On the 22nd of June, the three European Supervisory Authorities (ESA) looking over the European financial system, held the 2018 edition of the joint ESAs Consumer Protection Day centred around the theme “navigating new challenges together”. The event focused on three distinct areas of concern in terms of consumer protection:
– The costs and disclosure of past performance for retail investment products, which focused on price transparency and information to the consumer about how well an investment product fared in the past.
– Consumer protection and the future of Virtual Currencies, looking at the emerging issues that consumers face in the realm of virtual currencies (more specifically, cryptoassets such as Bitcoin or Ethereum).
– Self-placement of financial products, when firms sell to their clients, financial instruments that they have issued.
Martin Schmalzried from COFACE spoke on the panel dedicated to virtual currencies, representing the voice of civil society and examining the wider societal implications for the emergence of a specific category of virtual currencies (crypto-assets) and what opportunities and challenges lie ahead.
The first issue to address is the problem of information and education of people about blockchain and cryptoassets, what they are, where to buy them, how blockchain works… At this stage, only a very small fraction of European citizens have bought or use crypto-assets.
Most consumer protection issues arise from a specific type of Blockchain called “public permissionless” Blockchain and which includes Bitcoin or Ethereum. The main reason being that there is no central point of control, no one can be identified as “controlling” the Bitcoin network or the Ethereum network and thus it is impossible to identify a person “liable” in case something goes wrong or to “undo” a transaction or recover a lost “private key” (a type of password that gives you access to your crypto-assets).
Informing consumers is a real challenge since it entails some preliminary technical knowledge, however, some useful comparisons with existing technologies and applications can greatly help consumers navigate these new technologies and understand the risks involved.
One useful analogy is comparing crypto-assets to virtual money inside a multiplayer game. For instance, in Pokemon GO, anyone can buy “gold coins” inside the game which enables players to purchase virtual items like special “pokeballs” allowing them to catch rare Pokemons. Thus the “value” of the virtual currency inside Pokemon GO is only based on the interest that people have in playing Pokemon GO.
In a similar way, crypto-assets called “utility tokens” are used to pay for certain virtual decentralized online services. For example, Sia Coin is a crypto-asset used to rent/purchase hard disk space online (a decentralized cloud service). The value of a Sia coin is linked to the value that people give to hosting their files online.
With crypto-assets of public permissionless blockchains is that there is no guarantee that the “service” provided will continue in the foreseeable future. For instance, if everyone stops playing Pokemon GO, chances are the items that you purchased will become useless. The same applies to crypto-assets. Thus the major advice that people should remember when considering buying some crypto-assets is: do you intend to use the underlying service? For consumers not interested in using the service and only interested in speculating on the value of the crypto-asset, they carry a huge risk of seeing the value of their investment go to zero, simply because the value depends on its use. In short, it is like buying virtual money for an online multiplayer game that you have never heard of and that you don’t intend to play, betting that the game will become successful and that you will be able to sell that virtual money at a higher price than you bought it. A very risky bargain indeed.
The main opportunities that come with crypto-assets is enabling the advent of a real decentralized sharing economy. For those complaining about centralized services like Facebook, Uber, Booking and many other centralized platforms which abuse of their dominant, near monopolistic position, to extract wealth or violate privacy of their users, they might find solutions thanks to Blockchain by creating a decentralized version of all of those services.
Some of the major risks for consumers include scams, fraud and theft. The security of many exchange platforms (where you can buy/sell crypto-assets against fiat money like euro or dollars) is not perfect. Some fake exchanges also emerge and simply steal your money without providing you any crypto-asset.
In terms of regulation, there are certain policy recommendations that could help bring about more trust in the technology. First, centralised exchange platforms need to start cooperating and seeing security as a “common good” and not a competitive advantage, since a security breach in one platform affects the trust in the entire ecosystem. Regulators should thus greatly encourage or even mandate exchange platforms to share and agree on standard security measures. Second, key developers from certain Blockchain based projects should be invited by public authorities and financial users representatives to address the various scams and fraud and agree on ways to prevent them. For instance, the process to collect funds from consumers for a new project (called ICOs: Initial Coin Offerings) should evolve to enable investors more control over their funds. For instance, investors could be allowed to vote on releasing parts of the collected funds depending on how well the project they invested in is advancing or could vote to get their money back and dissolve the fund.
The most important aspect to keep in mind from the perspective of regulators is to avoid a “Napster like” fiasco. Napster, as many will remember, was a peer-to-peer file exchange programme that allowed people to share their music or other files online. Napster being in clear violation of copyright law was swiftly shut down. However, many copy-cat programmes emerged very quickly and thrive to this day with zero success from public authorities to enforce copyright law. Blockchain technology, especially of the public permissionless type, is in a similar position. Much of the projects that have emerged operate outside of the rule of law. However, if regulators try to ban or regulate in a very tight manner, this emerging technology, they could repeat the errors committed in the past and drive all of these projects underground, which, in the end, will go against everyone’s interest. We urgently need to rethink old business models and see how these new technologies can benefit everyone in a fair way.
All in all, Blockchain and crypto-assets is a very young technology, and is not yet mature for the “ordinary person” to get engaged in. However, it carries great potential for an Internet which is more decentralized and controlled by people for the people. COFACE-Families Europe will continue studying the development of Blockchain technology and identify the societal changes it may bring and how it could affect the lives of millions of families online.