A “wall of money” is waiting to move into the cryptocurrency market, but it won’t until regulators have worked out what cryptocurrencies actually are.

That was according to a panel of experts – which included academics, regulators, lawyers and fund managers – speaking at a conference organised by the Brevan Howard Centre for Financial Analysis, part of Imperial College Business School. The event was dedicated to discussing the current state of the cryptocurrency market and its future, and included a keynote speech from blockchain pioneer Nick Szabo.

Legal struggles

With the recent high-profile collapse in the value of Bitcoin and talk of increasing regulation in multiple jurisdictions, the speakers were in agreement there is little clarity in the cryptocurrency market, with even its greatest champions referring to the situation as “absolutely chaotic”. The problem for regulators is “the law is trying to deal with something it doesn’t deal with well” (as one expert put it) and at the moment they either don’t know or can’t decide what sort of financial instrument cryptocurrencies represent. This lack of framework means those wishing to participate face problems such as scam artists, and challenges such as scalability, privacy and volatility.

Given what control does exist is in the hands of the judiciary, panel members were unsurprised by how many people now associate cryptocurrencies with criminality, but there was less agreement on how fair this assessment is. There was acknowledgement that the openness of blockchain is both an asset, because in theory it means irregular transactions are easier to spot, and a challenge, as people may quite fairly want to keep some legal transactions secret. Others on the panel contended cryptocurrencies are mere vehicles and Bitcoin is no more to blame for money laundering than the US dollar.

What are cryptocurrencies?

Some felt we had been here before, pointing to commodity options as a novel and disruptive financial product lawmakers had found a way to regulate. The question then became what it is lawmakers are being asked to regulate and whether cryptocurrencies are even really currencies. As one speaker observed, the market is full of businesses and entities self-identifying, and individuals or organisations may not be the best judge of their own purpose.

Of the three principle attributes of a currency, Bitcoin and similar payment systems already display two in that they are a store of value and serve as a medium of exchange, but not the third as few if any businesses keep their accounts in cryptocurrencies. The panel considered if they are not currencies, then what are they? Alternative suggestions included asset tokens or payment tokens. A common sentiment was that, in working out which definition is the best fit, regulators will need to balance protection of individuals and the economy with protection of innovation.

The role of academia

Cryptocurrencies could yet prove to be the foundation for an entirely new financial services industry, or merely another novel product. Academia, it was felt, would play an important role in identifying which they are: being technology agnostic, it was suggested, academics are better placed than policymakers to assess the situation. The future of finance will be the theme of this year’s Imperial College Business School annual conference.

Speaking after the event, Professor Franklin Allen of the Brevan Howard Centre said: “Cryptocurrencies are very controversial, with both sceptical regulators and enthusiastic fund managers speaking out in recent weeks. This conference showed the breadth of views on the subject, and identified many of the key questions businesses, regulators and academia need to answer.”