While there have been many disruptive innovations, few have been as contentious as blockchain and cryptoassets. From inception, blockchain was intended to have a political and socioeconomic impact by removing the role of central banks as the gatekeepers of value.
It is appropriate to refer to “value”, as this is at the cornerstone of the cryptoasset debate. For example, take bitcoin. Bitcoin operates on the basis that it is finite in number and is exceedingly difficult to fake, however it has no “intrinsic” value. So, if participants value a bitcoin at $1m, then that is its value. Similarly, if participants value it at 50 cents, then it is worth 50 cents. The value is subjective and is generally a reflection of supply and demand — which sounds scary.
Except much the same can be said of shares and even money generally. What is a “share”? It is not necessarily a right to a dividend. It is not necessarily a right to “control” of the company. Rather, it is a right to a part of the proceeds if a company goes into liquidation, which is not how most investors describe their portfolio.
By comparison, what is a cryptoasset? Well, a cryptoasset can simply be seen as a voucher, and the rights it gives you are those set out in the relevant whitepaper. Yes, there may be fraud, but it is not as if there has never been a Ponzi scheme. It is highly questionable whether investors really understand the true nature of what they are buying, even with the most mundane of share portfolios, and at least you can judge a token by its whitepaper.
This brings us to the issue of regulation. Shares are regulated, which is a good thing. As such, it is natural to want to regulate cryptoassets and, as a statement, this is in itself relatively uncontentious. However, what is contested, is what regulation means.
The crypto community has a massive PR task: to convince the world that it should be supported. In doing this, it has to appeal and adapt to the complex web of cultures and priorities globally
The core problem is the intrinsic nature of blockchain, or distributed ledger technology — it is decentralised and so naturally lends itself to operating at a global level, across different cultures. However, different cultures have different philosophies as to how and why things should be regulated. China, for example, is built around the state, on the assumption that the state is best able to make decisions for the population as a whole. This is shown, for example, in the fact that there is both a push in creating a government controlled central bank digital currency, while at the same time clamping down on cryptoassets, such as bitcoin, not under the remit of the state. Indeed, it is important to see the Chinese approach to cryptoassets in context, as there have been various initiatives, such as curbing foreign merger and acquisition (M&A) transactions, where these are perceived as either undermining or subverting the role of the state.
In the EU, there is a different philosophy, centred around the power of the individual and seen in the General Data Protection Regulation legislation, which gives individuals control over their personal data. The priority when dealing in Europe, therefore, is not operating in a way that may be perceived as harming the individual, as it is difficult to argue that the overall good that a project may do should be allowed to outweigh the potential to harm a single individual.
The US has another approach. Typically, the US philosophy is centred on the corporate, on the basis that a healthy economy is the key to prosperity. This helps explain the trend in the US to create large companies, capable of buying out rivals to ensure dominance in the market, and this is one of the reasons why many of the largest internet companies are based in the US — size matters.
The natural response to a new innovation, therefore, is to spend large and dominate the industry. This is difficult with blockchain-based organisations, whose natural tendency to be decentralised undermines the ability for any particular player to dominate, and this jeopardises the traditional power of the corporate. On an international level, bitcoin has the power to undermine the soft power of the US dollar, as El Salvador sees it as an alternative currency. If a Latin American country uses the US dollar or bitcoin, in both cases the country has no control over its currency. However, at least bitcoin is aimed at the benefit of all users, not a specific country. Indeed, the concept of an international currency not backed by a nation state was advocated by John Maynard Keynes. In some ways, therefore, bitcoin takes us back to an older way of thinking, where currencies had fundamentals and governments could not simply print more money on demand.
With regards to the UK, there is a real question as to which direction the country will go in culturally. Naturally international, with fintech bridges being created around the world, yet with a historic legacy of prioritising the right of the individual post-EU, the UK is in an interesting position. In the centre of the debate, the Financial Conduct Authority naturally wants to support regulation, yet has to move quickly to keep up with developments; at the same time it is cognisant that if things go wrong, it will be held to blame, perhaps unfairly.
So, what does this all mean? The crypto community has a massive PR task: to convince the world that it should be supported. In doing this, it has to appeal and adapt to the complex web of cultures and priorities globally. This has been done before, with shares. The prize is worth it and revolves around supply and demand. If you can convince the world a bitcoin is worth $1m, then you are a lucky person if you hold one.
James Burnie is a partner at UK law firm gunnercooke.
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