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Digital Currencies

Should ICOs be regulated? A majority thinks so

In the most recent iteration of our digital currencies series with Baker McKenzie we are looking  into the rising popularity of Initial Coin Offerings – a means for blockchain start-ups to raise capital.

For those interested in cryptocurrencies and distributed ledger technology ICOs are one of the hottest trends of 2017. According to the latest estimates around US$1.3bn have been raised in ICOs since the beginning of 2017.

But we also warned that ICOs are “not for the faint-hearted“: while they can offer huge returns to investors they are also risky.

ICOs take place in a largely unregulated environment and a discussion is taking place whether this needs to change. More regulation would presumably reduce the risks, but quite possibly also the returns.

We were wondering how experts think about regulating ICOs and turned to banking, cryptocurrency, fintech and blockchain experts in the Euromoney Thought Leaders Panel to find out.

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Flash poll: 50.4% say regulating ICOs would make them more attractive

It turns out that a majority of respondents to the poll favours regulation, while about one third do not consider it to be necessary. Those opposing regulation do so for different reasons though: 15% argue that more regulation would reduce investor returns, while 21% think regulating ICOs would be a waste of time because they won’t be around for long anyway.

The poll “highlights the maturing of the digital currencies business, with its early adopters increasingly outnumbered by financial traditionalists with mainstream regulatory concerns around fraud and consumer protection,” writes my colleague Solomon Teague in his comprehensive analysis of the survey.

This is part six in of our series on digital currencies that we are publishing in collaboration with law firm Baker McKenzie. To catch up with all articles, infographics and interviews published earlier in the series, please head over to the Baker McKenzie financial institutions content hub.

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Initial Coin Offerings: Not For The Faint-Hearted

Initial coin offerings are the latest way for blockchain startups to raise capital and engage with their prospective client-bases. Investors have been making huge returns but the market has all the hallmarks of a bubble and is bound to burst sooner or later.

The ICO market has been red-hot in recent months. Only an indicator is the increased popularity of the search term “initial coin offering” on Google.

In fact, the total number of ICOs in the first half of 2017 surpassed the number for the whole of 2016, according to Santiment, a crypto-market intelligence platform: the increased interest reflected on Google is certainly no coincidence.

Advocates argue ICOs, where companies create and sell a new digital token or ‘coin’ to investors to raise capital, offer issuers huge advantages. They allow them to raise millions with lower barriers to entry than alternatives like debt financing or an IPO and link issuers with investors that are also typically early adopters, beta testers, development contributors and evangelists.

While issuers are attracted to ICOs by the flexibility that is possible due to the lack of regulation around them, investors are principally in it for the returns. These have often been spectacular, with returns of 10 or 20 times the initial investment not unusual.

But others warn of the volatility and risk for investors. In our latest piece in our digital currencies series, Gabriel Dusil, co-founder of blockchain infrastructure company Adel, describes the ICO space as “Wild West”. He knows what he’s talking about: Adel conducted its own ICO in March 2017.

You can read the full article “ICOs: not for the faint-hearted” here.

 

Banks Embracing the Blockchain

Digital currencies and distributed ledger technology will have huge and unpredictable implications for banks, increasing efficiency in some business segments and inviting competition in others. Eventually it could completely transform their relationships with clients.

Christophe Van Cauwenberghe, head of payment innovation at Societe Generale

Christophe Van Cauwenberghe, head of payment innovation at Societe Generale

The distributed ledger has the most obvious potential for banks in payments, syndicated loans, trade finance and know your customer (KYC) compliance, according to Christophe Van Cauwenberghe, head of payment innovation at Societe Generale.

In part four of our digital currencies series, which we are publishing in collaboration with law firm Baker McKenzie, we are asking how banks are embracing the blockchain.

While for now it remains next to impossible to say specifically how things may change, one thing is clear: no matter how disruptive distributed ledger technology may be for banks, it is always better to embrace new technology and adapt than pretend it isn’t happening.

If you would like to catch up on our digital currencies series, you can find our earlier publications here:

Part 1: Life after quantitative easing: Digital currencies could be a powerful tool for central banks, but there are risks

Part 2: Infographic: Centralised vs decentralised digital currencies

Part 3:  Banking on the Blockchain. An interview with UBS’ Head of strategic investment and fintech innovation, Hyder Jaffrey.

 

An interview with UBS about digital currencies
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Hyder Jaffrey is Head of Strategic Investment and Fintech Innovation at UBS

Banks have spent the last few years exploring how distributed ledger technology, or the blockchain, can help them cut costs or improve service.

To better understand how banks look at the issue we spoke to Hyder Jaffrey, Head of Strategic Investment and Fintech Innovation at UBS. In the interview he explains the utility settlement coin, a form of cryptocash a group of banks, including UBS, is working on.

Jaffrey argues that it helps to think of the world of digital currencies as a spectrum:

“At one end of it you have bitcoin, which is unregulated and operates outside of government control. At the other end you have central bank digital currencies – digital versions of existing currencies. The utility settlement coin is positioned right in the middle, with some of the benefits of bitcoin, such as the real time transfer of value (settlement), while taking on some characteristics of ‘real money’ issued by central banks. It is pegged to those fiat currencies and will always have the same value.”

You can read the full interview with Hyder Jaffrey here.

This is the third part in of our series on digital currencies, that we are publishing in collaboration with law firm Baker McKenzie.

Who Owns Digital Currencies (and why it matters)

Digital currencies come in different shapes and forms, which in turn has important implications for their respective use and application.

A lot depends on the question who ultimately controls a specific currency. Bitcoin, for instance, is decentralised and operates outside of the oversight of a single institution. It is therefore not well suited to manage inflation.

ownership digital currencies snippetBut a central bank issued digital currency* – none exists so far, but central banks around the world are considering it – would be a powerful tool to control and manage inflation.

A third type are digital currencies issued by banks, such as the Utility Settlement Coin (USC), being worked on by a number of top tier banks.

Our infographic: Centralised versus Decentralised Digital Currencies compares the implications the characteristics of different digital currency types have.

The chart is the second iteration in our new series on cryptocurrencies, which we are publishing in collaboration with law firm Baker McKenzie.

We’d be delighted to hear your comments. You can get in touch using the contacts form. For social media, we recommend the hashtag #cryptocurrencies.

* For more on central bank issued digital currencies, check our recent article, “Life after Quantitative Easing

Digital Currencies: Powerful Tools for Central Banks

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Today, we are launching a new project on digital currencies.

Over the next weeks and months we will investigate different types of cryptocurrencies and consider their benefits and potential downsides to financial institutions, central banks and the real economy.

We will discuss regulatory hurdles, explain digital payments systems, and look at distributed ledger technology.

We will also be speaking to central bankers and blockchain developers, commercial and investment bank experts, fintech visionaries and other stakeholders who will play a role in shaping the future of cryptocurrencies.

In the first part of this new project, which we are publishing in collaboration with law firm Baker McKenzie, we are examining why central banks are looking seriously at creating digital versions of fiat money. The article explains how the issuance of digital currencies will provide central banks with a new powerful tool that will give them unprecedented control over economies and markets.

Upcoming pieces in the series will include interviews, videos, animations, infographics and more.

In the meantime, please head over to our partner’s website to read our first article, “Digital Currencies: Life after Quantitative Easing”.

We hope you will find this new article series interesting. As ever, we would be delighted to hear your thoughts. You can get in touch using our contacts form. For social media, we recommend the hashtag #cryptocurrencies.

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Thought Leadership Consulting creates thought-provoking content for global business leaders.

With a team of independent journalists, experienced editors and professional marketers, we create reports, surveys, blogs, articles, videos and infographics. All of our content is unbiased, original, research-driven and audience-led.

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