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France Set to Approve First Crypto Firms Under New Rules This Month

France is poised to approve initial coin offerings operators and other crypto businesses with its new regulatory approach to the sector.

France is poised to approve initial coin offerings (ICO) operators and other crypto businesses with its new regulatory approach to the sector. 

‘France is a Precursor’

As Reuters reported on July 16, the new rules — expected to take effect later this month — will enable crypto-related businesses to voluntarily submit themselves to national standards on capital requirements, consumer protection and taxation in return for the regulator’s green light.  

Anne Marechal — executive director for legal affairs at the Financial Markets Authority (AMF) — told reporters that the bold crypto regulatory agenda from the G7 presidency holder should make France a forerunner in the field. She said:

“France is a precursor. We will have a legal, tax and regulatory framework […] We are in talks with three or four candidates for initial coin offerings.”

Beyond ICOS, the AMF is also in talks with several crypto exchange platforms, custodians and fund managers, Marechal revealed.

As Reuters notes, momentum to provide greater legal clarity for the little-regulated sector has apparently been galvanized by news of the forthcoming Libra cryptocurrency from U.S. tech behemoth Facebook. 

A meeting of G7 finance ministers in Chantilly, France, today could see France’s Bruno Le Maire and the U.S. Treasury Secretary Steven Mnuchin finding a rare island of common ground when it comes to cryptocurrencies — and Facebook’s plans in particular — against a backdrop of ever-rising transatlantic trade tensions.

The Crypto Regulatory Roulette

Gaging the appetite for regulation in the nascent industry is complex and while some believe that increased oversight could bring greater reputability to crypto firms, change is also fraught with risks. Those unwilling to court the unknown are preemptively selecting proactive jurisdictions to launch their offerings. 

As Frederic Montagnon — a co-founder of LGO, a New York-based cryptocurrency platform that chose to host its ICO in France — told Reuters:

“When you are an entrepreneur, the worst that can happen to you is to set up your business where there is no regulation, to see an adverse regulatory framework later imposed that jeopardizes your whole business.”

As reported, the crypto markets have taken a wild turn after both President Trump and Mnuchin’s explicit focus on the risks of cryptocurrencies — yet some are taking a “no news is bad news” perspective on such high-profile airtime for the sector. 

Le Maire has meanwhile characterized Libra as an “attribute of the sovereignty of the States” and revealed that France intends to demand guarantees from the social media titan in liaison with G7 central bank governors.

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2018: The Year Central Banks Begin Buying Cryptocurrency

Eugene Etsebeth is a former central banker with the South African Reserve Bank. There, he notably chaired the virtual currency and distributed ledger working group.


Behind closed doors, G7 central banks are sluggish traders that buy and sell the same foreign currencies, marketable securities, special drawing rights (SDR) and gold day in and day out.

Central bank traders follow the investment policy enforced by the executive committees with specific asset allocation targets. In order of importance, the objective for foreign reserves trading generally is liquidity, security and returns (in last place).

Currently, the G7 is only concerned with the “appropriate regulation” of cryptocurrencies and not with the asset class potential of cryptocurrencies. Bitcoin, ether and zcash are nowhere to be found on the list of eligible instruments and currencies that central bankers are allowed to trade.

In 2018, things will be different. G7 central banks will start buying cryptocurrencies to bolster their foreign reserves.

The times they are a-changin’.

Background

One of the core functions of a central bank is to manage their nation-state, or union’s, official gold and foreign exchange reserves.

Reserves are integral to ensuring that a nation-state can service its foreign exchange liabilities and maintain confidence in its monetary and exchange rate policies. Overall, the financial stability that comes from hording gold and foreign reserves has historically protected the economic well-being of citizens in the event of external shocks.

Gold is commonly held because it is used as protection against black swan economic events. It can be used as a buffer against calamity because of its high liquidity, currency attributes and its diversification benefits.

Foreign exchange is also highly liquid and has diversification benefits (compared to a central bank’s own currency). Foreign exchange is mainly accumulated through buying of foreign exchange in the spot market, conducting money market swaps in foreign exchange for investing and domestic liquidity management in term and call deposit accounts with foreign banks.

Interconnectedness

The G7 countries are interconnected through a lattice of political, financial and trade agreements.

This club of countries hold massive reserves of each other’s currencies – called foreign exchange reserves. Most of these countries also hold vast warehouses of gold reserves. Canada is the exception, as they recently liquidated all of their gold.

The G7 central banks normally also hold special drawing rights (SDR) and marketable securities denominated in foreign currencies like government bonds, corporate bonds treasury bills, corporate equities and foreign currency loans.

The SDR needs special mention. It is an international reserve asset, created by the International Monetary Fund (IMF) to supplement its member countries’ official reserves.

The SDR’s value is based on five major currencies – the basket includes: US dollar, euro, Chinese renminbi (RMB), Japanese yen and British pound sterling. RMB has only recently (Oct. 1, 2016) broken the monopoly of G7 currencies that make up the SDR.

It is important to note that the SDR is still heavily weighted to the G7 currencies.

In a nutshell, the G7 countries mostly hold each other’s currencies as foreign reserves whether it be through the SDR or directly. Gold is mostly accepted as the common standard of universal value.

Why 2018?

A turning point for G7 central banks will be when the bitcoin market capitalization exceeds the value of all SDR’s that have been created and allocated to members (approximately $291 billion).

Another tipping point will be the realisation that the values of G7 currencies are devaluing against cryptocurrencies. The SDR and G7 country currencies will be forced to alter their foreign reserve weightings and eventually include a basket of cryptocurrencies.

The prescient Christine Lagarde, managing director of the IMF, has already warned central banks about cryptocurrency causing massive disruptions.

Foreign exchange reserves are used to back a nation’s domestic currency. Fiat currencies are pieces of paper or coinage that inherently do not have value. If anything the currency is backed by the shared belief of participants in a country’s currency scheme. When a central bank from a G7 country like Japan purchases foreign exchange reserves of the United States (US dollars) the shared belief of the U.S. dollar advertently becomes shared with the Japanese people.

In 2018, G7 central banks will witness bitcoin and other cryptocurrencies becoming the biggest international currency by market capitalization. This event, together with the global nature of cryptocurrencies with 24/7 trading access, will make it intuitive to own cryptocurrencies as they become a de-facto investment as part of a central banks investment tranche.

Cryptocurrencies will also fulfil a new requirement as digital gold.

Furthermore, foreign reserves are used to facilitate international trade. This means holding reserves in a trading partner’s currency makes trading simpler. In 2018, cryptocurrencies like bitcoin will be utilized for international trade on a moderate basis because the high returns as an investment will encourage a ‘hold’ strategy for G7 countries.

Foreign reserves are also used as monetary policy tool. Central banks may pursue the option to sell and buy foreign exchange currencies to control exchange rates. In 2018, central banks will start realising that monetary policy for a global market in cryptocurrency is not achievable.

Foreign reserves are additionally used as a hedge against its own economy. Countries whose economies are dependent on export products may use foreign currency as a buffer should the exports or value of their currency drop.

G7 central banks will purchase cryptocurrencies as a hedge to the performance of their economy.

How it will happen

As the realisation of the systemic weakness of fiat currencies becomes apparent contrasted with the groundswell of cryptocurrency, the executive committee of central banks, including governors, presidents and chairpersons – will call emergency meetings to exercise their prerogative to deviate from the current investment policy for reserves management.

Bitcoin and other select cryptocurrencies will be added to the list of eligible securities and currencies. Central bank money will pour into cryptocurrencies.

Most G7 central banks will likely use external fund managers to invest in cryptocurrencies over this new epoch. But don’t expect this information to be freely available.

This will happen in the dark. Old habits die hard.

G7 flags via Shutterstock

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