Loretta Joseph’s Take on Implementation of Crypto-Friendly Regulations Creating a Path for CBDCs
Loretta Joseph’s take on Implementation of crypto-friendly regulations creating a path for CBDCs
In the peak of COVID-19 panic and chaos, many have started realizing the potential of crypto and fintech. Loretta Joseph, who realized the importance and potential of blockchain in its early days, firmly believes that proper regulation is the key to reaping the benefits of this technology.
While working hard on advising numerous governments on how to bring forth proper regulation, Loretta got stuck in Mauritius, in quarantine. Thanks to that fact, she had enough time to write a post for our blog – explaining her take on crypto regulation.
When talking about governments around the world, and how their process in moving forward with crypto regulation works, the first thing you need to know is how to unpack what we are talking about. Are we talking about blockchain, or are we talking about cryptocurrencies? You have to bear in mind that government bodies and central banks are not filled with tech-savvy experts. So explaining the distinction between blockchain and cryptocurrencies – aka digital assets is the first topic of conversation.
A cryptocurrency is just a form of a digital asset. We can now digitalize and tokenize any asset class, whether that’s a security, gold, electric energy… and, any asset that can be digitalized, can be tokenized. So, cryptocurrencies are obviously a form of money.
Now, it becomes difficult when you are talking to central banks, because we discussed cryptocurrencies, and we talked about stablecoins, and we talked about initial coin offerings.
Making sure everyone speaks the same language
One of the main issues in the beginning, was that nobody was speaking the same language. You had one set of regulators, referring to cryptocurrencies and anything using blockchain technology, as digital assets. You had other regulators that were referring to virtual assets, you had some that referred to crypto assets, so there has not been a developed line of constant unification of what we are talking about.
So one of the first things I did, I went to the Australian government, and I asked what is a bitcoin?
I said “what is it, is it an asset, is it a currency, is it a commodity, is it a security, what is it?” And they said “we don’t know”. And I said “well, that’s not a very good answer”, so the attorney general office called it a digital asset, the Finance Ministry was calling it a crypto asset, the regulators called it a cryptocurrency and there was no unified definition.
Then I started to look around other countries and nobody had this definition, so then I spent a lot of time in the next three years trying to understand what bitcoin was, what the technology was building. One of my first goals was to go private and to educate the public, together with governments and regulators on what the technology was.
Central banks have a mandate to look after two things: financial stability and monetary policy. Governments have mandates to look after many, many things, which is very different. Regulators look after securities, you have financial industries who look after finance. Central banks are generally not in governments, they are broad under their own regulation. So, when people started talking about cryptocurrencies and bitcoin, I wish they had not used the word currency or coins because the minute you do that, most central banks got very confused and concerned that you are talking about stepping into their mandate of managing fiat currency.
You have to be very careful when you are talking about the word currency or coins to governments and to central banks, because we can’t confuse conversations. So, when I speak to governments and central banks, I say the first thing is that cryptocurrencies are not legal tender. This puts governments and central banks at ease because legal tender is that piece of paper with the stamp on it and that is the currency of the country. It’s very important to get this issue out of the way when I speak to governments and central banks.
“What is your biggest problem at the moment?”
During discussions with central banks and governments, I don’t focus on selling services or goods, nor on some crypto-forward agenda. I simply focus on their mandates, giving them room to use the best parts of the technology in a way that will allow them to reach their goals.
So, I ask them – “what is your biggest problem at the moment?”, and then we build up from there.
Collaboration with governments around the globe
I first looked into bitcoin in 2012, and I thought, ok, I can see how this can be useful.
Two years later, a dear friend of mine talked about blockchain technology and its applications at a conference in Milan, and after that, he said to me “Loretta, you need to look at blockchain because it will change the world.”
So I did. And as I developed my own application for this new technology, I realized that my own country, Australia, didn’t have the laws that were necessary for regulating it. So, I started learning and working closely with regulators to rectify that.
Fast forward to Davos 2017, where I met the premier of Bermuda, a man called David Burt, who had just stepped into office. I was speaking at an MIT event about cryptocurrencies and digital assets, and he said to me: “ Loretta, come to the meeting tomorrow and write our law around this new space cause we think that we need regulation” and I said “I’m not going to the meeting tomorrow”, he said “No, no, yes, you are” and I said “I don’t even know where Bermuda is”, but he was very persuasive and the next day I hopped on the plane and I went to Bermuda.
So before I knew it, we sat in a room full of legislative drafters, government officials, bankers, regulators, the central bank and the premier of the country. And for the next three months, we worked on legislation for this new technology and its application that was in line with the existing laws in the country.
You see, you need to write comprehensive legislation with understanding of both the laws, technology, and the people of a country. Legislation has to be tailored to fundamentally work with the country’s regulation and legislation and inner workings.
And in order to achieve that, you need policy writers, drafters of legislation, the government, the technologists, the representatives of industries, to all sit together and write it together because it doesn’t work if it’s done in silence. When we all sit together – that being policy makers, the government and the central bank – these new systems can work.
After I helped create the legislation in Bermuda, people started asking me “how did you do that?” and I had to explain that it’s not just copy and paste, that the needs and wants from a regulator in Mauritius are very different from those of a regulator in the US. You need to sit in these countries, have the basic framework drawn out, and then work closely with the people there to make sure you understand how it interacts with existing regulation and legislation and your plans on technology implementation.
Countries that are small, they have to be innovative, they don’t have the population to build up industry like bigger countries do. But they can use their people to deploy services, utilize technology to become global business centers. Countries that can be nimble have to utilize it to their advantage, and they are the ones that come to me first.
But, that’s not the only reason.
Jurisdictions with no regulations are vulnerable to malevolent ICOs and similar financial scams, which ruins their reputation. So, it’s not opportunism that motivates them to take action, it’s the desire to protect their jurisdiction. If you don’t have regulation in place, money laundering, and criminal activities will flourish. The goal is to avoid nefarious activities by having regulation that prevents them.
Another goal is giving people who truly want to create businesses a chance to do so in a structured environment, an ecosystem in which everybody wins and that attracts innovators instead of making it difficult for them to function.
What do these countries get from implementing crypto regulation?
For example, for Bermuda, this regulation has been a huge boost for the economy.
In the last 2.5yrs about 240 fintech companies came to Bermuda and set up shop. It attracted people, it attracted new businesses, it allowed the entire country to prosper economically.
However, I see proper regulation of blockchain and fintech as much more than just a smart business move. I see it as giving room for the rebirth of technology, enabling the fourth industrial revolution, the revolution of the Internet of Value.
CBDC relevance in the age of pandemics
I think that now the conversation around CBDCs has come to be at the absolute forefront of every central bank’s governor’s mind, because people are scared to use cash, they think it may be tainted, they don’t want to touch money, credit card systems around the world are starting to break, online systems are breaking, you’ve got problems of fraud, consumers need the protection.
And many countries in the world are facing that.
So, if you take a central bank digital currency now, it becomes important for two reasons. One, because central banks don’t trust technologists, and they don’t trust many people, but they trust each other. We can now start to have instantaneously atomically swapped assets using a blockchain technology and start to do cross-border transfers of money. We can take all the inertia, the post trade, process that has always been very manual, very slow, take them out of the system and inject a lot more money back into economies that are struggling due to numerous issues, and now, also due to Corona. So, I think this is the time when CBDCs become a very interesting conversation, but a very difficult conversation because central
banks have very different definitions of what central bank digital currencies are.
Now, with COVID-19 shutting everything down, everyone will embrace all the new technologies they can. Social distancing has ironically made the world come together. This will help improve ecosystems and make them work with new technologies and upgrade and regulate everything accordingly at an unprecedented speed.
I still have a few big questions when it comes to central bank digital currencies, but I also believe that now is the time for this topic to be brought forward and discussed, so that the next global pandemic doesn’t have to cause a global economic crisis.
Title photo by geralt, Pixabay.