Degrees of freedom: geopolitics as a stumbling block and a ‘glass ceiling’ for crypto-regulations.

London, UK | May 14, 2018

Over the past few months, we witnessed some major new developments in the field of crypto-regulations. Unfortunately, legacy regulatory infrastructure in financial services industry proved to be too rigid to adapt after servicing the incumbents for too long. Regulator’s assumption that crypto is easily malleable into traditional fiat-era templates and their efforts to blindly shoehorn outdated policies onto new crypto-economy is nothing else but shackles on innovation and a detriment to society.

We can expect regulatory back-n-forth to continue for the rest of the year or even longer in some jurisdictions, as all of them are working on mechanisms to ensure controls. But, unlike in the era of fiat-based economies, I believe the new compartmentalized jurisdiction-specific regulations will hit the invisible ceiling as soon as matters get escalated to the very top of the societal hierarchy, i.e. geopolitical elevation. While we are eager to usher the basic “rules of the game” for the new crypto-economy, I see the existing opposing geopolitical forces to become the main limiting factor for new crypto-regulations, and here is why and how…

Phase I: Jurisdiction-specific crypto regulations

Jurisdiction-specific regulations is something we see happening right now around the globe and is the 1st evolutionary step in crypto regulations. Governments try to quickly replicate fiat practices in order to re-gain controls over their tax base, prevent fraud, protect investors, develop basic infrastructure to enable monitoring and enforcement in the new crypto-economy.

However, no matter how thought-out the regulations might be, they will not prevent, among other things, ICOs from jurisdiction-hopping or citizens from using VPN to circumvent restrictions. This was also well articulated by Kraken CEO, Jesse Powell in his “Kraken position on Regulation”.

Crypto Valley in Zug, Switzerland is leading the way in building crypto-friendly regulatory environment

Phase II: Inter-Governmental Agreements (IGAs)

During Phase II we should expect governments to use the G7/G20 stage to kick off efforts to convince all the nations to become signatories to an inter-government agreement (IGA) similar in nature to Obama’s FATCA in 2010and CRS in 2014. And this is where our discussion gets more tricky and interesting as it leaves the area of Economics and enters the territory of Political Economics and Geopolitics.

It is important to note that both FATCA & CRS roll-out as ‘voluntary’ IGAs were assured by the over-hanging threat of being disconnected from the SWIFT system, i.e. being unplugged from the lifelines of the global economy. This left multiple nations, some as big as China & Russia and others as small as Cayman Islands & Switzerland, with an unpleasant after-taste and a reminder about their limited capacity as sovereign nations.

Phase III: & Geopolitics as a stumbling block for crypto-regulations

Today, USA is the #1 superpower in the world and able to project its geopolitical interests to other countries (besides militarily) via:

  • its economic levers of control
  • its ability to effectively export & enforce regulations beyond the borders of its own jurisdiction

Unfortunately, contrary to the past 25 years, today’s world & geopolitical centers actively resist the convergence: the Brexit vote, the Trump posture on global trade, Russia stance despite the sanctions, China’s own geopolitical ambitions, and other evidence of reluctance to uniformity which is currently enforced by the US on the global stage.

Now coming back to the original thesis for this article, I believe we are destined to see crypto becoming a major tool and a weapon used by each geopolitical player in their competitive game to undermine each other. With strong political drivers and numerous new alternatives to SWIFT, crypto effectively enables any nation (either as posh as Swiss or as rogue as North Korea) to make decisions without fear of penalties of being cut off from global economy or getting black-listed on SDN list of sanctioned individuals..

Indeed, over the past 6 months, we already witnessed the first examples of “rebellion” behavior with the launch of Petro crypto-currency in Venezuela allegedly facilitated by Russia, followed by similar initiatives in Iran and in sanctioned Crimea.

Bringing it all together

We are all eager to establish “rules of the game” for the new crypto-economy, which should bring investor confidence at the level of specific jurisdictions. However, at the very top level of Geopolitical clusters (i.e. jurisdictions orbiting the same geopolitical centers), we most certainly will continue to see the differences and inconsistencies in crypto-regulations.

For as long as Bill Gates’ vision for the entire world to have one government remains to be just a futuristic idea, for as long as there are competing geopolitical centers of gravity on this planet, the idea of perfectly regulated crypto-economy will remain an utopia, meaning that companies will be able to find and exploit arbitrage opportunities leveraging inconsistencies in regulations, opportunistic loopholes as well as policies deliberately designed by Geopolitical centers and aimed to undermine their rivals on the global stage.

You can reach me with questions or comments on LinkedIn at https://www.linkedin.com/in/geneswinton/