Crypto-currencies and the innovation, regulation conundrum

As with crypto-currencies, the speed at which innovation can take hold and outpace regulation is concerning.

Read time 4min 30sec
Kevin Phillips.
Kevin Phillips.

It is inevitable that regulation lags innovation: look at home DNA testing kits, for instance.

Already an ethical minefield from a privacy point of view, one of the largest service providers, FamilyTreeDNA, recently admitted it was running DNA matches against its database for the FBI. On the one hand, great news for justice and already some cold cases dating back years have been solved. But on the other, what does this mean for individual privacy and confidentiality?

It's one thing for customers to opt in to sharing their data, but what about their relatives? And furthermore, what are the implications for individual DNA data being used in research for commercial gain?

Crypto-currencies and the blockchain are another example of this lag. Regulation around the world veers from China's heavy-handed approach, and Japan stopping granting licences to crypto exchanges in response to massive hacks in the last few years. On the other hand, countries such as Malta, Bermuda and Switzerland have actively welcomed the innovation.

There is always going to be a need to balance innovation with trust, consumer protection and preventing crime.

In South Africa, the Crypto Assets Regulatory Working Group, an intergovernmental fintech working group, released a consultation paper on policy proposals for crypto assets (it balks at using the term "currency") in January.

While the group does not go so far as to welcome crypto-currencies and the related ecosystem, it does take a measured approach based on a principle of "do not harm". It suggests regulating the specific risks that have come to pass, mostly to do with consumer protection, and anti-crime and money laundering, but only dealing with more generic risks, such as undermining the central bank's sovereignty, or financial stability in the country - when they happen.

It also takes a technology neutral stance and favours amending existing legislation, rather than creating new laws.

For now though, although the trend is towards tightening up, they have not ruled out a complete ban. The first step that is planned will be registering the various stakeholders in the ecosystem.

So, phased and dynamic are the watch words for the moment, and while I do believe this is the right approach, my big concern is the speed at which innovation can catch hold and outpace regulation, a bit like a veld fire: one minute it is a braai, the next minute the whole mountain is alight!

We have seen how rapidly technology can adapt and change, morphing virtually overnight and spreading virally.

Crypto and more particularly blockchain technologies have the ability to do just this. A hands-off and keep a watchful eye approach can rapidly become a flat spin in an attempt to catch up. But, far from wanting to double-down on regulation now to prevent this, I am concerned that this panic is the time when regulators and lawmakers bolt the stable door and ban new technologies outright, because this is now the only recourse to get a grip on things again. That is not where we want to be.

There is always going to be a need to balance innovation with trust, consumer protection and preventing crime. But I also wonder whether sometimes these are red herrings, behind which traditional industries hide, in order to protect their aging business model for as long as possible. Which, ultimately, slows the entrance of efficiencies, increased access and increased productivity from entering the market, costing all of us time and money. (And the sheer frustration of knowing there is a better way to do something, but it's just not available yet.)

This is the Shirky Principle, named after digital commentator and writer, Clay Shirky, who said: "Institutions will try to preserve the problem to which they are the solution."

Could this principle be driving the moral panic around crypto-currencies from governments, regulators and the financial services industry? To be sure, banks around the world are looking at how they can apply blockchain technology, which underpins crypto-currencies, internally - but this is a very different beast to the free-range, decentralised blockchain applications driving crypto-currencies outside of the banking industry.

And these free-range applications are what are driving the ability for, among other things, transactions to take place faster, and more cost-effectively. The ability to streamline payments around the world seems like a good idea for everyone except the banks.

Being able to reduce the cost for people to send remittances home to support their families is certainly a good thing. The ability for a global business to transfer money around the world instantly, without it being held onto by banks unnecessarily - allowing them to triple dip: they get paid once by the transactor, and then win again on the exchange rate, and a third time by holding onto the business's money for days or weeks - also seems like a good idea.

We'd do well, I'd argue, to avoid getting sucked into a moral panic manufactured by those that have the most to lose.

Kevin Phillips

Founder and CEO of IDU Holdings.

Kevin Phillips is founder and CEO of IDU Holdings. He has degrees in commerce and accounting, and started IDU with partners James Smith and Wayne Claassen in 1998. He is fast becoming a thought leader in his field, and regularly comments in the media on current affairs affecting business, as well as accounting, finance, budgeting and software. Phillips is a columnist for Accountancy South Africa and AccountingWeb UK, and has been featured in Sunday Times, Business Day, Enterprise Risk, Succeed and Entrepreneur. He has also appeared as a guest speaker on Radio 702, Kaya FM and Summit TV.

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