The broad ethic of the World Economic Forum’s meeting every year at Davos in Switzerland is about being constructive. The forum prides itself in being a problem-solving institution, which can make it seem simultaneously high-minded, earnest, and...a bit dull.
But every now and then the mask slips and there is a public disagreement among panel participants, hidden, of course, behind good intentions and constructivism. Natch. And this year, one of the most tense discussions I came across unsurprisingly concerned crypto. But what was surprising was that it involved South Africa's Reserve Bank Governor Lesetja Kganyago. (The discussion is available here).
Kganyago has been an absolutely stand-up Reserve Bank governor but I have to say, he came across badly in this session. He was a little light on pertinent knowledge, quite pernickety, and a bit superior and in a way, he provided a good example of the enormous understanding gap between regulators, the crypto industry, and the savings industry. At one point Kganyago himself wondered openly why he was on the panel!
To be fair, this is a fabulously complicated arena. And Kganyago was up against a panel of absolutely solid crypto supporters at precisely the moment that crypto is, well, having a moment. And neither did it help that he was pitted against one of the crypto industry’s leading lights, Brian Armstrong, co-founder and CEO of Coinbase.
Coinbase is the third biggest crypto exchange in the world - behind Binance and Bybit - and is the largest in the US. It has a revenue of $1.1-billion and an operating profit of around $8-million, which, by the way, is pretty modest for a company which trades around $4-billion a day. Crypto exchanges are not a huge margin business but the company has been on a tear over the past year, doubling in value like many crypto exchanges.
But there were hairy moments back there in 2022 and 2023 when it looked as though crypto was deep in the dwang and Coinbase’s competitor, FTX, was filing for bankruptcy and FTX’s flamboyant founder Sam Bankman-Fried was, you know, going to jail.
The difference between Bankman-Fried and Armstrong could not be more stark: Coinbase is seen as a trusted, conservative player in the crypto industry and has always supported industry regulation. Armstrong is formal, clipped, experienced up the wazoo, thoughtful and banker-ish. Compare that to the freewheeling, shorts-wearing Bankman-Fried, who essentially went to jail for using his clients' money to bankroll the bets the company was making in the crypto market which had gone sour - temporarily as it happens.
Fast forward till today and what a different picture. Armstrong gushed as you might expect, saying, “It's the dawn of a new day. You have to remember that the last four years it was a very hostile environment”.
But in this past year, particularly with the advent of crypto-based Exchange Traded Funds (collections of crypto coins or related corporations offered to public investment and retirement funds), the trading volume in the industry as a whole has shot up to about $30-trillion. Yes, that's with a T. What is more, payments using crypto are now growing fast, up about 300% over the year, as are stablecoins (coins that mirror the value of existing fiat currencies).
About half of the Fortune 500 have some sort of pilot going in crypto, as the largest financial services firms, every fintech company, and all neo-banks integrating crypto, Armstrong said. “This is a technology that's going to update the financial system globally, make it faster, cheaper, more efficient”.
Well, Kganyago begged to differ. Asked directly whether SA would ever hold Bitcoin as a strategic reserve, Kanyago was frankly hostile. He acknowledged the utility of the technology and pointed to SA’s Reserve Bank trial using blockchain technology in SA’s payments space, which had been very successful.
But he added, “I would have a significant problem with a lobby that says governments should hold this asset or hold that asset without knowing what the strategic intent of the government is”.
There is a history to gold, he said, but “if we now say, okay, Bitcoin, then what about platinum? What about coal? Why don't we hold strategic beef reserves? Why Bitcoin?”
“I would caution against … an industry with a particular interest in a particular product, saying we would like to impose it on society and say society must hold this as a reserve. I would have a fundamental problem with it.”
Armstrong was having none of that: “I think it's clear at this point that Bitcoin is a better form of money than gold. It is proveably scarce, just like gold, but it's more portable and divisible, so you can actually use it”. Bitcoin has been the best-performing asset of the last ten years, he pointed out, and so as a store of value, “I think it's going to be important for governments to hold this over time. It might start with being one per cent of their reserves, but I think over time, it'll come to be equal to or greater than gold reserves,” he said.
Quite a prediction!
The conversation drifted onto newly inaugurated US president Donald Trump’s decision to launch a meme coin in his own name just before becoming president, and founder of SkyBridge Capital, Anthony Scaramucci, made the obvious point that Trump’s decision was bad for the industry.
“The reason I believe it hurts the industry is that you have older people in politics, older people in policymaking that still do not understand the industry… I don't want them to meet the ideas behind the Trump meme coin and the potential negative things that are associated with the Trump meme coin. I just think it's going to slow down some people in the regulatory process.”
Host Spriha Srivastava, UK bureau chief of Business Insider UK, then asked Kganyago whether South Africans were trading the Trump meme coin, and Kganyago clearly didn’t know, changing to subject to the issue of regulation.
I do feel if you are responsible for currency transactions in a country, you should know what is being traded, and of course, the coin is being traded wildly (!) by South Africans, as evidenced by my story below.
Tim Cohen
It would have been such a great opportunity to trumpet SA’s openness to new technology in all its forms.
But as it happens, I thought he was still very good on the issue of regulation itself. “I don't think it is for the government or for regulators to tell financial consumers which products should come and which products should not be used. Our duty as regulators is to make sure that the products that are there are transparent, they are fair to consumers, and that consumers understand the products that they are involved in,” he said.
“So, if your product behaves like a deposit, we will regulate it like a deposit; if it behaves like a lending instrument, we will regulate it like a lending instrument; if it behaves like a payment product, we will regulate it like a payment product. In our, in our space, we don't regulate the product, we regulate activity.”
Nice phraseology, but lordy, lordy, I wish that were true. The essential issue here is whether crypto should be regarded as a security or not. Those in favour, often established industry participants like banks, brokers, and exchanges argue that there should be a level playing field.
They are subject to stringent securities regulations, including disclosure, compliance, and anti-money laundering (AML) requirements - why should the crypto industry not be subject to the same rules?
Well, says the crypto industry, because we are different. Crypto is more comparable to a commodity or even a software license, particularly in the case of crypto, which can enable transactions or power applications, or something like that. And also, sotto voce, we don’t want to be caught up in the myriad rules and regulations associated with securities on stock markets, for example.
The US has got itself into an awful tizzy on the regulation issue, which is why the industry is so delighted with Trump’s victory in the recent election because they hope he will oversee an innovation-friendly, rule-light regulatory regime, which seems very likely now that he is a big investor himself.
The countries that have got it more or less right are those like Switzerland and Singapore, which have tailored rules. Switzerland, for example, distinguishes between payment tokens, utility tokens, and asset tokens. Asset tokens that represent real-world assets or promise returns are classified similarly to securities.
In SA, the Financial Sector Conduct Authority (FSCA) declared crypto assets as "financial products" under the FAIS Act in 2022. That means you need to be an authorised Financial Services Provider (FSP) and comply with relevant Financial Intelligence Centre Act (FICA) requirements.
Included in these requirements are customer due diligence and reporting, anti-money laundering and so on - some pretty heavy-weight restrictions - very like securities regulation - and don’t really conform to Kganyago’s stated approach that you should regulate the activity, not the product.
Still, it's much more conducive to crypto than the countries out there banning trading entirely or restricting it. Bottom line: SA’s monetary authorities need to understand this sector rather than just mouthing word salads.
From the department of legal and personal optionality
From the department of really pointless, but amusing, words.
From the department of just fessing up because it makes you feel so good
From the rare and unusual department of beautiful nationalism
This is the Columbian National Anthem ‘sung’ by 41 birds, three amphibians, one jaguar and some whales, and it offers a glimpse into one of the world’s most biodiverse countries.
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