Differentiating between legitimate areas and outright scams remains difficult when it comes to cryptocurrency, says Nordea's Head of Emerging Technologies, Ville Sointu. Corporates need to do their homework before deciding whether and how to incorporate crypto payments into their business.
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While almost all activity in cryptocurrency revolves around speculative investing, the original intent was to create a future payment network. Will crypto eventually become a mainstream part of the global payment system, and what should corporates do to prepare? Nordea’s Head of Emerging Technologies Ville Sointu (VS) reflects on crypto’s past and future evolution this interview with Johan Trocmé (JT) from Nordea On Your Mind.
JT: Most of us have heard about cryptocurrencies by now, but it is not necessarily easy to understand what they are and how they work. Could you think of a simple description for beginners?
VS: I’ve been involved with cryptocurrencies and related blockchain technology since 2013 and it seems my answer to this question has changed several times over the years. The reason for this is simple: Cryptocurrency used to be fairly simple to explain by walking through what bitcoin is and what it isn’t, but these days not only do we have countless cryptocurrencies that differ from each other signiﬁcantly, we also have different levels of regulation around the world that deﬁne these digital assets in different ways.
The biggest challenge in answering this question therefore is the tricky fact that there is no single technical or functional deﬁnition of cryptocurrencies, as there are simply so many different kinds. Most cryptocurrencies, though, share a few common goals:
- Decentralisation: By using different flavours of public key cryptography, consensus and reward mechanisms, cryptocurrency networks aim to eliminate the need for trusted third parties, for example when processing transfers of value between accounts. This makes cryptocurrencies generally challenging to regulate in any speciﬁc jurisdiction.
- Openness: Most cryptocurrency networks don’t require their users to identify themselves, and anyone with an internet-connected computer can participate without necessarily registering any customer information. This allows unknown actors to transact in the network, making it difficult for ﬁnancial institutions complying with strict know-your-customer and anti-money-laundering laws to interact with these networks.
Virtually all current activity in crypto is speculative investing.
The original intent of bitcoin, in particular, was to create a decentralised and open network to make censorship-free (cash-like) peer-to-peer payments possible over the internet without relying on regulated ﬁnancial institutions to act as middlemen. This future payment network narrative, however, has evaporated due to the technical and legal limitations of bitcoin-like cryptocurrencies. These days, it looks like practically all activity in the cryptocurrency space is about speculative investments. It’s easy to believe this because bitcoin, or any cryptocurrencies for that matter, cannot really be used for anything really practical anywhere at the moment, except by converting it to regular (ﬁat) money through exchange services.
JT: Could cryptocurrencies offer new or improved functionality compared with traditional means of payment, such as speed, transaction costs, convenience or transparency?
VS: The current ﬁnancial system has been built over decades and decades of technological and regulatory evolution. Due to this legacy and multiple generations of platforms and systems working together, there is of course an argument to be made that it could all work faster. This fragmentation and a historical focus on privacy within legacy technology also makes the current system opaque compared to bitcoin-like cryptocurrencies that rely on an open ledger for all on-chain transactions (even though bitcoin accounts/wallets themselves are not necessarily linked to any veriﬁed person).
If you make cryptocurrencies comply with the same regulations as the current payment system, they are typically inferior and more expensive.
Cryptocurrency advocates, for the most part, propose that everyone should move away from this legacy infrastructure and jump into this new system. However, this is not a matter of simple choice. In order for cryptos to work in the same society as our current monetary system, they would need to comply with the same rules, controls and regulations as the existing system. It turns out that if you make cryptocurrencies comply with existing laws and regulations, they are in fact inferior and more expensive technical solutions than most current centralised systems, let alone modern and relatively straightforward cloud-based platforms.
The question therefore becomes: Should a new regulatory framework be developed and applied to decentralised cryptocurrencies? It’s far from clear why this would be necessary or even justiﬁed. The point of regulation is not to choose any technology over another (decentralised or otherwise) but to focus on service, outcome, open competition and consumer protection. “Same service, same risks, same rules” is a principle that I believe is fair and transparent for any regulatory approach.
JT: What drawbacks or challenges do you see with cryptocurrencies?
VS: My main concern these days is the fact that cryptocurrency valuation is completely disconnected from any real value that these systems actually produce. Cryptocurrencies are in many cases seen as (highly speculative) investments, but average investors tend to not see that these currencies produce absolutely nothing in terms of real-world value and all appreciation is built on new money entering the system. This speculative nature of the market, combined with insufficient supervision and consumer protection, creates a dangerous environment where potential bad actors can manipulate prices and exploit people who are not within the very small inner circle of crypto. While it’s easy to draw similar comparisons from the traditional ﬁnancial system, at least there is a large amount of attention and energy spent on supervision and regulation to have better investor protection and fair rules in place – something that’s mostly absent from the crypto markets.
Creating a global digital currency while navigating laws and regulations is highly complex – as demonstrated by Facebook's Diem.
JT: Could you see a scenario where there is a global migration from ﬁat currencies into crypto as a mainstream phenomenon? Would it require technological, regulatory or other changes?
VS: If a technically and functionally superior cryptocurrency emerges that manages to comply with national laws and regulations across the world, there is no doubt it could create a move to this new system. This, to a certain extent, was – and I believe still is –the goal of Facebook’s Diem (formerly “Libra”) project, but after a few years of trial and error they are learning that creating a global digital currency while trying to navigate all related laws and regulations is not straightforward. Time will show how Diem manages to move forward, and the whole industry is keen to follow its progress.
The only other approach would be to ignore existing laws governing the monetary system and claim that somehow no current rules apply in this new system. While bitcoin started this way, it is very hard to convince governments and a majority of people to adopt this “new deal”, particularly because you still can’t pay taxes with anything except legal tender. El Salvador took an interesting step towards making bitcoin legal tender earlier this year, but it’s far from clear how it will actually be implemented and whether the people of El Salvador even want it.
JT: Could the growing use of cryptocurrencies lead to a diminished role for banks in the global payment system?
VS: As we discussed in earlier questions, this depends on what the cryptocurrency in this scenario is and how it would be regulated. In a speculative scenario where a number of nation states decide or vote to adopt a form of cryptocurrency as legal tender more broadly, I don’t see how banks would be left out of these systems – in most countries, they are the trusted entities that most people trust to take care of their wealth – ﬁat or otherwise. In this very hypothetical scenario, banks would of course have new competitors, which would make the service landscape even more versatile and interesting. The biggest question banks would face in this scenario would be how the crypto ecosystem could coexist with the ﬁat system – a question with many, many complexities, as explained in earlier questions.
JT: How do you think large corporates should think about cryptocurrencies at present? Do they need to get involved and prepare to use them?
VS: The only advice given the current state of the cryptocurrency space is to ask corporates to do their due diligence and research carefully, regardless of what they decide about cryptocurrencies in the end. There is a lot of false information, vapourware, regulatory arbitrage, and suspicious actors in the crypto space, but many are working hard to move this ecosystem forward in a legitimate way. Differentiating between legitimate areas and outright scams is still difficult, so no matter what you do, be aware of the risks and do your due diligence with extreme prejudice.
Don’t miss our other related Nordea On Your Mind content:
- Podcast: All you wanted to know about cryptocurrencies
- Corporate lending under Basel IV
- Podcast: Basel IV – A game changer for bank lending to corporates
See the full range of publications from Nordea On Your Mind here.
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