Most jurisdictions around the world take a cautious approach to crypto businesses that want to entangle themselves with the traditional banking sector. Some countries, like Bahrain, make it harder than others to mix digital assets and traditional banking. Yet one company that just became the first ever to be licensed by Bahrain's central bank has proven very instructive. They have shown the rest of the world how to do it.
News reports say the Rain Cryptocurrency Exchange is the first exchange in the Middle East to receive a regulatory license. The exchange is based in Bahrain. As such, their license comes from the Central Bank of Bahrain. It is a license that gives the exchange the same legitimacy as businesses in the traditional financial sector.
Complementing the new license is some $2.5 million in new funding provided by a number of partners, including a blockchain fund based in Kuwait. Rain management has said that the license has allowed the company to become "the first encrypted currency trading platform in the Middle East to be fully licensed by a regulatory entity and join a limited range of internationally recognized platforms for currency trading."
Special challenges in the Middle East
It might be hard to appreciate how significant this story is if you do not understand the special challenges that exist in Middle Eastern countries. Those countries operating under Islamic banking laws are subject to a myriad of rules and regulations governing what are considered acceptable and unacceptable business transactions. For example, gambling is frowned on altogether. So attempting to combine cryptocurrency and online gambling in many Middle Eastern countries is a nonstarter.
Those same banking laws also address speculation and lending on interest. Rules against speculation are the most difficult for cryptocurrency exchanges. The good news for Rain is that different jurisdictions in the Middle East have differing opinions on the concept of exchanges and how speculation affects what they do.
Bahrain's central bank has apparently reached the conclusion that the cryptocurrency exchange concept does not violate Islamic banking laws. In granting the license, they have given Rain permission to enter into productive relationships with local banks and currency trading platforms. This should make it easier for Rain to run its business on a day-to-day basis.
How they presented cryptocurrency
We do not have a lot of details about the application process and exactly what it is that convinced the Central Bank of Bahrain to grant Rain a license. But there are some clues. For example, in a recent blog discussing their license application, Rain officials chose to put the emphasis on topics like governance, security, capital adequacy, etc. They chose to focus on the company's ability to provide reliable service to both commercial and consumer clients.
It doesn't appear as though they spent a lot of time justifying cryptocurrency or cryptocurrency exchanges in light of Islamic banking laws. Instead, they focused on the service they could provide; they explained how they provide it. By all accounts it seems that their approach was a masterful stroke.
Rain appears to have altogether avoided the debate over whether or not cryptocurrency is acceptable. By working on the belief that it is, they were able to move forward and clearly establish what their business does and how it can be beneficial to customers. Perhaps that forced those reviewing the application to look solely at the business merits of Rain's license application.
A model for others
Again, we do not know all the details of Rain's license application or approval. Yet what we do know provides a model for others. It shows cryptocurrency ICOs, crypto exchanges, and blockchain businesses how to present themselves in an environment that looks increasingly hostile toward cryptocurrency as a whole.
By now you are familiar with Facebook's proposed Libra and Calibra projects. It turns out those projects may never get off the ground. According to Facebook's own words published in a recent SEC filing, the company has no reasonable assurances that either project will succeed. They even admitted in the filing that they really don't know what they are doing or how they will make Libra profitable.
That is all well and good but let us assume Facebook figures it out. They still have an uphill climb to convince regulators they can be trusted. Rather than argue that point, it might be better for Facebook to present Libra as a business opportunity that could potentially benefit both commercial enterprises and individual consumers. If they focus on the business merits of Libra instead of its technical aspects, they might have a better shot at convincing regulators.
This is not to say that Facebook should not put effort into making sure Libra and Calibra are technically sound. They absolutely should put forth that effort. But gaining regulatory approval might be more easily won by proving their technology is sound and then moving on to discuss the benefits that the technology offers.
A do-over for cryptocurrency
The cryptocurrency industry could use a similar do-over. Think of it as a reset of sorts. If the crypto community could refocus the public's attention on the original goals of Bitcoin instead of the current investment frenzy everyone seems to be so obsessed about, they might be able to make more significant inroads into worldwide adoption.
As a total percentage of the world population, very few people own cryptocurrency assets. Even fewer use those assets as a day-to-day monetary system. The vast majority of crypto holders treat their holdings as assets and a store of value. They buy solely for the purpose of waiting for the price to go up so they can sell.
This investment-first mindset is one of the things that has led to slow adoption. It is a mindset that affects cryptocurrency prices not based on utility but based on investment supply and demand. It is the primary cause of the price volatility cryptos like Bitcoin are known for. Furthermore, volatility is retarding cryptocurrency's adoption as an alternative monetary system.
The way around it might be to follow Rain's example. In other words, the decision makers behind the world's top cryptocurrencies should be seeking to change the discussion. They should be attempting to shift the focus away from investing and toward daily utility.
Changing the discussion is not so easy. After all, topics like bull markets and market capitalization are mysterious and intriguing to the general public. Moreover, deciding to eventually get in on the crypto market by making that first investment does wonders for a person's self-esteem. There is a mystery that comes with crypto investing that people love.
Nonetheless, cryptocurrency will never reach its full potential if it does not accomplish worldwide adoption. We need to get back to the original utility of Bitcoin if worldwide adoption is to ever become reality.
Easing regulatory concerns
Would a more utilitarian focus make it easier to satisfy regulators? Probably. Regulators are not so concerned with making rules governing how people use their fiat to buy food, put fuel in their cars, etc. They are not sitting around looking to dictate how people use their debit cards or write paper checks.
Most banking sector rules govern security, privacy, and accountability. The rules are aimed at protecting consumers against a banking industry that would otherwise take advantage of them. That is exactly where we are with cryptocurrency.
Regulators are not all that worried about how consumers might eventually use Libra tokens to conduct routine transactions. They are concerned about how well Facebook will safeguard customer data. They are concerned about Facebook's overall security and its ability to defend against cyber security threats.
Other cryptocurrency entities in the same boat face the same kinds of regulatory scrutiny. So maybe the best way to overcome regulatory hurdles is to shore up the technology so that such concerns are no longer legitimate. Then follow it up by changing the discussion to focus on utility. Show regulators how a project will benefit customers. Show how it will work alongside existing financial tools to make things better for everyone.
It can be done with resolve
The biggest take-away from the Rain story is the understanding that it is possible to satisfy regulators if an organization is willing to put forth the effort. It does take resolve, but it can be done. Rain has proven it possible to satisfy regulators in one of the more restrictive environments in the world.
It is interesting to speculate over whether or not Bitcoin's original creator ever imagined where his project would end up 10 years later. Did he have any idea that what he intended to be an alternative monetary system would become what it is today? There is no way to know. But we do know that the discussion has changed considerably.
Today we talk about cryptocurrency primarily as an investment. And with that comes a whole host of ethical and moral questions. Maybe it is time to get away from the investment focus and get back to what Satoshi Nakamoto originally intended: an alternative monetary system that allows people to transact business outside of the traditional banking system.