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Financial Stability Board’s crypto report full of holes: Crypto industry experts

Tony Zerucha

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In a recent report, The Financial Stability Board outlined a serious of issues posed by crypto-assets. While the report states crypto-assets do not currently pose a material risk to global financial stability, that could change should use continue to evolve. Those risks include:

  • Confidence effects and risks to the reputations of regulators and financial institutions;
  • Financial institution exposure to crypto-assets;
  • Payment and settlement concerns; and
  • Market capitalization and wealth effects concerns.

Crypto-assets also raise broader policy issues, including:

  • The need to protect consumers and investors;
  • Market integrity protocols;
  • AML and terrorist financing regulation and supervision (including international sanctions);
  • Tax evasion prevention strategies;
  • Avoiding circumvention of capital controls; and
  • Concerns related to the facilitation of illegal securities offerings.

While security concerns should always be taken seriously, it’s not as if mainstream financial institutions keep the bar high, Blockparty CTO Rikesh Thapa said (Blockparty is an app designed to solve ticketing’s major pain points).

“As a cybersecurity expert and member of several white hack groups, no industry has more abysmal security than current financial institutions, financial government structures, and financial platforms. The only reason we do not hear about hacks in current financial systems is due to the huge investments current institutions make in targeted marketing or cover-up schemes to prevent massive hack news from spreading.”

Mr. Thapa listed several significant weaknesses he sees in the current financial structure, beginning with the supply chain. While large financial organizations do a lackluster job of spending on security, they still make it difficult for hackers to penetrate security. The same cannot be said for common software programs.

Rikesh Thapa

“Any half-brained hacker knows how to hack the software vendors who provide services to financial institutions,” Mr. Thapa said.

ATM systems are highly susceptible to malware, Mr. Thapa explained, adding it is simple to attach a malicious computer to an ATM. Related card fraud rates have already begun to spike over the last three years as the private data breach rate has risen. The amount of personal information available on the dark and open webs means the rate is likely to continue to rise.

Cyberwar between nation states hurts innocent mainstream financial participants, Mr. Thapa said, but cryptocurrency can help solve that.

“Crypto is stateless, it belongs to the people, so there is no such thing as Russia hacking the Ethereum network because Russia does not like the US and vice versa because Ethereum does not belong to any country.”

The cryptocurrency industry does more than pay lip service to transparency, Mr. Thapa said. The industry philosophy fosters an environment where security can only improve.

“The crypto industry intentionally places all hacks into the wide open, so the developer community and the broader community know to watch out and resolve for such issues,” Mr. Thapa explained. “The overwhelming amount of hacks occur due to social engineering where fake news is used to make it seem like ICO giveaways are taking place/ phishing scams. These same methods are still employed for regular financial institutions. The only difference is the crypto community knows how to avoid this issue while the larger financial community has yet to resolve its problems.”

The industry needs to continue its migration to blockchain-based security systems, qiibee co-founder and CEO Gabriele Giancola explained. A Swiss company, qiibee is a loyalty token protocol helping global brands run blockchain-based loyalty programs.

Eastern governments are beginning to regulate exchanges. That will help too, Mr. Giancola suggested.

“Moreover, an increasing number of governments, such as South Korea and Japan, are introducing regulation with regards to exchanges, which will see stricter and higher security standards. This will also attract more experienced developers which will enhance the cryptographic quality of a platform, as well as reduce the likelihood of a platform being hacked.”

The FSB threw water on the market’s near-term potential, citing low trading volumes for Bitcoin futures. That’s premature judgement on a new and evolving industry and a bad comp to boot, Mr. Thapa cautioned.

“Crypto has yet to truly be around for a full decade. Trace equities market, commodities market, precious metal, any market growth, and trajectory. Industries, economies, markets do not develop overnight.

“No one truly cares about US bitcoin-based futures. If someone wants bitcoin they buy bitcoin. People need to learn to separate traditional financial models, practices, and principles for crypto. People need to stop tying the concept of fiat to crypto on ramps and off ramps as a significant player in crypto markets. Futures trading is a slim facet of crypto markets– anyone who has any financial sense knows it. Take a look at the volume of flows of crypto from wallet to wallet. That is a true indicator of an active marketplace where finance is being rendered for economic activity without ever involving fiat.”

Gabriele Giancola

Growth trends are a more important indicator than volume. They are positively trending, Mr. Giancola added.

The FSB also mentioned volatility is concerning, stating that as of Oct. 4 the price volatility of the top two crypto-assets by market cap was between six and 13 times higher than the euro, gold and S&P 500 US equities index.

Regulation, which we have seen is increasing, will help tame volatility, Mr. Giancola suggested.

“Increased regulation in the space is one way to combat this issue, and we are already beginning to see governments around the world step up and take action. Until recently, there has been limited regulation in the industry, which has allowed for market manipulation, leading to volatility and lack of institutional investment.”

Crypto markets are still maturing, and as they do and the outlook steadies, a more diversified investor base could arise and bring stability, Mr. Giancola said. New innovations such as stablecoins can bring robustness and also reduce volatility, he added.

In comparing the new sector of cryptocurrency to established markets at a healthy point in the cycle is comparing apples to oranges, Mr. Thapa cautioned.

“This is solely an exercise of price discovery. Every market has seen volatility. Let us wait until the market recession hits in the following years and retest the volatility assessment of conventional markets.”

The FSB, with little evidence, said they are concerned about leveraged investors, a sentiment that barely hides the thought regulators need to protect Main Street investors from themselves, just like they supposedly had to in peer-to-peer lending before the institutions took that over. Both Mr. Thapa and Mr. Giancola said there is no evidence suggesting crypto investors are more leveraged than anyone else.

“I cannot find any evidence of this as the whole US economy is essentially ‘leveraged’,” Mr. Thapa said.

The FSB said the crypto industry has to address structural issues including the amount of energy consumed by mining. Yes it is a concern, but other forms of wealth generation expend energy too, Mr. Thapa countered.

“Gold and diamond mining consume more energy, cause more pollution. There is no clean way to conduct this business.

“Crypto mining can be conducted using renewable resources. One of my mining facilities runs only on solar energy. Printing money, which the FED cannot seem to stop doing, probably consumes more energy. POS, POP policies are taking over slowly, and will no longer need mining in the conventional sense.”

Mr. Thapa said the crypto industry is evolving and addressing many different issues. They are much more proactive than the industries the FSB seems to support, he added.

Mr. Giancola agreed with Mr. Thapa on the crypto industry’s proactive approach to areas of concern. 

“Blockchain consortia such as the Enterprise Ethereum Alliance and the Hyperledger Project are pooling resources and working towards solving fundamental technical issues such as energy consumption, asset concentration, and scalability challenges. In order for these issues to be rectified, extensive research and development efforts are still required.”

The FSB also cited tax evasion, money laundering and terrorist activity as areas that crypto has to address. With the help or regulators that is happening, Mr. Giancola said.

“Regulatory bodies have an important role to play when it comes to clamping down on illegal activities such as tax evasion, money laundering, and terrorism. Silk Road was shut down five years ago and since then, bitcoin, and indeed blockchain, is now being used across various industries including healthcare, education, banking, and social impact. Therefore, it is imperative that the focus remains on increasing regulation and compliance to minimize any potential concerns.”

Fiat currencies also have their issues, and in the end, cryptocurrencies have better transparency in their core design, Mr. Thapa said.

“Tax evasion, money laundering, and terrorist activity is more prominent and opaque with the USD, Euro, and other fiat currencies– (or maybe not). Regardless, with crypto all transaction and payment flows are visible, transparent and out in the open. The IRS, SEC, etc can easily learn to trace money through the blockchain to see which wallets they land in.”

Tony Zerucha

Tony Zerucha is an alternative finance journalist with more than seven years experience in the space. The author of more than 1,000 articles, Tony was named LendIt's 2018 Journalist of the Year.

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