This
is the second part of a three-part series that covers the regulatory
landscape for digital currencies in 2019 and looks at the prospects of
2020. While the first chapter in the series looked at the "Insiders," this installment covers the prospects for the so-called “Outsiders” — i.e., China, Russia, India and the developing world.




Unlike
the Insiders, which built the modern financial system on top of the
U.S. dollar in the 1940s, the Outsiders pay for access to that system
due to varying historical and geopolitical reasons.



Crypto: The Outsiders’ double-edged sword



Led by China, the Outsiders shredded extreme poverty
over the past 30 years from 40% globally to less than 10% today.
Similarly, in terms of the percentage of global GDP, countries not a
part of the OECD
(i.e., “outsider countries”) has moved from 40% 30 years ago to the
majority today — and continues to climb. All of this economic growth,
however, has failed to move these countries to the center of the
international banking and monetary system.


Plagued by
currency instability, and either a real or perceived lack of legal and
institutional integrity, the Outsiders constantly battle capital flight
to Insider countries, leading to strict capital controls designed to
prevent currency expatriation. Given the Outsiders’ recently growing
economic clout, we have seen overt pushes from Outsider countries to
upend the global monetary order itself. Zhou Xiaochuan, the former
Governor of the People’s Bank of China, has argued publicly since 2009 that the U.S. dollar should be replaced as the world's reserve currency.


If
these countries are not able to replace the world monetary order with
one in their own image, they would at least stand to lose a lot less
should decentralized cryptocurrencies weaken the current order. This
potential creates a double-edged sword for Outsiders. On the one hand,
an increasingly decentralized global financial system might allow the
Outsiders’ growing economic heft to move them to the center of gravity
in the world financial system. On the other hand, the growth of crypto
industries thus far has, predictably, resulted in net capital flow from
Outsider to Insider countries, exacerbating their monetary woes.


Russia: Back and forth, and still unclear



Given this dilemma, the Outsiders’ near-term strategies are similar. Russia, India and China
all have histories of initiating or, at least, seriously threatening
outright crypto-bans. For Russia, this manifested as one of the earliest
on record. In 2014, Russia followed Thailand as one of the first
countries to announce a ban on Bitcoin (BTC), followed by Vietnam shortly thereafter.


To
borrow a phrase from Winston Churchill, Russia’s 2019 position on
crypto remains a riddle, wrapped in a mystery, inside an enigma — at
least, to the untrained eye. President Putin’s
2017 powwow with Moscow-born Ethereum founder Vitalik Buterin at the
height of the initial coin offering bubble, that saw the launch of
dozens of Russian projects, should come as little surprise.


What seems more surprising, however, is the forward-looking nature of the Russian Duma’s October 2019 bill
defining “digital rights” and granting legal authority to smart
contracts. It is hard not to read this as Russia looking toward the
dreamy utopia that crypto evangelists hope for, where commerce is
governed by smart contracts and legal rights exist on the blockchain.


At the same time as this uncharacteristic Russian optimism, we have seen Russia’s central bank and Ministry of Finance remain publicly skeptical
of cryptocurrencies, and have yet to see Russia overtly legalize them.
Whether this internal division is superficial or not, it feels like
Moscow’s stance on crypto is always primed for an about-face.



This
Russian political configuration is reminiscent of the South Korean
regulatory dance during the height of the ICO bubble. South Korea,
hardly a traditional Outsider, shares the Outsider’s characteristic need
to prevent capital flight. In the span of a few days in January 2018,
we saw the minister of justice in South Korea (the country with the
then-highest crypto-penetration rate) declare the asset class illegal,
the finance minister publicly disagree, and then Prime Minister Moon
Jae-in play hero, striking a compromise by legalizing the industry with
Know Your Customer rules and mandatory capital flight controls for South
Korean nationals. Thus, it is hard to tell whether political divisions on crypto in the upper echelons of these countries are real or an illusion.


India: The most radical decisions



Of
all of the major Outsiders, India is probably the farthest from feeling
the long-term upsides of a decentralized world. It is perhaps for this
reason that Indian laws are among the most draconian, with a legislative
panel proposing a ban on all non-sovereign cryptocurrencies in July 2019, including a violation penalty of up to 10 years of imprisonment.



If
you are good at pattern recognition, you probably predicted that this
ban was followed by wide-ranging political conversations about
cryptocurrencies and promises of pending legislation. Given that it is
no secret that Libra is targeting India, it is also worth noting that a
few weeks prior to the July panel’s pronouncements, an Indian cabinet
official announced that the country is not comfortable with the Facebook project.
It is hard to say whether the recent anti-crypto sentiment was
exacerbated by the Libra revelation, but the timing looks suspicious. To
date, there has been plenty of posturing to suggest that legislative
action is pending — perhaps it will reveal itself in 2020.



China: Blockchain without crypto



Finally,
we turn to China, whose monumental pivots cause seismic reactions in
the crypto markets. 2019 witnessed China pivot stronger than any
Outsider country toward crypto, announcing blockchain
as central to its upcoming five-year plan. Perhaps more importantly,
however, shortly after pronouncements on Libra, China sharpened state
publicity of its foray into central bank digital currencies, a
development coming far sooner than expected. This all comes on the heels
of China’s routine invasions of local crypto exchanges, after banning ICOs, repeatedly threatening to ban cryptos, and making it essentially illegal as of 2018 for crypto-to-fiat businesses to operate on the mainland.



To understand the significance of China’s proposed digital currency, consider how it accelerated
the yuan’s internationalization strategies in recent years. In 2019,
the yuan secured the spot as the third most used currency in global
trade finance — whereas 30 years ago, it had no material use in global
trade finance. This spot, however, represents just 1%–2% of payment
volume, while the U.S. dollar holds firmly in first with around 90%. It
is hard not to see China’s foray into CBDCs as an effort to get ahead of
the curve and the dollar, at least in crypto markets, which is quite
bullish for the industry.



On some level, it is clear that either the policies of China’s central bank, the PBoC,
or the Chinese public’s appetite for crypto puts China at a greater
short-term risk of capital flight than the other Outsiders, but its own
burgeoning startup, e-commerce and artificial intelligence industries
are positioning the country for long-term competitiveness in a more
decentralized financial world.


With all of this, the situation remains volatile. As recently as Dec. 27, Chinese financial regulatories issued a stark warning
against consumer use of Bitcoin and other cryptocurrencies. Needless to
say, the machinations at the top of the Chinese Communist Party remain
the X-factor for the crypto markets in 2020 — with President Xi wielding
the power to wreck your portfolio harder than an inverted cup and
handle on BitMex. 


In the third and final installment of
this yearly crypto recap, we will look at the “Experimenters”: the
countries that have waded into the uncharted regulatory waters to bring
crypto projects onshore.

The
views, thoughts and opinions expressed here are the author’s alone and
do not necessarily reflect or represent the views and opinions of
Cointelegraph.




Zachary Kelman
is the managing partner of Kelman.law (Kelman PLLC), a boutique law
practice based in New York specializing in matters related to
cryptocurrency and blockchain technology. The firm handles both
litigation and corporate matters, including advising on compliance with
international standards for data and financial services. Zachary has
advised governmental bodies and central banks around the world on the
application of local and international laws to digital assets and their
many uses.