFCON21 On-demand Video: Central Bank Digital Currencies CBDCs - The Future of Money
If stablecoins seek to be acceptable widespread substitutes for commercial bank deposits as a means of payment, it stands to reason that stablecoins will need to meet the core elements of our existing regulatory framework for private money which underpins confidence that it is interchangeable with cashfootnote [8]. These are:
- A legal claim – to allow for prompt redemption at all times, for the amount initially deposited, and at no cost to the depositor; In other words – the little boy’s right in ‘Mary Poppins’ to demand that the bank ‘give him back his money.
- Capital requirements – to lower the risk of insolvency, these are calculated based on the nature of the risks issuers undertake (credit, operational, market risks); they act as a cushion to absorb losses, reducing the chances that a firm fails.
- Liquidity requirements – to ensure redemptions can be met in most circumstances – supported by eligibility for central bank facilities where relevant, to meet firms’ liquidity needs in extremis. This ensures that temporary liquidity issues arising from difficulties selling assets backing the value of stablecoins don’t result in firm failure; and
- A backstop to compensate depositors – or in this case coinholders – such as the Financial Services Compensation Scheme (FSCS) (or in other countries deposit insurance), in case of failure. This ensures that, even if a firm fails, transactional deposits up to a certain amount remain exchangeable for central bank money. Notably – one of the key responses to the Northern Rock episode was to increase FSCS coverage in the United Kingdom.
This is not to say the regulatory model for stablecoins needs to be identical to banks. It could include different applications of the above features. For example, if stablecoin operators are restricted to backing themselves in high quality liquid assets they won’t need regulation to cover credit risk. If they only back themselves in central bank reserves, which are inherently liquid, they don’t need liquidity facilities. Ultimately, the specific requirements may well be different from those applicable to banks, but the outcome will be the same – that systemic stablecoins used as money will offer the same protection to coin holders as commercial bank money.
Continue to the full article --> here
Download the BoE 'New Forms of Digital Money' Discussion Paper --> here
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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