FSA chair: Cryptocurrencies here to stay, regulation inevitable

Kilvar Kessler.
Kilvar Kessler. Source: Siim Lõvi/ERR

The head of Estonia's Financial Supervision Authority (FSA), Kilvar Kessler, said in an interview with ERR that there is no sense in trying to fight cryptocurrencies like Facebook's Libra token. Instead, regulators should work to understand them in detail and see to it that laws and rules are adapted accordingly, Kessler said.

Asked about Facebook's announced introduction of the Libra token, Kessler said that the only sensible thing to do is to look at what it is in detail, and then for authorities to react. Innovations in the area of money in principle shouldn't be rejected: after all, money is a human invention.

In his interview with ERR (link in Estonian), Kessler explained that needs to be understood and regulated is how cryptocurrencies affect the tax system, and how their issuers are to be seen and treated. "Another thing relating to money is the development of its value over time. We deal with this through credit," Kessler said.

The case of Facebook's Libra token isn't so much one of a financial company moving into new technologies, but the opposite, a large international with an enormous customer base and enormous amounts of available information moving into financial products.

Facebook has two major advantages, according to Kessler. One is that its large customer base implies a potentially powerful role within countries' tax systems, the other that it also has the resources to process the enormous amounts of information at its disposal.

"Every time a loan is granted, this involves all of the available data about risk. Who is applying for the loan, what their abilities are to pay it back, what the environment is within which they are applying for the loan, what they're going to use the money for, and so on. The condition here is to have that information as well as the ability to process it. And Facebook has both," Kessler explained.

This sets Facebook and similar internationals up as competitors of both the established payment system as well as the credit sector. And at the point where its own cryptocurrency reaches a certain critical mass, it also stands to become a competitor of national and supra-national currencies.

A possible development could be that Libra might become a harder currency than some national ones one day. The comparison drawn by Kessler here is the Soviet ruble against the Finnish markka: towards the end of the Soviet Union, the markka was generally seen as the more stable and safer currency, which meant that people preferred it to the ruble. Something similar could happen with certain cryptocurrency tokens, Kessler thinks.

"Money, as a state-sanctioned means of payment, is an instrument of economic and financial policy. So naturally, countries might in the long run come to see [cryptocurrency issuers like Facebook] as competitors," he told ERR.

"Countries don't typically allow that. They regulate these things because they want to hold on to their monopoly," Kessler added.

Asked where tokens like Libra could be introduced, Kessler pointed to financially less developed areas. "In Africa, some regions of Asia. Areas where tax systems are less developed. When new options emerge that are easily obtainable to the local population, very different from the local banking system, then naturally these areas could become a starting point for Facebook to expand into more mature financial markets like the EU and the United States."

So far, technology companies have moved into payment solutions first, an approach that has been observed e.g. in China, Kessler said. "The next step is already the credit market, the reason being that they have the required raw material. The financial market is information plus the ability to interpret it. This comes down to mathematics, the calculation of probabilities, and this works with contracts and laws," he added.

Information, as a raw material for business, can be compared to mining, Kessler went on. "Data are the raw material, and privacy regulations much like the framework that regulate the use of natural resources. Nobody is allowed to dig for them at random, someone is needed—the land owner, the state—to grant permission. Privacy can be regarded the same way, as a [regulatory] framework," Kessler said.

As none of the large data miners is based in the EU, for the union the matter has become one of protecting its own resources. A way to do this has been the General Data Protection Regulation, or GDPR. Again drawing a comparison with the traditional mining sector, Kessler argues that the EU is protecting the wealth of data of its own populace.

"This is currently done as a means of protecting privacy and personal information, but I'd say that it's actually a matter of competition," Kessler said.

Meanwhile, a state or supra-national organization has the means to regulate markets of this size. "The power of the state is based on its ability to establish legal norms, and to exercise power to enforce them," Kessler explained. "History has shown that once a business grows to the point where it threatens the state's basic functions, then the state tends to regulate that business."

Kessler thinks that at least according to how it has presented Libra so far, Facebook will likely need permits to introduce it on the EU market. Authorities will want to know what they are dealing with, and not only from the point of view of privacy and data protection, but also from the point of view of financial regulation.

"Financial regulations are introduced to protect the consumer that uses the payment systems, loans and savings products offered, and to be sure that the system works according to expectations," Kessler said. "That their money or Libra token isn't lost, that it isn't stolen."

Naturally, there are pitfalls, and also risks involved in introducing such novelties to the financial markets. But to simply reject all of it isn't the way to go, according to Kessler.

"We don't want to keep anything out, and I don't think anyone would want that either," Kessler said. "That which changes will change the face of money and tax systems, the technology. We once just had metals, then came paper, and now we have it as electric impulses." But what shape exactly it will take is difficult to predict at this point, he added.

The state's objective will remain to keep developments within safe and acceptable limits. In that sense, it is the duty of the state to react if a private entity infringes on its monopoly to define economic and financial policy. Which, according to Kessler, once again leads to two issues: consumer protection, and implementing government policy.

"States have interests of their own. The state's democratic interests are defined by the people, while the commercial interests of companies are defined by their owners. These different interests aren't necessarily aligned, and this is again where business might one day become a threat to the state, and where the latter will have to intervene and manage or minimize this threat," Kessler said.

Social media giant Facebook initially proposed its own cryptocurrency token, called Libra, in 2018, with a view to introducing it some time in 2020. As of mid-2019, the token is to be based on blockchain technology and overseen by the Libra Association, an organization founded by Facebook subsidiary Calibra along with several dozen companies and institutions across different sectors.

Code released by Facebook earlier this year has been called "nondescript," and a concession to worried regulators, especially in the EU. There is currently no working version at any developmental stage.

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Editor: Dario Cavegn

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