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'Big techs', cryptocurrencies and regulation

"The essence of the decentralized protocols behind many of the cryptocurrencies, including those of Bitcoin and Ethereum, makes control of the issuers impossible"

The latest manifestation of the strength of technology We have seen it in the results published by the large US platforms. The combined revenues of Apple, Amazon, Google, Facebook and Microsoft have reached $ 322 trillion, its operating profit has been $ 78 trillion and its market capitalization reaches $ 8,5 trillion, up from $ 5 trillion a year ago.

The other paradigm shift is the cryptocurrency market, which according to Coinbase already capitalizes $ 2 trillion, but which by its nature we cannot compare with the concentration of value that the big technology companies represent, not even with all those that are listed in the North American technology indices, even if we include the big Chinese platforms.

Why? Because the underlying activity of cryptocurrencies is different, or, put another way, your business is different.

If technology platforms have been configured primarily as operating systems, information and connection networks and online intermediation services, the cryptocurrency market needs to be understood in terms of what it contributes and what it competes against.

And what appears on the surface is that they are investment assets, not fully contemplated in current regulation, that are listed in global centralized markets that operate 24 × 7 with delivery versus payment in real time, and also in decentralized markets also outside the market. legislation. Interestingly, these markets did not exist 10 years ago.

But the background of cryptocurrencies (also called crypto assets) there are different value propositions. One of them is bitcoin, product of the programming of a 'white paper' where it was defined as a 'peer to peer' payment system without intermediaries, although for now bitcoin has remained as an investment asset for the security of its consensus protocol, its easy transferability and above all its limited emission. It is not conceivable, even if Elon Musk offers it, that someone would buy a Tesla with bitcoins, and therefore it will not be a widely accepted means of payment because, although it is functionally possible, it does not make economic sense.

Another is ether, the payment cryptocurrency, on the Ethereum blockchain, which requires that anyone who wants to make developments on this blockchain must acquire ethers. The Ethereum blockchain was the first where the blocks can act as smart contracts, so that linked routines can be programmed so that if a certain block is executed (for example, a contract) an associated block is executed (for example, the pay). Ethereum aims to become the most important decentralized computer in the world and is the epitome of the internet of value, which means that information and transaction can be combined within the same system. Current informational systems, in addition to being centralized, are related to transactional systems through specifically created links, which makes them less scalable and with more points of failure. It must also be remembered that cryptocurrency 'operating systems' are decentralized by definition and they disperse the risk of critical failure, since the transactions are validated by a large number of interveners, becoming completely public, as in the case of bitcoin or ETH ether with block validation through computational force (consensus' proof of work ', although the ethereum Blockchain is migrating to' proof of stake ').

Bitcoin and ether account for 62% of the total capitalization of cryptocurrencies on Coinbase, but it is necessary to analyze other proposals to understand that current 'ranking' may not be static. For example, there are several cryptocurrencies that are trying to build blockchain infrastructure applied to different sectors, perhaps competing more closely with ether. ETH than with bitcoin. This is the case of Binance Coin, the cryptocurrency of Binance, the largest 'crypto exchange' in the world, above Coinbase. Binance's success lies in the construction of its own blockchain, the Binance Smart Chain, which is having significant success among developers of adjacent services within the Binance 'exchange'. Or DOT, the cryptocurrency of the Polkadot blockchain, which allows interoperability between different blockchains. Or 'stablecoins' such as Tether or USDC, which seek to solve the problem of instability by linking their price to the US dollar.

Where cryptocurrencies take on an even more complex dimension is in DeFI cryptocurrencies when they try to replicate complex financial services now offered by regulated intermediaries, such as banks or stock exchanges or 'exchanges'. These are cryptocurrencies issued and decentralized operations that allow crossing pairs of cryptocurrencies through automatic 'market making' mechanisms, generating interest rates for holding certain cryptocurrencies ('yield farming') or obtaining financing using as collateral cryptocurrencies that are owned. They are the traditional banking activities of exchange, lend or take.

After this simplified taxonomy that still appears fragile today due to the volatility of its prices and the unregulated nature of its proposals in some areas, hides a challenge not less than the monopoly present of the big technological platforms. Additionally, behind Blockchain A whole new category of services is hidden that can be provided through 'apps' and that increasingly replicate parts of what we call the financial system, although their current exponents do not yet express an explicit concern.

Bitcoin is not a payment instrument, but it is increasingly seen as an investment asset whose next benchmark is the capitalization of gold (around $ 12 trillion). If Ethereum and infrastructure blockchains continue to grow, an operating system equivalent to IOS or Android is being created, and if decentralized finance or DeFI continues its march, then the reference is the banking services and the listed securities markets.

It is still too early to know if these expectations will be fulfilled with realities, but the real one has yet to be defined. Regulator response to large suction. And in the same way, big tech is glaringly absent in the world of cryptocurrencies, with the exception of Facebook and its bet on Diem.

Big technology companies are beginning to be besieged at their core with regulations that could force their fragmentation, as in the case of the existing conversations in the US, the future Digital Market Act regulation in the European Union, which imposes a series of obligations on digital platforms that reach a certain size in areas such as operating systems, social connections or online intermediation. China is in a process of reducing the power of digital platforms such as Alibaba after the cancellation of the IPO of its subsidiary Ant Financial.

The regulatory response to cryptocurrencies is less clear, with the exception of the EU, which is in full debate of the draft MiCA regulation. Without going into detail, it establishes the obligations of issuers and participants in the dissemination and provision of services linked to different crypto assets, the authorities reserving the approval of certain cryptocurrencies or of 'e money tokens'that may have a material impact on the markets.

But the essence of the decentralized protocols behind many of the cryptocurrencies, including those of bitcoin and Ethereum, make control of issuers impossible, a cornerstone in the supervisory system that governs financial markets and those involved. It is not clear what mechanisms the authorities can use beyond an exhaustive ban on the main cryptocurrencies that is coordinated by the main countries of the world.

* Enrique Titos, Independent Director. Member of the Academic Council of Fide. Director of the Digital Money Group and Payment Systems de Fide.

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