The South African Intergovernmental FinTech Working Group (IFWG) released its consultation paper on policy proposals for crypto assets and requested members of the public and any impacted stakeholders to provide comments on the document. I prepared and submitted the following response.
I am pleased to provide my comments on the IFWG’s Consultation Paper.
I do not wish to respond to each section or paragraph of the Consultation Paper. Rather, this submission will focus on the IFWG’s suggested regulatory approach to crypto assets and will conclude that any proposed ban has the potential to cause negative economic consequences for all South Africans.
The Consultation Paper provides that South African authorities reserve their rights to ban the buying, selling or holding of crypto assets, or payments using crypto assets:
“[5.3.4] South Africa does not currently intend to ban the buying, selling or holding of crypto assets, or to ban crypto assets for payments … The decision not to ban the use of crypto assets is, however, based on the existing landscape and current levels of adoption, acceptance and use. South African authorities, therefore, reserve the right to amend their policy stance should crypto assets pose a material risk to their respective regulatory mandates”(Own emphasis)
This submission to the IFWG: (i) pre-empts any future attempt by South African authorities to ban crypto assets and highlights that powerful nation states (i.e. USA and China) have already tried but have been unsuccessful in their attempts to ban bitcoin; and (ii) suggests that South African authorities ought rather to carefully consider what the effect would be if they impose regulations that hamper the South African population’s ability to buy, sell or hold crypto assets, or pay using crypto assets, and a crypto asset becomes the reserve currency of the world.
The USA wanted to ban bitcoin and China have not been able to implement their ban
Kathryn Huan, who is a former federal prosecutor with the U.S. Department of Justice, has spoken about how in 2012 her superiors at the Justice Department asked her to help “shut down and prosecute bitcoin”. From minute 1:48 of this YouTube video Kathryn acknowledges that there was never any chance of achieving this outcome.
In China, cryptocurrency exchanges and trading platforms were effectively banned by regulation in September 2017. Notwithstanding this, Eric Meltzer, a founding partner of a crypto asset fund and a Chinese resident, has reported that Chinese citizens are still buying large amounts of bitcoin in an ‘over the counter’ (OTC) fashion. See post number 33 of Eric’s Proof of Work newsletter in this regard.
These failed attempts are evidence of the fact that it is not possible to censor the Bitcoin system. Indeed, Bitcoin is decentralised with no central body, institution or closed group of people controlling or ensuring Bitcoin’s continued operation.
To this end, there is no practical solution to stop people from using Bitcoin and we need to think about what that means for the global economy.
A free market in money
Bitcoin is not going away and its invention created a free market in money. The practical effect is that supply and demand, as opposed to regulation, will dictate which money is held, spent and accepted.
A free market in money existed in the 1800’s. In my view, it is pertinent to examine what transpired during this period because the outcomes show how crucial it is that we make the right decisions in regard to Bitcoin and crypto assets in general.
In the 1800’s, nations adopted a monetary standard of paper fully backed by, and instantly redeemable into, precious metals. Some nations chose gold and others chose silver. Britain was the first to adopt a modern gold standard in 1717 and other European countries (France, Holland, Switzerland, Belgium and Germany) followed it. Countries such as India, China and Hong Kong adopted silver, giving rise to immense economic consequences.
Gold was a better store of value than silver and as more nations chose gold over of silver, the purchasing power of gold increased relative to silver and this created higher incentives for other nations to join the gold standard. The reality is that a free market in money tends to result in a ‘winner takes all’ outcome. See my article “What’s Next For Bitcoin: 2019 and Beyond” for a look at this principle and how it also applies to bitcoin.
In addition, Alan Greenspan, former chair of the Federal Reserve of the United States, published an article in 1966 that contains an explanation of the ‘winner take all’ outcome:
“In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.” (Own emphasis)
The demonetization of silver had a significant negative effect on the nations that were using it as a monetary standard at the time. Ultimately, India switched from silver to gold in 1898, while China and Hong Kong were the last economies to abandon the silver standard in 1935.
By the time India shifted the backing of its rupee to the gold-backed pound sterling in 1898, the silver backing its rupee had lost 56% of its value in the prior 27 years. China stayed on the silver standard until 1935 and its silver lost 78% of its value during that period. This destruction of wealth and capital has wide-ranging negative socioeconomic consequences.
South African authorities have great responsibility
What the 1800’s proved is that no nation or individual can isolate themselves from the economic realities that are imposed by a free market in money. In short, if we end up holding a money that is losing value while other people are holding a money that is increasing in value then our wealth is decreasing in comparison to theirs and we all live in the same economy, purchasing the same or similar goods and services, therefore we must not land up on the wrong side of money.
In the circumstances, it is incumbent on all stakeholders to consider what the effect would be should South African authorities opt to limit or hinder the use of crypto assets (including bitcoin) whilst a crypto asset (bitcoin) is on a path to becoming the reserve currency of the world.
My article “Bitcoin is Like Gold, But it’s Superior” sets out why bitcoin has the potential to sustainably function as a store of value and a medium of exchange for the entire world. In my view, South African authorities ought to consider what the attributes of good money is; why gold was used by the world as money; gold’s shortcomings and bitcoin’s potential to become the global reserve currency.
We ought to conduct these investigations and thought experiments because if bitcoin (or any other crypto asset) becomes the global reserve currency and South Africans are unfairly restricted from holding such asset during its path to monetization, then, in a similar fashion to how the Indians and Chinese suffered in the 1800’s, South Africans will experience significant wealth destruction.
Suggested regulatory approach
As stated in the Consultation Paper, U.S. Commodity Futures Trading Commission Chairman Chris Giancarlo, has emphasised the need for a cautious and ‘do no harm’ approach when regulating crypto assets:
“Do no harm” was unquestionably the right approach to development of the Internet. … With the proper balance of sound policy, regulatory oversight and private sector innovation, new technologies will allow American markets to evolve in responsible ways and continue to grow our economy and increase prosperity” (Own emphasis)
This is unquestionably a prudent approach to regulating crypto assets as it enables Americans to participate while the global market decides whether or not bitcoin, or any other crypto asset, is the money that should be used in society as a store of value and medium of exchange. If a crypto asset does indeed become the next global reserve currency then Americans will be able to position themselves for that, and they will ultimately be able to preserve their wealth.
In view of the potential for extreme negative consequences, the IFWG and South African authorities ought to approach to the regulation of crypto assets with the mindset of ‘doing no harm’ to South Africans.
Disclaimer: The comments, views, opinions and any forecasts of future events reflect the opinion of the quoted author, do not necessarily reflect the views of Switch or other professionals working for Switch, are not guarantees of future events or results and are not intended to provide financial planning or investment advice.