It is a given that innovation will always precede regulation. The emerging Fourth Industrial Revolution (4IR) will give rise to many disruptive technologies that ought to be regulated.
Many of these technologies will change our lives for the better while others might have the opposite effect. No one disputes that regulation is necessary. However, knee-jerk regulation is not the answer. There was a good example of such unthinking reaction last week when the US Congress blocked Facebook’s Libra Cryptocurrency. Clearly, the US Congress erred. There are many different types of cryptocurrencies, but the ones that are of great concern are utility/security and general coins, sometimes referred to as tokens.
A utility token is a form of digital currency created for the purpose of raising capital for a venture. It means that the buyer of the utility token pays the issuer in exchange of a share of the investment that can be redeemed at a later date.
The process is called initial coin offers (ICO) like the initial purchase offer (IPO) in the stock exchange. The crypto coins function just like fiat currency (its value is backed by the issuing government) except that it is in digital format and can be used to buy goods and services.
In essence, crypto coins operate just like mobile money, a digital form of currency that is backed by the national currency that is not on blockchain.
Libra token, therefore, is M-Pesa. It is backed by financial assets and exchanges one on one to the dollar and by extension a basket of other currencies. One of its purposes is to serve the underserved (people without access to traditional banking) and enable consumers to purchase the currency and use it to pay for goods and services.
It is, however, on a permissioned blockchain, a platform with a security layer managing those who can have access to the network of individuals and enterprises. Such a layer minimizes platform vulnerabilities that can undermine its credibility if money launderers were to penetrate the system.
All the US Congress needed was to ask Facebook to permission the regulators into their blockchain and study their activities for some time to enable innovation and regulation.
Instead, they sought answers from what they knew without regard to a world that is constantly under disruption. They sought to know if Libra was money and whether Libra Association was a bank somewhere in Switzerland. Federal Reserve Chairman Jerome Powell told the Senate that “there isn’t any one agency that can stand up and have oversight over this.”
Their fears centre on lack of intermediaries that they can hold accountable. Is Libra an investment currency with volatility such as the one witnessed? It isn’t. There wasn’t anyone seeking to understand the benefit these disruptive technologies will bring over and above the existing problems such as money laundering and other harmful transactions in the dark web. The United Nations Office on Drugs and Crime reported that the estimated amount of money laundered globally in 2018 is 2 – 5 percent of global GDP, or $800 billion - $2 trillion in current US dollars.
Other reports say illicit financial flows, that is, illegal movement of cash (like multinational corporations misreporting the value of their imports or exports to reduce tax) between countries, accounted for $68bn a year, three times as much as the $19bn Africa received in aid.
If the current problem of illicit financial flows is well acknowledged, the Congress should be asking if the new technologies will solve the problem.
Indeed, online magazine Fintech Futures of March 6, 2018, acknowledge the fact that 4IR technologies such as Artificial intelligence and machine learning are playing a significant role in the decline of fraud in the banking sector.
Several other studies show that blockchain's decentralized technology can enable banks and financial institutions to be more effective in prevention of fraud and money laundering.
The US Congress’ fears are misplaced. They need lessons from Kenya on how to regulate digital currency even when there is limited capacity as we did in 2007. What we had was abundant courage to allow Mobile money while learning how to regulate the emergent technology.
With Silicon Valley having pioneered many of the disruptive technologies that have become the envy of many countries, it will be an anti-climax for Congress to stand in their way. It will also send wrong signals to countries that are in the nascent stages of innovativeness.