There are two certainties in tech: innovation and regulation. All disruptive new technologies encounter regulation on the path to mass adoption. Think Uber with the taxi industry or Airbnb with the hotel industry. Both navigate complex patchworks of rules across the many regions in which they now operate. But these haven’t stopped them becoming the behemoths they are today. In fact, you could argue regulation has actually helped them get to where they are.
The same is true of Bitcoin and other cryptocurrencies. The cryptocurrency industry has, historically, faced limited regulation. However, this is changing rapidly and there has been a clear global move to regulate providers in recent times. We are now required to comply with Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) legislation in several of the countries we operate in. Where that's not yet the case, we have clear guidance from the Financial Action Task Force (FATF) to measure our approach against. In terms of data protection too, different regions all have some form of law – including the General Data Protection Regulation (GDPR) in the EU and the Protection of Personal Information Act (POPI) Act in South Africa.
Since our launch in 2013, we’ve taken a proactive approach to ensuring the safety of our customers and the industry and have conducted ourselves as if we were regulated. We apply robust AML and CFT controls that, wherever possible, are based upon the laws and regulations that apply to the financial services industry.
This approach isn’t necessarily common in the crypto industry. Many crypto exchanges have decided to wait until they are bound by regulatory requirements before doing anything. This is fine – freedom can be seductive and there’s profit to be made. We choose to act as if we are regulated because we firmly believe that it’s the right thing to do in the long-term. We’ve seen first hand the positive impact that proper regulation can have. It benefits our customers and our long-term business, which in turn benefits the entire crypto space and – eventually – all of society.
Why we believe in regulation
Regulation in the crypto industry is important for many reasons, but chief among them is customer protection.
Regulations help to protect your cryptocurrencies by lifting standards in the industry and implementing barriers to entry for operators with low concern (or capabilities) for consumer protection. An effective regulatory regime typically imposes obligations that promote the protection of customer funds and the crypto ecosystem more broadly. As such, the existence of a license to operate or other regulatory standing should provide customers with a good indication that a company can be trusted with their funds, and that they will have controls in place to prevent use of cryptocurrency for illicit means.
Such trust is vital for any company that deals with your finances, but particularly in crypto as it’s still not widely understood. There remains a widespread misapprehension that Bitcoin is only used for ‘bad’ or criminal purposes, and this unfairly tarnishes the entire industry.
For cryptocurrency platforms, regulation is also important because it lays the groundwork to develop the relationships critical to success. Key among these relationships are those with banking institutions. Banking services have, to date, been difficult to obtain for those providing cryptocurrency platforms, with banks often citing a lack of regulatory certainty as giving rise to unacceptable risk. Should this risk be diminished, all parties again would benefit in myriad ways and the experience for customers would be vastly improved.
What does effective regulation look like?
While regulation is necessary, it’s also important that it’s designed and implemented effectively. Regulators don’t have an easy task. They have to get to grips with a new technology that very few yet understand. They’re also working with limited evidence of cryptocurrency’s impact on society and any unintended consequences that may arise from widespread use – or, indeed, from their regulations. And they must do all of this without stifling innovation, carefully weighing the need to protect consumers with the benefits of a new technology with huge potential.
Importantly, it’s essential that the global nature of cryptocurrency is taken into account in the design of any regulatory framework. Crypto knows no borders. This presents new risks that are not commonly encountered with other financial instruments. Outright prohibition or ineffective regulation risks unintended consequences. In particular, regulatory arbitrage results, an "underground market" develops or the peer-to-peer market booms, thereby causing a lack of visibility for regulators and a lack of protection for consumers.
Ultimately, we hope that a global regulatory framework can be implemented, or at least some form of ‘passporting’ or mutual recognition regime developed, such that crypto asset service providers can expect consistent treatment, and live up to consistent standards, across all jurisdictions. The guidance provided by FATF in terms of anti-money laundering and countering the financing of terrorism is a useful step in the right direction, but the industry has a long way to go before it can say it is truly global. For now, we’re working hard to ensure effective regulation in the countries we operate in.
Effective regulation requires a collaborative and phased approach, with regulators acknowledging the benefits of gathering learning and working alongside industry. An excellent example can be seen in South Africa, where the Intergovernmental Fintech Working Group (IFWG) has released a position paper on crypto assets (the Position Paper). The Position Paper provides recommendations for the development of a regulatory framework for crypto-assets and suggestions on how the changes should be implemented.
The IFWG’s report was several years in the making and during that time input was sought from a number of industry leaders, including Luno. As a result, we were able to enhance the IFWG's understanding of how crypto works, its possible use cases and the size of the local market so they could understand the benefits and settle on a policy position.
We’ve always maintained close relationships with regulators around the world to help create appropriate regulatory frameworks – whether it’s in Africa, Europe or Asia. In Malaysia, for example, we worked closely with the Securities Commission in helping it to better understand the cryptocurrency industry as it went through the regulatory process. The Securities Commission was efficient in its introduction of crypto specific regulation and we were proud to become the first registered crypto exchange in Malaysia.
The truth is the regulatory space understandably doesn’t always move at the same pace as fast-moving startups. Many are struggling to define Bitcoin and other cryptocurrencies; they have the properties of an asset, a payment mechanism, and a currency. There are also many of them, all of which weigh these qualities differently and work in different ways. This means the creation of new or unique regulation has been slow. By working alongside regulators, though, and with open and honest communication, together we can build a functioning regulatory regime that works for everyone.
Luno’s view on Nigeria
Nigeria is among the world’s biggest users of cryptocurrency. We have worked hard to build a safe and transparent ecosystem for our Nigerian customers and today, Luno has more than 3 million customers in the country.
This mission was unfortunately interrupted recently, when a Central Bank of Nigeria circular was published, prohibiting banks and other payment providers from working with cryptocurrency platforms. We share the Central Bank of Nigeria’s concern for Nigerians, but we feel that the approach it has taken here does not achieve the CBN’s objectives in this instance.
Any attempt to restrict access to cryptocurrency does not protect Nigerians. It holds them back and leaves them vulnerable. It prevents honest Nigerians from taking advantage of all that cryptocurrency has to offer them. It also leaves the regulators at a disadvantage. Blanket bans push people “underground” [i.e. trading via Whatsapp or Telegram groups, for example]. This makes activity involving transparency less transparent and means financial bodies have less visibility of what’s going on.
Pushing people underground also makes it easier for scammers to exploit Nigerians, and we are already seeing Bitcoin trade at huge premiums in the country as a result of the ban. Other companies have made the choice to find workarounds that are less visible for regulators – for example, Peer-2-Peer (P2P) trading. Our view is that P2P trading would go against the spirit of the CBN’s directive. We believe that the focus should instead be on demonstrating to the CBN that exchanges such as Luno have the necessary controls in place to address the concerns it has in relation to cryptocurrencies.
Nigeria’s regulators have taken a pragmatic and forward-looking approach to cryptocurrency in the past, with the SEC even actively developing a framework to regulate. We’re confident that this issue can be resolved quickly, so that Nigeria can continue to play a central role in the growth of cryptocurrency. This also isn’t the first time Luno has faced a situation like this. When the Malaysian Securities Commission introduced a new regulatory framework for crypto exchanges in the region, Luno worked with regulators to become the country’s first licensed exchange. This has created an inclusive and transparent cryptocurrency ecosystem in the country, making it easier for consumers and regulators alike. We would like to work with CBN and regulators in Nigeria as we have in other countries, to create an open dialogue and to come to a solution that works for everyone.
The future of crypto regulation
Regulation is inevitable. It’s also necessary. Our firm belief is that regulation will raise the bar in the cryptocurrency industry and, in our experience, this is also what customers want.
It’s our mission to bring the world into a new financial future. We are building the bridge between what we have today and a future, frictionless financial system where it’s safer, cheaper, faster and more secure to transact and move money around. BUT, for now, we're in a hybrid economy where we still heavily rely on existing financial infrastructure to make the move to a future system easier. For as long as we interact with the existing financial system, legacy systems, we will have to adapt and follow some of the same rules that apply to them. Cryptocurrencies are maturing from a self-regulated domain to a regulated one, where individuals and businesses can introduce aspects of crypto assets into their daily lives, with investments and payments. For Luno it’s not about entering markets and making money quickly, but helping to build and establish a proper regulatory framework and fundamentally, upgrade the world to be a better financial system. Luno will therefore always adhere to the changing laws in any country that we operate and will continue to work with regulators around the world, including the Central Bank of Nigeria, to put in place the appropriate regulatory frameworks that are optimal for all stakeholders and, ultimately, benefit you – the customer.