Finance – Cryptocurrencies in the 21st century, Quo Vadis?

For several years, cryptocurrencies have been in the news.

Developed to support an innovative idea, to dispense with the tutelage of nation states, represented by their official currency(ies), the success of cryptocurrencies was then reinforced by the financial crisis of the ssub-primes and the resulting distrust of traditional financial players. The most illustrious of cryptos, I named Bitcoin, was born, following the publication of the “ White Book » bitcoin on 1^East November 2008 by “ Satoshi Nakamoto “.

We understand that the number of bitcoins issued (“mined”) will total a maximum of 21 million; at the most recent price this represents a capitalization of more than CHF 730 billion. There would also be more than 110 million ETH in circulation, which is more than 240 billion CHF.

The numbers speak for themselves, and it is obvious that no one can ignore cryptocurrencies today.

Main characteristics

I offer some legal explanations so that you understand the main characteristics of cryptos.

A notable Swiss legal reference for the classification of cryptos is, surprisingly, not a law or even an ordinance, but a lighter legal basis, i.e. a directive of our financial regulator, FINMA (the Swiss Financial Market Supervisory Authority), entitled Practical Guide to ICOs. In this, FINMA distinguishes between three types of tokens:

Payment tokens are, I would say, the best known; indeed, the most famous of them, Bitcoin, is by consensus a payment token. Thus, it is not a financial instrument and the obligations of behavior and information of said LSFIN, as well as the obligation to obtain a state license (cf. THE END), do not in principle apply.

Usual reviews

As is often the case with a phenomenon of innovation or “disruptive” technology, there are many criticisms. In principle, this is not surprising. It is a normal reflex for the majority of users/consumers to maintain their habits. In this regard, the innovation curve de Rogers indicates that innovators are only 2.5% of the population and that precursors (Early adopters) are 13.5%.

A usual criticism is that cryptos allow large-scale scams (for example, this contribution: https://www.letemps.ch/economie/sulfureuse-tentation-cryptomoines ). This recent article indeed refers to the scams “ pump and dump “, or support or inflate the course of a crypto, then sell en masse when enough people have invested, at the risk of leaving the “pigeons” on the floor with a significant loss.

Another accusation is that cryptos are not transparent and are at risk of being used to facilitate money laundering. For example, a dispatch from the same publicationdating from last summer indicates the current record UK cryptocurrency seizure worth GBP 180m (about CHF 220m).

Finally, in another register, that of the monetary policy of the states, one of the founders of Ether, Vitalik Buterin, indicates that the new Salvadorian law obliging companies to accept Bitcoin clearly goes against the ideals of freedom that drive the crypto community: https://www.numerama.com/tech/746441-contraire-aux-ideaux-de-la-sphere-crypto-le-createur-de-lether-critique-la-loi-bitcoin-du-salvador.html. The IMF even urges El Salvador to abandon Bitcoin as legal tender, on the grounds that this would entail significant financial stability risks: https://www.ft.com/content/fbf9aef0-453f-4e61-bd83-ff2b2bc92221.

Current legal roots in Switzerland

Having noted that cryptos could facilitate transfers of potentially anonymous values, even for illicit purposes, FINMA quickly clarified that the proposal for custody services and payment services in virtual currencies (custody wallet) and the operation of trading platforms allowing the purchase and sale of virtual currencies constitute activities subject in particular to the law on money laundering (LBA). People who intend to offer this type of service must therefore, before starting their activity, join a self-regulatory body. This offers guarantees similar to the activity of other Swiss financial intermediaries.

Technically, however, the risk of anonymity is low. In fact, once the first step has been taken, either the identity of the holder of a wallet given determined unambiguously, for example by providing a screenshot proving that the wallet is effectively linked to the holder’s email address, the entire chain of transactions is in principle public and immutable.

Moreover, with the entry into force of the Law DLTAdopted by Switzerland specifically to encourage crypto-related activities and retain its comparative advantage, the law on prosecution and bankruptcy (LP) has been amended. In effect, article 242a paragraphs 1 and 2 LP provides that the administration of the bankruptcy makes a decision on the return of the crypto-assets whose bankrupt (i.e. the crypto-broker) has the power to dispose at the opening of the bankruptcy and which are claimed by a third party (i.e. the end customer). Such a claim is founded when the bankrupt has undertaken to keep these cryptos at all times at the disposal of the third party, and that these are allocated to him individually or are allocated to a community, the share due to him being clearly determined. This will normally remove the legal uncertainty that could have arisen from crypto-broker bankruptcies.

Finally, at the level of the obligation to obtain a FINMA regulatory license (in a way quite similar to banks), the DLT law led to the modification of the law on banks and indirectly to that of the ordinance on banks. From now on, under certain conditions, such as acceptance of deposits from the public or investment remuneration (generally called “interest transactions”) a Fintech may have to obtain a FINMA fintech license, or even a banking license in certain more extreme cases (for example the play in particular of articles 1b and 16 paragraph 1bis LB, as well as 5a and 6 OB).

Evolution

In view of the above, many of the usual and somewhat routine criticisms against cryptos do not stand up to counter criticism.

As we have seen, once the initial identification of the holder has been carried out, the entire subsequent chain of transactions is public and cannot be altered, which, on the other hand, is not guaranteed by bank transfers.

Very modern and strict legal provisions govern the security of cryptos during possible bankruptcies, and, of course, upstream, during state surveillance of the majority of fintech activities in Switzerland.

Obviously, some will add that cryptocurrencies are not backed or guaranteed by any state, which increases the risk. This would possibly be true in a classic design. But, on the one hand, the extreme intervention of states via their central banks on monetary policy or the purchase of assets in the event of a crisis and, on the other hand, sometimes unclear or logical sanctions or boycotts on certain state currencies or transactions, make state currencies – once safer, perhaps now more dangerous than cryptos, which depend solely on supply and demand and hence the confidence of the relevant community in it(s) means of payment.

It is clear that Bitcoin is irrevocably long-term and as something official. Indeed, some: – developing countries, – innovative automobile company (subject to certain reservations), – Swiss canton and municipality such as Zug and Zermatt, have all adopted it as a recognized means of payment.

One of the criticisms that remains outstanding, however, concerns the energy consumption of Bitcoin. Will this be taken into account by users and the general public and, if so, what will be the solutions?

Published: 31.01.2022, 11:42

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