Posted Wednesday 2nd December 2015 by Andy Jarrett
Why Jersey’s Cryptocurrency legislation is more important than you think
Unfortunately, there are many people who see the word ‘cryptocurrency’ and will immediately dismiss it as a whacky geek idea that will never gain credibility in a well regulated and sophisticated financial world. The people who think this way are likely to regret their refusal to look more closely. Behind cryptocurrencies is the principle of Blockchain, a powerful invention that is not just going to disrupt, but will revolutionise our relationship with the digital world. This means everything from banking, health, insurance, government – you name it, it’s going to change.
The good news for Jersey is that our government has recognised this fast approaching revolution and has already come to a policy position for the regulation of virtual currencies. Ultimately, the aim of this policy is to further enhance Jersey’s proposition as a world leading fintech jurisdiction at the forefront of this digital transformation.
Jersey has made the decision to regulate at the interface between fiat and virtual currency in order to prevent money laundering and to counter the financing of terrorism. The policy also highlights the fact that our Financial Services regulator is open to and interested in nurturing this emerging industry by introducing the concept of a regulatory sandbox for cryptocurrency businesses. This will allow small businesses to get started and then, once turnover reaches defined thresholds, they will see the appropriate regulations introduced. This pragmatic approach is a clear message to the fintech sector that while Jersey’s highly respected finance industry needs to be protected, the regulator and our government are also open to helping small, innovative businesses to establish themselves and flourish here.
Jersey is a highly innovative jurisdiction for this sector and I predict that licensing and regulating cryptocurrency exchanges will eventually lead to a stabilisation of the currency’s value, which will result in an increase in retail adopting Bitcoin.
Cryptocurrencies are early adopters of blockchain protocols and The World Economic Forum (WEF) expects that by 2027, 10% of global domestic product (GDP) will be stored in blockchain technology. This is extremely significant for Jersey, as we are already establishing ourselves as open to this up-and-coming sector.
This said, there still seems to be a continued reluctance to take cryptocurrencies and blockchain seriously. This is because many are still unsure about what they are and there’s a tendency to assume that they are one and the same. The short answer is, they’re not the same! A cryptocurrency is a digital currency, whereas blockchain is a verifiable distributed ledger of digital events that can be updated only by a consensus of participants in the system, and once information is entered and verified, it cannot be erased.
Essentially, blockchain is used alongside cryptocurrency to make a record of every transaction, however, its usage is actually universal. This is because blockchain ensures certainty in what is often seen as an ‘invisible’ digital world where internet security is forever an issue. I recently saw Dave Birch, Director of Innovation at Hyperion describe various types of blockchain as part of his presentation at Fintech Jersey 2015 , the island’s first ever fintech conference. His presentation can be found here, I’d highly recommend taking a look at Slide 5, which provides the best explanation of blockchain that I’ve seen!
Blockchain is being identified across the globe. The UK’s Financial Conduct Authority is also looking into its potential benefits, launching an Innovation Hub and releasing the WEF’s Technology Tipping Points and Societal Impact report, which forecasts that tax will be collected by Government via Blockchain for the first time by 2025.
The blockchain phenomenon is not just happening at Government level; recently, a member of a small team working for a Swiss bank at London’s Canary Wharf, tapped a screen and a bond was sold by a company called ABC to an investor called XYZ. This type of transaction is executed millions of times a day by banks globally, but this dummy transfer was different. It was completed via an internal blockchain. Banks are becoming increasingly open to the power of blockchain technology, with many believing that the technology could reduce costs by $20bn (source ft.com) and transform the way the industry works.
Blockchain shouldn’t be viewed as a threat to the banking system, but as an opportunity, which will provide:
• Increased transparency. Blockchain is essentially a global ledger, which can have the effect of allowing free flow of money, taking the risk out of compliance
• Better property records in emerging markets, making everything traceable
• Increasing tradable assets, as all kinds of value exchange can be hosted
• A reduction in the overall cost
The impact of blockchain could be far reaching, with the WEF predicting an explosion in tradable assets as all kinds of value exchange can be hosted. Blockchain is already being proposed for use within the music streaming industry to ensure the transparent distribution of royalties.
Recognising trends in the emerging world is highly important for Jersey’s future economic success. Former Group CEO of Barclays, Antony Jenkins, recently stated that the world’s top banks are likely to cut jobs by half within the next 10 years, as they fight to stay relevant and profitable against ‘unstoppable force’ of technology. Finance is the major employer in Jersey, it accounts for over a fifth of the island’s workforce, however, if you look at the sub-sector of banking in the latest government statistics, employment there has fallen below levels seen before the crash in 2007 and 2008. Banking is not going to return to the status quo of a pre-recession world, Antony Jenkins’ predictions are not years off, they are already happening. The world has moved on and we need to ensure that as an island, we are moving with it.
One day we may look back at the Jersey cryptocurrency policy as a landmark in our island’s history.