<\/p>\n
The Bank for International Settlements\u2019 (BIS) Project Atlas report offers yet another indication that the worlds of crypto and traditional finance may be converging.<\/p>\n
On the surface, this proof-of-concept project backed by some of Europe\u2019s biggest central banks \u2014 like German central bank Deutsche Bundesbank and Dutch central bank De Nederlandsche Bank \u2014 seems modest enough: securing more crypto-related data, like cross-border Bitcoin (BTC<\/a>) flows. <\/p>\n But the mere fact that these giants of the incumbent financial order now want such information suggests that crypto assets and decentralized finance (DeFi) applications are becoming, in the report\u2019s words, \u201cpart of an emerging financial ecosystem that spans the globe.\u201d<\/p>\n BIS, a bank for central banks, and its partners still have some serious concerns about this new ecosystem, including its \u201clack of transparency.\u201d For instance, it\u2019s still hard to find seemingly simple things, like the countries where crypto exchanges are domiciled.<\/p>\n And then, there are the abiding potential risks to financial stability presented by these new financial assets. Indeed, in the introduction of the 40-page report, published<\/a> in early October, BIS references how recent crypto failures \u2014 such as the recent theft of $61 million<\/a> from Curve Finance\u2019s pools \u2014 \u201cexposed vulnerabilities across DeFi projects.\u201d Moreover:<\/p>\n \u201cThe crash of the Terra (Luna) protocol\u2019s algorithmic stablecoin in a downward spiral and the bankruptcy of centralised crypto exchange FTX also highlight the pitfalls of unregulated markets.\u201d\u00a0<\/p><\/blockquote>\n Overall, this seemingly innocuous report raises some knotty questions. Does crypto have a macro data problem? Why are cross-border flows so difficult to discern? Is there an easy solution to this opaqueness?\u00a0<\/em><\/p>\n Finally, assuming there is a problem, wouldn\u2019t it behoove the industry to meet the central banks at least halfway in supplying some answers? <\/p>\n \u201cIt\u2019s a valid concern,\u201d Clemens Graf von Luckner, a former World Bank economist now conducting foreign portfolio investment research for the International Monetary Fund, told Cointelegraph.\u00a0<\/p>\n Central banks generally want to know what assets their residents hold in other parts of the world. Large amounts of overseas assets can be a buffer in times of financial stress.<\/p>\n So, central banks want to know how much crypto is going out of their country and for what purpose. \u201cForeign assets can be handy,\u201d said von Luckner. A large stock of crypto savings abroad could be seen as a positive by central banks worried about systemic safety and soundness. In times of crisis, a country may get by financially \u2014 at least for a period \u2014 if its citizens have high overseas holdings, von Luckner suggested. <\/p>\n Yet the decentralized nature of cryptocurrencies, the pseudonymity of its users, and the global distribution of transactions make it more difficult for central banks \u2014 or anyone else \u2014 to gather data, Stephan Meyer, co-founder and chief legal officer at Obligate, told Cointelegraph, adding:<\/p>\n \u201cThe tricky thing with crypto is that the market structure is significantly flatter \u2014 and sometimes fully peer-to-peer. The usual pyramid structure where information flows up from banks to central banks to BIS does not exist.\u201d<\/p><\/blockquote>\n But why now? Bitcoin has been around since 2009, after all. Why are European bankers suddenly interested in cross-border BTC flows at this moment in time?<\/p>\n The short answer is that crypto volumes weren\u2019t large enough earlier to merit a central banker\u2019s attention, said von Luckner. Today, crypto is a $1 trillion industry. <\/p>\n Moreover, the banks recognize the \u201ctangible influence these [new assets] can exert on the monetary aspects of fiat currencies,\u201d Jacob Joseph, research analyst at crypto analytics firm CCData, told Cointelegraph. <\/p>\n Recent:\u00a0Token adoption grows as real-world assets move on-chain<\/em><\/strong><\/a><\/p>\n Meyer, on the other hand, assumed \u201crather that the emergence of stablecoins led to an increased demand for gathering payment data.\u201d<\/p>\n Still, it\u2019s complicated. Many transactions take place outside of regulated gateways, said Meyer. When regulated gateways do exist, they usually aren\u2019t banks but \u201cless-regulated exchanges, payment service providers, or other Anti-Money Laundering-regulated financial intermediaries.\u201d He added:<\/p>\n \u201cThe usual central actors existing in the fiat world \u2014 e.g., the operators of the SWIFT network as well as the interbank settlement systems \u2014 do not exist in crypto.\u201d<\/p><\/blockquote>\n Central banks are currently getting their crypto data from private analytic firms like Chainalysis, but even this isn\u2019t entirely satisfactory, noted von Luckner. An analytics firm can follow Bitcoin flows from Vietnam to Australia, for example; but if the Australian-based exchange that receives a BTC transaction also has a New Zealand node, how does the central bank know if this BTC is ultimately staying in Australia or moving on to New Zealand?\u00a0<\/p>\n There seems to be no simple answer at present. Meyer, for one, hopes that the central banks, the BIS and others will be able to gather data without <\/em>introducing new regulatory reporting requirements. <\/p>\n There\u2019s some reason to believe this could happen, including proliferating numbers of chain tracking tools, the fact that some large crypto exchanges are already disclosing more data voluntarily, and the growing recognition that most crypto transitions are pseudonymous, not entirely anonymous, said Meyer. <\/p>\n Would it help if crypto exchanges were more proactive, trying harder to provide central banks with the data they require?<\/p>\n \u201cIt would help a lot,\u201d answered von Luckner. If exchanges were to provide via an API some basic guidance \u2014 such as \u201cpeople from this country bought and sold this much crypto, but the net was not so much\u201d \u2014 that \u201cwould give central banks a lot more confidence.\u201d<\/p>\n \u201cPresenting regulators with clear, insightful data is beneficial for the development of reasonable regulatory frameworks,\u201d agreed Joseph. He noted that analytics firms like Chainalysis and Elliptic already share \u201cvital on-chain data\u201d with regulatory entities. \u201cThis collaborative approach between crypto companies and regulators has been effective and will likely continue to be crucial in navigating the regulatory landscape.\u201d<\/p>\n As part of a first proof-of-concept, Project Atlas derived crypto-asset flows across geographical locations. It looked at Bitcoin transactions from crypto exchanges \u201calong with the location of those exchanges, as a proxy for cross-border capital flows.\u201d Among the difficulties cited:<\/p>\n \u201cThe country location is not always discernible for crypto exchanges, and attribution data are naturally incomplete and possibly not perfectly accurate.\u201d<\/p><\/blockquote>\n So, for starters, perhaps crypto exchanges could reveal a home country address?<\/p>\n \u201cThere are different factors that drive this opacity,\u201d von Luckner told Cointelegraph. Part of it is the crypto ethos, the notion that it\u2019s a universal, borderless, decentralized protocol \u2014 even as many of its largest exchanges and protocols are owned by a relatively small cohort of individuals. But even these centralized exchanges often prefer to present themselves as decentralized enterprises. <\/p>\n This opacity may also be driven by strictly business interests, such as minimizing taxes, added von Luckner. An exchange may make most of their profits in Germany but want to pay taxes in Ireland, where tax rates are lower, for example.<\/p>\n That said, \u201cIt\u2019s not in the industry\u2019s interests,\u201d at least in the longer term, because \u201cit risks crypto being banned altogether,\u201d said von Luckner. It\u2019s just human nature. What people \u2014 i.e., regulators \u2014 don\u2019t understand, they want to go away, he argued.<\/p>\n Moreover, the average Bitcoin or crypto user doesn\u2019t really require a system perfectly decentralized with total anonymity, von Luckner added. \u201cOtherwise, everyone would use Monero\u201d or some other privacy coin for their transactions. Most just want a faster, cheaper, safer way of conducting financial transactions.<\/p>\nIs crypto data really lacking?<\/h2>\n
What is to be done?<\/h2>\n
Is Europe overregulated?<\/h2>\n