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Will the push for transparency undermine cryptocurrency anonymity?

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Will the push for transparency undermine cryptocurrency anonymity?

Rene Hendrikse, Managing Director EMEA, Mitek 

The increasing popularity of cryptocurrencies has the potential to radically change how the world uses money.

Many see advantages in this digital money over the alternatives: fast settlement, secure transactions, and, depending on the coin used, a level of anonymity.

Anonymity can, of course, be both an advantage and a disadvantage—there are definitely two sides to this coin. In a world where people are worried more and more about how their data is being stored and tracked, a payment method that offers a certain level of privacy is attractive. But it also appeals to those who want to use that privacy to hide from the law. One survey, from the University of Sydney and the University of Technology Sydney, estimated that nearly half of all Bitcoin transactions were associated with illegal activity. Even with the high-profile Silk Road shuttered, people are finding ways to get illicit substances online, and using cryptocurrency to pay for it.

Cryptocurrency is also indelibly linked with ransomware. A person or business confronted with a message that their PC has been hacked and their files encrypted will be given one way out. Pay a ransom to the perpetrator, and that ransom will be in a digital currency. If cryptocurrency is to gain widespread acceptance, it will need to shake off its reputation as the choice of criminals, hackers and other miscreants, and be seen as more than just the newest form of shadow banking.

Getting rid of cryptocurrency’s grubby reputation likely means the end of its anonymity. Regulators won’t be willing to accept cryptocurrency as a mainstream payment technology unless users are willing to accept the same rules.

Going straight

Legitimate businesses have been using cryptocurrencies for some time, but they are now under pressure to adopt the same Know Your Customer (KYC) processes as they would for any other method of payment. If a business needs an audit trail for every other customer, then it needs one for those who use cryptocurrency.

In Europe this will soon be mandatory. The EU’s fifth anti money laundering directive(AMLD5) will bring cryptocurrency wallets and exchanges into line with bank accounts and similar products. This follows similar moves by regulators in Japan (Act on Prevention of Transfer of Criminal Proceeds) and Australia (AML and CFT Amendment Act). Regulators have decided that if cryptocurrencies are here to stay, then they need to follow the rules. China, on the other hand, has introduced measures to crack down on cryptocurrency trading, going as far as to ban its citizens from offshore trading. Either way, the message is clear: if cryptocurrency is to go mainstream, it needs to be regulated in much the same way as any other currency.

One result of this is that compliance firms have seen a surge in business as cryptocurrency wallets and exchanges look to get ahead of regulation. While they’ve made progress, they’re not quite there yet. A study by John Devlin of P.A.ID Strategies found that 68% of the 25 most prominent cryptocurrency exchanges and wallets in Europe and the US did not perform identity checks on their clients.

There are also calls by the cryptocurrency sector itself for better regulation. The trade association CryptoUK has been established to educate politicians and regulators about cryptocurrency, and promote higher standards of conduct. Their definition of a supportive operating environment includes “appropriate regulation”—unlike many other trade bodies, CryptoUK is in favour of more regulation, including introducing anti-money laundering practices to exchanges.

Cryptocurrencies are on the way to meeting regulatory demands and “going straight”, but is there a risk that doing so undermines the very ethos of the crypto movement?

The need for transparency

Fundamentally, cryptocurrency needs to gain the trust of regulators and the public. Its short history has left it with a reputation as the currency of choice for criminals and money launderers. Long-term success will rely on wallets and exchanges to comply with regulation, which demands stricter identity verification.

The KYC requirements to meet Anti-Money Laundering regulation gives law enforcement an audit trail to follow if money laundering is suspected—they can tell who made particular transactions and identify if a transaction was an attempt to hide the origin of money that was the result of crime. It’s undeniable that cryptocurrency will lose one of its main features in order to gain mainstream acceptance, but it’s necessary.

This is only a problem if anonymity is the only advantage of cryptocurrency. It isn’t, it’s just the one that gave it notoriety. Cryptocurrencies are decentralised, meaning there is no single point of failure that a hacker could attack. As a peer-to-peer system, settlement doesn’t rely on business hours, making trading on weekends and holidays possible. And while it remains controversial whether this is an advantage or not, it retains its unique feature of having no central bank or government control.

The push for transparency by regulators will, ultimately, undermine the anonymity of cryptocurrency. What remains to be seen is if the unique features of cryptocurrency are enough to sustain its growth as a way to transact.

Finance

Sterling rises above $1.37 for first time since 2018; UK inflation rises

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Sterling rises above $1.37 for first time since 2018; UK inflation rises 1

By Elizabeth Howcroft

LONDON (Reuters) – A combination of heightened risk appetite in global markets and UK-specific optimism lifted the pound on Wednesday, as it strengthened to its highest in nearly three years against the dollar and five-month highs against the euro.

The dollar weakened against major currencies for the third straight session, helped by U.S. Treasury Secretary nominee Janet Yellen’s urging lawmakers to “act big” on spending and worry about debt later.

The pound rose above $1.37, hitting $1.3720 — its highest since May 2018 — at 1045 GMT. By 1136 GMT it had eased some gains and changed hands at $1.3687, up 0.4% on the day and up 0.2% so far this year.

Versus the euro, the pound hit a five-month high of 88.38 pence per euro, before easing to 88.51 at 1137 GMT, up around 0.5% on the day.

The pound’s recent strengthening can be attributed in part to relief among investors that the impact of Brexit has not caused the chaos some feared, as well as a lessening of negative rates expectations, said Neil Jones, head of FX sales at Mizuho.

“Going into early 2021, there was a bearish sentiment building into the pound on the Brexit deal, in terms of maybe it had a limited reach, and then secondly an expectation of negative rates and so to some extent the market has been cutting down on sterling shorts because neither of those things have been quite so apparent as they were,” he said.

Bank of England Governor Andrew Bailey said last week that there were “lots of issues” with cutting interest rates below zero – a comment which caused sterling to jump.

The UK’s progress in rolling out vaccines is also seen as a positive for investors, Jones said.

Currently, the United Kingdom has vaccinated 4.27 million people with a first dose of the vaccine, among the best in the world per head of population.

“Further progress in vaccinations (a pick-up in the daily rate) by the time the BoE MPC meeting takes place on 4th February may prove enough to hold off on any additional monetary easing,” wrote Derek Halpenny, head of research for global markets at MUFG.

Inflation data for December showed that prices in the UK picked up by more than expected in December, to a 0.6% annual rate.0.6

Inflation has been below the Bank of England’s 2% target since mid-2019 and the COVID-19 pandemic pushed it close to zero as the economy tanked.

(Graphic: CFTC: https://fingfx.thomsonreuters.com/gfx/mkt/oakpeyayxpr/CFTC.png)

(Reporting by Elizabeth Howcroft, editing by Larry King)

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Euro sinks amid broader risk rally against dollar

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Euro sinks amid broader risk rally against dollar 2

By Ritvik Carvalho

LONDON (Reuters) – The euro struggled to join a broader risk rally against the dollar on Wednesday as analysts said the risk of extended lockdowns in Europe to combat the spread of COVID-19 and the continent’s lag in a vaccine rollout were weighing on the currency.

Down 0.1% against the dollar at $1.2117 by 1130 GMT, Europe’s shared currency had only the safe-haven Swiss franc and Sweden’s crown for company in resisting a broad rally against the greenback by the G-10 group of currencies.

“We’re getting more headlines that the current lockdowns will be extended further, which could mean that the euro zone would be flirting with a double-dip recession before long,” said Valentin Marinov, head of G10 FX research at Credit Agricole, noting Europe’s lag in rolling out a coronavirus vaccine compared to the United States and Britain.

“So all of that plays into the story that tomorrow’s ECB meeting, while uneventful in terms of policy announcements, could convey a relatively dovish message to the market. On top of that, President Lagarde could once again jawbone the euro, so the euro is kind of lagging behind.”

Marinov also noted price action in the pound, which hit $1.3720 – a 2-1/2-year high – and 88.38 pence – its highest since May 2020 against the euro – as a contributing factor to euro weakness. [GBP/]

There was also focus on a story by Bloomberg News, which reported the European Central Bank was conducting its bond purchases with specific yield spreads in mind, a strategy that would be reminiscent of yield curve control.

Elsewhere, the risk-sensitive Australian dollar gained 0.4% to $0.7727. The New Zealand dollar, also a commodity currency like the Aussie, gained 0.25% to $0.7133.

DOLLAR WEAKNESS

While the world will be watching Joe Biden’s inauguration as U.S. president at noon in Washington (1700 GMT), traders were more focused on his policies than the ceremony.

U.S. Treasury Secretary nominee Janet Yellen urged lawmakers at her confirmation hearing to “act big” on stimulus spending and said she believes in market-determined exchange rates, without expressing a view on the dollar’s direction.

The index that measures the dollar’s strength against a basket of peers was up almost 0.1% at 90.510. The euro forms nearly 60% of the dollar index by weight.

It also fell 0.1% against the Japanese yen to 103.81 yen per dollar.

While the dollar has perked up in recent weeks on the back of a rise in U.S. Treasury yields, investors still expect the currency to weaken.

“We remain bearish U.S. dollar, and expect the downtrend to resume as U.S. real yields top out,” said Ebrahim Rahbari, FX strategist at CitiFX.

“Continued Fed dovishness remains important for our view, in addition to global recovery, so we’ll watch upcoming Fed-speak closely.”

Positioning data shows investors are overwhelmingly short dollars as they figure that budget and current account deficits will weigh on the greenback.

(Graphic: Dollar positioning: https://fingfx.thomsonreuters.com/gfx/mkt/oakveyombvr/Pasted%20image%201611132945366.png)

UBS Global Wealth Management’s chief investment officer Mark Haefele reiterated a bearish view on the dollar, saying that pro-cyclical currencies such as the euro, commodity-producer currencies, and the pound would benefit “from a broadening economic recovery supported by vaccine rollouts”.

The cryptocurrency Bitcoin fell 4%, trading at $34,468.

(Reporting by Ritvik Carvalho; Editing by Angus MacSwan)

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Britain to publish new weekly consumer spending data

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Britain to publish new weekly consumer spending data 3

LONDON (Reuters) – Britain’s statistics office said it would publish new weekly consumer spending data from Thursday, based on credit and debit card payments information collected by the Bank of England.

The figures come from Britain’s CHAPS high-value payments data and cover the proceeds of recent credit and debit card payments made by payments processors to around 100 major retailers.

The ONS said the figures would provide greater insight into spending on social activities and other consumer services that are not captured by its monthly retail sales data.

(Reporting by David Milliken, editing by Elizabeth Piper)

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