The head of the Estonia Financial Supervision Authority – cryptocurrency is coming anyway

Updated: Jul 30, 2019

The head of the Financial Supervision Authority, Kilvar Kessler, considers the introduction of cryptocurrencies, such as Facebook's Libra, an inevitable development that makes no sense to fight, but must be subject to the right rules by the states.

The idea of ​​Facebook to create its own cryptocurrency has received much criticism. Why?


In order to talk about a phenomenon at all, one should first understand what we are talking about, what these elements are. And only then can one conclude whether something deserves criticism or praise, or both. Probably we should explain what is money, what is the payment system and then a little look at what Facebook is.


So what is this money?

Money is a human invention, it is not found anywhere in nature, nor is it in the physical world. As a lawyer, I would even say that he is a child of justice.

Money has historically created or been assigned certain functions - it holds value, it is a unit of account and it is also a means of payment, or even legal tender. Money, just this legal tender, has so far had specific issuers - it has been countries. The country because money is the ideal instrument to regulate the economy. While other resources are subject to market demand - who produces how many wooden spoons - there is a limited number of money-makers. It is the state itself and some other parties - the banks, which also generate money. Because for each currency you deposit, you can lend a certain amount and again it is deposited somewhere in the bank. This is how banks create money, not just the state itself or the central bank.

Now that the nature of money is more or less clear, delimited - the child of law and creation of man, and it has functions - that holds value and is a means of payment, another concept that has to do with and needs to be clarified is that what is a payment system.


Need a payment system to use money?


If there is only cash, we are not talking about a separate payment system at all. But a payment system is a network of relationships between different parties that allows you to move that money in space. And in the case of a payment system, in principle, the larger the system, the more participants there are, the more transactions there, the cheaper it is for each participant to operate this system - known as the scale effect.

Another thing about money is moving money or value over time. This is what we know as lending - we bring the loan into the present, or we put the deposit into the present.

And how do we get to Facebook from here?

In the financial world, Facebook-like ventures are called bigtech or techfin. They are characterized by a couple of phenomena. Firstly, they have a very large customer base, or a very large amount of information. And another thing that characterizes them is that they have a pretty high ability to process this information.

And now we get there: As mentioned earlier, what is important with payment systems is that if there are many players, there will be a certain competitive advantage, the opportunity to provide this service cheaply. And secondly, for every lending, after all, the entire risk record is important - who borrows, what is its ability to repay, in what environment it borrows, what it uses it for, and so on. And that in itself also means information, the ability to process it. And this bigtech, including Facebook, has that kind of computing power. So, in fact, in two areas - both as a payment system and in the field of credit - they can compete with the existing financial system.

Kilvar Kessler Autor: Siim Lõvi /ERR

And would you need your payment instrument, your money, to to compete?


Yes, if Facebook now decides to create its own unit of account, at some point it may start to compete with the money issued by states, the legal tender. Older people probably remember how the Finnish mark competed with the ruble at the end of the Soviet era. Particularly because it was more stable, it deposited more value due to higher ruble inflation. Therefore, the so-called hard currency, the Finnish mark, proved to be more popular with the people than the ruble. So that there may also be competition for such larger units issued by bigtechs with its real, legal tender, although the reasons may be different from the example given.

And to come back: since money, or legal tender, is one of the instruments of economic and monetary policy, of course, countries may be exposed to competition in the long run, the risk that someone from the private sector may also influence economic and monetary policy. And countries usually don't allow it. They regulate such phenomena because they want to maintain a monopoly of power.


Where and how could Facebook come out first with its currency - Libra?

If you look at business opportunities, where Libra-like products can hit the ground first, they would be areas with less developed financial market infrastructure. Be it Africa, some regions of Asia - areas where payment systems are less developed. When it comes to new technologies that are easily accessible to the general public - as opposed to the banking system in those areas - of course, Facebook may gain some leverage or point of departure to enter more advanced financial markets such as the European Union and the United States.

The practice so far shows - and this has been seen especially in China - that such systems first enter the payment services market. And from there the next step is the credit market. This is precisely because they have raw materials - the financial market is data and we can synthesize it. Perhaps mathematics - calculating probabilities - and this mathematics is bound together by law, so it means by contracts and laws.


If the information held by the company enables people background and creditworthiness to be assessed, is it directly related to the issue of privacy protection?


I would say that data is a raw material today - after all, it is quite comparable to mining. After all, mineral resources also allow people to do the things they need. Data is a raw material, and privacy is to some extent like a framework, under which conditions these raw materials can be mined. After all, not everyone can start mining arbitrarily, and this requires the permission of someone - the landowner, the state. So is privacy - a framework, or vice versa, to protect privacy.

If we look at it more broadly, all these big data miners come from outside the European Union - Facebook is a US company, Alibaba is Chinese. The European Union itself does not have such companies, at least for the time being. You probably want to protect your jurisdiction, your resources, so to speak. To this end, the European Union General Data Protection Regulation (GDPR) has been established. It has been given the title of privacy and personal data protection in this case, but I would say that competition is the title.


Kilvar Kessler Autor: Siim Lõvi /ERR

Then there is the aspect of responsibility - if a foreign operating in Europe receives income but does not take responsibility. Do we have enough power to hold him accountable?


It still is. If you have enough assets, if the market is big enough, you also have the power to regulate these larger companies. Every country has the power to do so. And the power of the state is that it has the power to enact laws and to enforce its enforcement. This is a country-specific ability. And life, after all, shows that when one business grows too big, and once again, the basic functions of the state may begin to be endangered, states will always regulate that business.


So can the European Union set its own rules for Libra?


If you look at Facebook's libra project as it has been introduced to the public, it will probably require licenses in the European Union or the euro area. It's not so easy that we bring it to the market and the country does not want to know what it is all about. Yes, it wants to! And not just in the form of privacy or personal data protection, but also in the form of financial market regulations.

After all, financial market regulations have been put in place so that the consumer, those who are going to consume these products in the future, or even to borrow or deposit, is to protect the interests of those consumers, to make sure that the system works as expected. That their money or libraries have not been lost, that no one has stolen them.

Remember, some time ago, Rain Lõhmus told the media how he had bought cryptocurrency but forgot the password of a digital wallet, and now he has lost that money - some sort of situation or risk needs to be mitigated and the associated technological risks must be mitigated. After all, these big bigtech projects are getting attention. Somebody likes it, somebody doesn’t like it - that's why the criticism and praise comes in the media.


So it seems that such things are the word of the future and can't be really prevented.

I look at this more easily, that we don't want to prevent anything, and I also believe that nobody wants to. Life itself sets everything up. I maintain that phenomena such as money and the need to move it in space and time remain. It has been, it is now, and this need will continue to exist.

What is changing is the form of money and payment systems, the technological solution. Once upon a time we had money in the form of metal, then it was in the form of paper, and in a way it turned into electrical impulses. If we could see what it would look like in the future, it would become rich right now, but we don't exactly foresee it.

Of course, the whole payment system and the form of money are evolving, and the advances in information technology are defining what the payment systems and money will become in the future. The goal is not to force it into static, for example, to make money on paper all the time.

The aim of the countries is to make developments predictable for consumers and safe and acceptable - this is a national responsibility. That is, on the one hand, and on the other - as I have described - when a private player comes to the country's playing field, that is, to shape monetary policy, then of course the countries react. So there are two sides: consumer protection and policy enforcement.

If one thinks that the nation's maintained monetary systems are like altruistic systems, but Facebook is a private for-profit company, then it probably has other motivations to launch such a system. Can i draw a line here?

Absolutely! Countries have their own interests. The interests of states in a democratic environment are determined by the people, private companies have their own interests, they are defined by their owners, and the interests of the people and those of private companies may not always coincide. This is the point that while a private company may pose a threat to the interests of the state in the medium or long term, the state is likely to take steps to manage or minimize that threat for itself.


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