Hi Tariq. Can you provide our readers with some background?
I qualified at the Bar twenty years ago, specialising in consumer-focused subjects and company and commercial law. As one of the early wave of lawyers to then go in-house, I joined a consumer finance lender and had a focus on the legal and regulatory compliance of our products. Three years later we were acquired by GE Money, and I joined their legal team, working with the retail finance senior management team to create new credit products and take them to market through retail store customers. Exactly three years later I left to join a MBO of fledgling Marlin Financial Group, as Chief Legal & Compliance Officer; a title that disguises the breadth of operational involvement needed in building a highly-regulated, consumer finance business. We built the company through to a £295m exit and learned a lot along the way!
I have since been mentoring on accelerator programmes like Techstars (where I have been EIR), doing advisory work and sitting on the Boards of various FinTechs and RegTechs across Europe, and angel investing in those companies I feel I can materially support beyond capital. Later in the summer I will be launching Outrun Ventures with a long-time friend and colleague, focusing on seed and Series A investing in FinTechs and RegTechs that we, again, believe we can really help scale.
So, how did you get into crypto?
Back in early summer 2017, I was asked – given my background in regulation, company building and fundraising – whether I’d like to join a team to help blockchain projects run their ICOs. I didn’t, but this is when I woke up to blockchain and its potential, and took an interest in the crypto market whilst also reading countless whitepapers that promised solutions far broader and more complex than they could possibly achieve. The tokenised economy appeared to have real merit in that it would reward individuals for contributing to a project, yet many projects were raising money via ICOs in a manner that took advantage of people less experienced in investing in, and less aware of the difficulties and risks in building, early stage companies. They called this ‘democratisation of investment’ – a description with whose intentions I sympathise, yet which disguised the overriding financial motivations of many to crowdfund Series C+ sums for pre-MVP companies with excessively large advisory teams and very few people actually committed to the project.
The crypto market is an intriguing place to invest/trade as the influences on token price, at least in the short term, are far faster moving than in traditional public equities, subject to manipulation and also strongly influenced by herd mentality. Long term investing requires the same approach as with any startup, and some great technology and companies have emerged.
Regulation and Crypto is one of the key topics of RegTechTalents. How will regulation impact the crypto world?
The methods by which ICOs were promoted has already raised a lot of regulatory attention around the world, and we have seen consultations by the FCA in the UK, guidance – derived from concern – by FINMA in Switzerland (where a large number of ICO companies are domiciled), and particularly by the SEC in the US, which has prosecuted a number of companies for promoting securities without complying with securities laws. The days of dressing up a security as a utility token are well over, and thereby the ability to raise boom-time speculative funding that some took advantage of is no more, not least because regulators are now wiser and clearer in their expectations. This has been a good thing, providing protection for investors and enabling credibility to be greater noticed where due. The sector is maturing at a fantastic pace.
Gone also are the days when a token could be launched without conducting KYC checks on purchasers, driven in part by the unwillingness of traditional banks to provide banking facilities to companies in the blockchain/crypto space for this reason and the reputational risk more broadly associated with it.
What are the advantages or disadvantages of cryptocurrencies being regulated?
We have to be careful what we mean by cryptocurrency – it seems to be a term applied for any sort of tradable tokens but ought only be those intended only for a store of wealth and means of exchange. Truly decentralised cryptos cannot be effectively regulated, because there is no organisation or person – no controlling mind – to regulate. This is a topic recently consulted upon by the UK Cryptoassets Task Force, following their initial report last year.
Regulators can however attempt to regulate how we use and access these cryptos, such as when we buy them through exchanges or spend them in a retail environment, though this may become harder as more decentralised infrastructure becomes available to us. The real issue for users is then trying to bring crypto into the regulated world, as banks, for example, may only accept deposits from regulated exchanges. Even Lambo dealers might conduct KYC checks. Regulation as such could drive a parallel decentralised economy, which governments might struggle to regulate – for better or worse – and tax, and which could in time shift economic control away from the main actors in the traditional economy, such as banks. This could have social advantages through fairer distribution of wealth, but only if done well and if not corrupted – a difficult characteristic to avoid.
The more mainstream recognition of cryptos, and therefore blockchain technology, has however given an innovation push to many corporates, banks included. And whilst many organisations are now actively engaged with, and sometimes launching their own take on ‘crypto’, such as in the form of centralised or private network stablecoins, the advantage of regulators getting involved has created legitimacy than has spurned this innovation for greater efficiency and collaboration between organisations, hopefully leading to efficiency gains, better risk management, more stability and lower costs.
Many argue that regulation is the enemy of innovation, which I often interpret as standing in the way of making money quickly. Whilst regulation can be onerous, it does serve a purpose of providing a fair playing field to serve all involved. Without that, someone loses out; usually the consumer. The early rise of payday lending is a case in point, where the most financially vulnerable were provided much needed short-term loans, and then encouraged to borrow month upon month at short-term interest rates and then charged excessive fees when they couldn’t make repayments. When regulation of this sector eventually arrived, some of even the most successful payday lenders could not survive. A fine example of regulation serving its purpose: if you can’t make money trading fairly, you shouldn’t be trading. I’m concerned that some new actors in the decentralised finance space are unaware of why such regulation exists and in their quest for utopian lending to all may end up repeating the mistakes of the consumer finance industry some decades ago.
What should the government response be to privacy coins?
There is a possible disparity between my desire to see a greater take up of privacy coins in the interests of preserving one’s personal and transactional privacy, against what I assume to be the government’s desire for stronger surveillance capability (which is served well by most public blockchains). The usual claim is that untraceable transactions lead to more money laundering and tax evasion, though I do question the extent to which we all really harbour criminal ambitions. I do draw a parallel between privacy coins and cash, whereby with cash we can trade freely and privately without anyone gathering data and making assumptions about who we are, what motivates us, or how we might be manipulated or sold to. All up to a certain value level, of course, as depositing larger sums still requires our banks to ascertain their origin (though not where the origin obtained the sums from; something more easily identifiable with ’non-private’ coins on a public blockchain). Of course, the digital nature of privacy coins means they don’t carry a physical burden to the transaction and so are transferrable globally, any time. As a society, I think we all need to be more proactive in understanding the risks of losing our privacy and with retaining what we have left of it.
What are the threats with crypto exchanges?
Crypto exchanges have helped open up trading to many people who might not have yet traded traditional equities. I expressed concern above with how some tokens were (are) promoted and I do think that any token information made available by exchanges should be fact-based. Many do hype new coin issuances, often supported by their celebrity CEOs on Twitter. Great if you already hold the coin and make your return on it, but not great for building a trustable platform in the longer term. Couple this with the trading bots and market makers, and traders may also believe there’s far greater liquidity in the exchange than there really is and so they’ll be able to sell easily when desired. Maybe on the larger exchanges, but not on many more. Again, not good for building trust in the sector.
These are factors that traders can get wise to with some experience, but what the retail market is less aware of is the quality of cybersecurity protection an exchange may or may not have employed. We’re all used to trusting our money to banks (even if some let us down in the past) and could, especially the less initiated, apply the same trust to crypto exchanges. It’s wise to get one’s crypto onto hard storage, or at least not held in too concentrated manner on few exchanges.
Last question: should tokens (exchange tokens, utilities tokens) be treated as securities?
The only tokens that should be treated as securities are those with the characteristics of securities. There’s no reason not to. And the reasons for that are clear – the protection of purchasers and investors, the requirements for good business practice and a stable financial sector, and to make leadership teams accountable.
A token that isn’t designed with these characteristics should be treated for what it is; if it’s an effective voucher (a utility token) for purchasing services or a software licence, for example, the laws applied should only be those that are relevant. It may be that the value of the tokens fluctuate with demand, as may the prices of non-tokenised goods and services (such as gold, classic cars, art etc). The question is what to do with someone who promotes buying a utility token for speculation. Are they undermining the characteristic of the token, or are they doing no more than someone who promotes classic cars as an appreciating asset? The answer lies in the actual purpose and characteristics of the token itself.
Tariq Khan is on the Steering Committee for RegTECHTalents 2019.