Brokers Push for Crypto-Transparency Before Rules Get Mandated

The latest calls to regulate the exploding cryptocurrency market come from an unusual place.

Some of Europe’s largest digital-coin brokers, who would be saddled with the new rules, are actually asking for them in a bid to clear the air and shake off perceptions they help criminals transfer money. Firms such as eToro Europe Ltd. in London and Bitpanda GmbH in Vienna say clear, “know your customer” rules would let trading platforms go mainstream more easily, gain clients and eventually tap institutional business.

Eric DemuthPhotographer: Ernst Kainerstorfer/Bitpanda GmbH
“We’d be happy to have regulations, so we know where we stand,” said Eric Demuth, the 31-year-old co-chief executive officer of Bitpanda in Vienna, who said he meets frequently with potential regulators at Austria’s Finance Ministry. Moving into loosely regulated jurisdictions like Malta or Gibraltar isn’t interesting because “it doesn’t look good,” he said.

Pursuing transparency may seem ironic in a digital-coin market that mushroomed in the shadows since 2009 to as big as $800 billion. In many countries, people can still buy Bitcoin from specialized cash machines without showing any ID, and then use it for trading or for buying luxury goods, contraband and even property -- leaving few if any traces of identity.

“This is all about where the burden of proof lies for anti-money-laundering, so wanting regulations seems very sensible,” said Marc Ostwald, global strategist at ADM Investor Services International in London. “Even if you’re making a killing in trading, someone could come up with an unexpected piece of regulation that puts a big red line through your business plan.”

Japan Example
In the U.S., San Francisco-based Coinbase has garnered 20 million users while rigorously documenting its clients. In Asia, Japan’s supportive rules have made it perhaps the global center for digital coins. In Europe, the business is relatively smaller. And for many brokers, nabbing an institutional customer is tough to impossible. In-house compliance rules of money managers typically limit dealings with unregulated firms.

The European Commission and regional supervisors are currently studying whether current European Union rules can be applied to crypto trading.

At the same time some tax agencies, such as those in the U.S. and Spain, have demanded brokers and banks turn over names and trading data on crypto clients, an ugly situation for a customer who assumed some level of anonymity.

Platforms in Europe don’t want a harsh decision like Germany’s BaFin made in March, classifying tokens and virtual currencies as “financial instruments,” thereby setting extensive requirements on operators.

“That would be horrible” for Austrian platforms, said Demuth, who’s gearing up to go after money managers someday with co-founder Paul Klanschek, 28. Bitpanda forecasts trading volume in 2018 to roughly triple to 2 billion euros ($2.4 billion) from last year’s level.

For a link to the debate over rules for exchanges, and Gemini versus Kraken, click here.

In the U.K., online currency-trader eToro opened for business in 2007, two years before Bitcoin was created. Cryptocurrencies now encompass about 75 percent of its business and eToro Managing Director Iqbal Gandham is chairing a trade group to bring transparency to their industry, he said. Members include Coinbase UK and the CEX.IO exchange.

“The benefits of regulation are clear. An appropriate framework would serve to both protect consumers, and ensure the longevity and legitimacy of the industry itself,” Gandham said.

For a look at how digital coins may have fueled ransomware growth, click here.

While some brokers have actively sought for digital assets to be regulated as if they were a traditional asset, such as gold, Gandham rejects that approach.

“Given that we are dealing with new and nascent technology, we wouldn’t want to simply cherry pick from existing regulation developed for other asset classes,” he said.

Potential rules “would need to focus on those crypto organizations that interact with consumers – the ‘on-’ and ‘off-’ ramps between fiat and cryptocurrencies. You can look at Japan to see how this might work.”
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