The crypto question: Market movement ramps up the debate

Following the October 2020 launch of a “sand dollar” by the Bahamian Central Bank, other markets are making moves to normalise the use of cryptocurrencies in their economies with varying degrees of success.

At the heart of this debate is the ongoing question of whether crypto is a just highly risky investment vehicle – or whether it actually has a future as a new means of payment. 

El Salvador

The crypto question: Movement ramps up debate

This tiny Central American state raised the ire of the World Bank when it decided to make bitcoin legal tender in the country. However, their late September launch failed within hours when the government was forced to take its app for storing the volatile digital asset temporarily offline and the price of Bitcoin slumped. 

President Nayib Bukele said the Salvadorian digital wallet app called “Chivo” — Salvadoran slang for cool — would stop working while server capacity was increased.

“El Salvador’s experience shows how far we still have to go before crypto becomes user-friendly.”

The app, which offers Salvadoran citizens an initial $30 of free bitcoin, went back online a few hours later. By midday the Chivo app was available on Huawei and Apple phones. The government also wants to make it available via Google.

This crash came just a day after El Salvador spent millions of dollars investing in Bitcoin and currently holds 550 coins. While El Salvador has now made the move to using crypto alongside their fiat currency, this incident shows how far we still have to go when it comes to making crypto user-friendly.

Crypto-friendly Cantons

For centuries, elites across Europe and the world have flocked to Swiss banking as a safe haven for their assets. With the digital revolution continuing and crypto-currencies gathering momentum, Switzerland is evolving its reputation for banking security and privacy in the digital environment. 

Famously divided into 26 “Cantons”, or municipal areas with wide-ranging autonomy, Switzerland is one of the world’s most crypto-friendly countries. There are more Bitcoin-enabled ATMs in Switzerland per capita than anywhere else on Earth, and crypto acceptance is widespread.

The city of Zug, for instance, made it possible to pay taxes and fines using bitcoin in 2016, while it’s legal to pay for Swiss property and other high-ticket items using crypto. Across the board, Switzerland boasts one of the widest crypto acceptance networks anywhere.

As we report in our e-commerce section, Worldline has just announced crypto acceptance for a further 85,000 Swiss merchants.

This degree of crypto-friendliness has been backed up by a solid regulatory regime. Crypto exchanges such as Coinbase and Kraken are active in the Swiss market, overseen by Swiss regulators FINMA and SFTA just like other financial institutions.

Indeed, one distinguishing feature of the Swiss crypto scene is the extent to which existing regulations related to physical currencies such as the Swiss Franc and US dollar have been extended to crypto. 

“In Switzerland, regulation aims to get crypto to conform to regular currency norms.”

In 2019, the Swiss federal parliament decreed that crypto trading and payments would be subject to the same regulatory requirements as traditional currencies, while a 2020 law ensured that crypto activity is covered by Swiss Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) legislation.

A third wave of legislation, planned for early 2022, is designed specifically to enable crypto payments for retail purposes and extended consumer protection for crypto payments.

Regulation for good?

Such an extensive regulatory regime sounds reassuring – and it’s this solid regulation which has encouraged the growth of crypto-focused banks such as SEBA Bank, and local Swiss crypto exchanges like Bity.

Crypto storage is also advanced in Switzerland, with many users and investors choosing the more secure “cold storage” (completely disconnected from a PC or device) and hardware options for their crypto-wallets, rather than internet-enabled digital wallets.

“The rise of crypto is showing that these new currencies are not immune to the same challenges faced by traditional national currencies.”

To a large extent, however, Switzerland’s rapid roll-out of crypto regulation has been informed by a number of scandals in recent years. In 2018, Bancor announced that hackers had stolen $23.5 million in crypto assets; in the same year, regulator FINMA blocked $2 million of crypto transfers via Swiss-based Quid Pro Quo citing AML and CTF legislation.

Most recently, hugely secretive Swiss crypto exchange Shapeshift announced that it will morph into a user-owned platform to enable crypto swaps, rather than continue as a regulated exchange. Some commentators believe this move is being made to avoid increasing scrutiny from local regulators.

PCM SAYS: 

As these developments show, the growth of digital currencies is exacerbating some age-old challenges (AML and KYC) as well as underlining the importance of having the right protections in place. AML in crypto has special requirements, including difficulties identifying the counterparties in a transaction, or monitoring the cash-out methods used to transfer value from crypto to traditional fiat currencies. 

Those looking to accept crypto, including governments, will increasingly need to include crypto-specific approaches and software routines if they are to meet increasingly stringent demands for transaction monitoring, oversight and flow of funds analysis.

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