Understanding Cryptocurrency in the ECCU
By Martina Regis, Stephanie Pascal, Waverly Paul and Kezron Walters
Key Messages
- Despite significant risks such as scams, fraud and security breaches in the crypto space, interest in crypto appears not to have waned among global investors.
- Recognising these risks, global and national regulators are actively introducing regulation to mitigate them; however, the global crypto regulatory landscape remains fragmented.
- Although the ECCB has introduced a unique regional legislative framework to guide the development of this ecosystem, regional investors are being advised to exercise extreme caution before undertaking any crypto activity.
In March 2024, Sam Bankman-Fried, founder of the cryptocurrency exchange, FTX, was sentenced to 25 years in prison, for defrauding customers of billions of dollars deposited with FTX. FTX - headquartered in The Bahamas - was among the world’s largest and most recognized cryptocurrency exchanges, until its implosion in November 2022.
The collapse of FTX offers the ECCU valuable lessons and insights concerning the risks of cryptocurrency. The fallout highlights the Caribbean region’s potential exposure to the crypto ecosystem, including the regulatory and reputational risks from this event.
In addition to FTX, there have been several other crypto failures globally, underscoring the structural vulnerabilities of the crypto ecosystem. Despite their inherent price volatility (see Figure 1) and prominent failures, public interest in digital assets has remained high (PwC, 2022; Armstrong, 2022), particularly in developing countries (see Figure 2).
What is Cryptocurrency?
Before explicitly defining what cryptocurrency is, it is important to understand the concept of money and its varying properties. Money is anything that can be suitably used as a medium of exchange, a measure of value, or a means of payment. Bech and Garratt (2017) (as cited in Beck, 2021) utilizes a money flower (see Figure 3) to illustrate how money may be classified across four themes: issuer (central bank or other), form (electronic or physical), accessibility (universal or limited) and transfer mechanism (centralized or decentralized). For example, while bank deposits and mobile money are universally accessible, electronic and confined to the centralized location of a payment system, they are issued by commercial banks, rather than being issued by central banks.
Figure 3: Money Flower
Bitcoin, the first and most renowned cryptocurrency, acts as a decentralized peer-to-peer electronic cash system. The definition above suggests that Bitcoin can be used as an alternative currency (Baur, Hong, & Lee, 2018). However, given its inherent volatility, investors often buy a crypto asset intending to sell it at a higher price, thus making it akin to a speculative asset. A speculative asset is one that is purchased with the expectation of profiting from a significant price fluctuation rather than for its intrinsic value. These assets are often characterised by high price volatility, uncertain future returns and high reliance on market sentiment rather than economic fundamentals like cash flow. Thus, they pose risks to vulnerable customers who may be attracted by potential high returns.
Within this crypto sphere, several types of asset classes have emerged, such as security tokens, tokenised commodities, tokenised real estate, and Non-fungible tokens (NFTs) (see Figure 4).
The introduction of stablecoins has now added another twist to the cryptocurrency puzzle. Stablecoins are another type of cryptocurrency intended to maintain a fixed price relative to another asset. Due to their stability, they may be viewed as a more useful means of payment relative to other cryptocurrencies and, although minimal, can become more widespread.
For this reason, central banks and regulators from around the world have been advocating for the development of regulations to protect vulnerable customers, but also to preserve the role of fiat currency and the payments system. Central banks have sought to develop alternatives to these digital assets through the introduction of central bank digital currencies (CBDCs), such as the Bank of Jamaica’s JamDex and the Central Bank of The Bahamas’s Sand Dollar. In 2020, the Eastern Caribbean Currency Union (ECCU) amended Articles 2 and 18 of the ECCB Agreement (1983) to include the digital version of the Eastern Caribbean Dollar, DCash, which was officially issued in March 2021.
Regulatory Responses to Crypto Risks in the ECCU
Given crypto assets’ interlinkages with the traditional financial system, their adoption may pose significant risks to financial stability, including a heightened level of ML/TF/PF[1] risks, due to their potential to encourage anonymity, their lack of transparency, and fragmentation of cross-border payments. Varying stages of development in the implementation of AML/CFT/CPF[2] regulatory measures exacerbate these risks, leading to regulatory arbitrage (International Monetary Fund, 2021). The World Economic Forum described the significant regulatory challenges quite fittingly in its May 2023 White Paper, entitled “Pathways to Crypto-Asset Regulation: A Global Approach,” noting that crypto’s “borderless, open-source, decentralized and constantly evolving” (World Economic Forum, 2023, p. 3) nature has resulted in a fragmented global regulatory landscape. Resultantly, many recent cryptocurrency conversations centre on the need for greater regulation (Chipolina, 2024).
In particular, the ECCB has adopted a cautious but vigilant stance as it relates to the regulation of cryptocurrency within the ECCU. Currently, the ECCB does not regulate cryptocurrency and often releases advisories to the public noting the assets’ increased volatility, lack of transparency and the Bank’s inability to intervene to mitigate adverse impacts (ECCB, 2022).
Recognizing the need for a regulatory framework, the ECCB introduced the Virtual Asset Business Bill to regulate the digital asset ecosystem. The Bill has been passed in seven (7) of the eight (8) ECCU countries with Anguilla maintaining its Digital Assets Business Act. The Bill creates a harmonised legal framework for the ECCU to mitigate risks within this landscape. In addition, the Virtual Asset Business Regulations have been developed and passed by four member countries. These regulations aim at ensuring compliance with Recommendation 15 of the Financial Action Task Force (FATF).[3]
Although the regional legislative architecture provides a useful first step to regulate the space, the regional framework alone will not be adequate to address crypto within the regional jurisdiction. The integrated nature of global finance suggests that, to be effective and avert regulatory arbitrage, regulation must have a global scope, highlighting the importance of collaboration and participation in regional and global dialogues.
A Call to Action: Proposed Avenues for Strengthening the Regulatory Architecture
Despite numerous crypto failures, the digital assets landscape continues to evolve. This growth is driven in part by the introduction of new digital assets and products. The development of regional and global regulatory frameworks is a step in the right direction. However, the introduction of these new digital products challenges the effectiveness of existing regulatory approaches, which lag behind innovation. Regional and global regulators should continue to explore new avenues to alleviate these emerging risks, adopting a more modern and responsive regulatory framework that allows for timely adjustments, as the nature of crypto becomes clearer.
Consequently, the ECCB recommends that member Governments:
- Expedite the issuance of the Virtual Asset Business Regulations.
- Promote alternative options to crypto products, such as investment in the regional capital markets and the use of DCash 2.0 once the digital currency is relaunched.
- Fast track the establishment of systems that would help in the identification of virtual asset providers operating in the ECCU and their licensing arrangements under the Virtual Asset Business Act.
- Facilitate the establishment of the Eastern Caribbean Financial Standards Board to ensure a cohesive approach in order to reduce regulatory arbitrage and ensure thorough and consistent treatment of virtual assets by financial institutions.
- Strengthen investor and consumer education, and public awareness - highlighting the potential risks of digital assets, while the regulatory framework continues to develop.
Ultimately, regional investors must exercise extreme caution before venturing into crypto assets or any new form of innovative investment. The market’s inherent volatility, combined with its evolving nature and uncertain regulatory environment exacerbate potential risks. The numerous swindles, which have plagued the market, further heighten these concerns, and reinforce the need for extreme caution before investing in or using crypto: “Caveat emptor!”
References
Adrian, T., He, D., Ismail, A., & Moretti, M. (2023, July 18). Crypto Needs Comprehensive Policies to Protect Economies and Investors. Retrieved from https://www.imf.org/en/Blogs/Articles/2023/07/18/crypto-needs-comprehensive-policies-to-protect-economies-and-investors
Aquilina, M., Frost, J., & Schrimpf, A. (2023). Addressing the Risks in Crypto: Laying out the Options. BIS Bulletin (No. 66). Retrieved from https://www.bis.org/publ/bisbull66.pdf
Armstrong, M. (2022, November 14). Where the Crypto Hype is Growing. Statista Daily Data. Retrieved from https://www.statista.com/chart/27070/cryptocurrency-use-selected-countries-over-time/
Baur, D. G., Hong, K., & Lee, A. D. (2018). Bitcoin: Medium of exchange or speculative assets? 54, pp. 177-189.
Beck, T. (2021). Digital Technology and Financial Innovation: A Literature Survey. In T. Beck & Y.C Park(Eds.), Fostering FinTech for Financial Transformation: The Case of South Korea (pp. 47 – 72) Centre of Economic Policy Research
Chipolina, S. (2024). Tether crypto token increasingly favoured by money launderers, UN warns. Financial Times. Retrieved from https://www.ft.com/content/78c6ea20-5e9d-40ba-867f-1e0431ebb710
Eastern Caribbean Central Bank. (1983). Eastern Caribbean Central Bank Agreement Act, 1983.
Financial Stability Board. (2023, September 7). IMF-FSB Synthesis Paper: Policies for Crypto-Assets. Retrieved from https://www.fsb.org/wp-content/uploads/R070923-1.pdf
International Monetary Fund. (2021). Global Financial Stability Report, October 2021: COVID-19, Crypto, and Climate: Navigating Challenging Transitions. Washington, D.C.
PwC. (2022, December). PwC Global Crypto Regulation Report 2023. (PricewaterhouseCoopers, Ed.) Retrieved from https://www.pwc.com/gx/en/new-ventures/cryptocurrency-assets/pwc-global-crypto-regulation-report-2023.pdf
World Economic Forum. (2023). Pathways to Crypto-Asset Regulation: A Global Approach. Retrieved from https://www.weforum.org/publications/pathways-to-crypto-asset-regulation-a-global-approach
[1] Money laundering/Terrorist financing/Proliferation financing
[2] Anti-Money Laundering, combating the financing of terrorism and counter proliferation financing
[3] Recommendation 15 reiterates how critical it is for governments to meet their commitments to implement the AML/CFT standard for the virtual asset sector in order to effectively tackle money laundering and terrorism financing nationally and globally (Chainanalysis, 2024)
About the Eastern Caribbean Central Bank
The Eastern Caribbean Central Bank (ECCB) was established in October 1983. The ECCB is the Monetary Authority for Anguilla, Antigua and Barbuda, the Commonwealth of Dominica, Grenada, Montserrat, Saint Christopher (St Kitts) and Nevis, Saint Lucia and Saint Vincent and the Grenadines.
Disclaimer
The ECCB strongly supports academic freedom and encourages such activity among its employees. Notwithstanding, the views and opinions expressed are solely those of the authors. The ECCB may not necessarily endorse the writers’ position or guarantee technical accuracy. Readers are free to submit their comments or questions on the information presented in this publication.
