EU Discusses Regulation and Competition in the Cryptocurrency Landscape
According to a report titled ‘Competition Issues in the Area of Financial Technology (FinTech),’ the European Union (EU) is concerned about a number of issues concerning the nature of competition in the cryptocurrency industry.
The EU concluded that the current state of the fintech market and cryptocurrency industry is too fluid to reach a clear conclusion. The international nature of the cryptocurrency market also presents a significant challenge to European competition policy.
“Many of the players operate from global locations outside the jurisdiction of European competition authorities, which makes investigation or prosecution on anticompetitive behaviors more difficult,” said the report.
Despite these difficulties, the EU mentioned that regulation remains important because it “sends a message of caution about the appropriateness of competition policy tool as the preferred means to address every challenge.”
The report was commissioned by the European Parliament Committee on Economic and Monetary Affairs (ECON), a body that is responsible for overseeing the EU’s European Central Bank.
Inter-Cryptocurrency and Intra-Cryptocurrency Competition
While the report was focused on the entire fintech industry—from banking, insurance and wealth management, to personal finance and forex—there was a large component dedicated to digital currencies and the current areas concerning inter-cryptocurrency and intra-cryptocurrency market competition.
The report defined the inter-cryptocurrency market competition as competition between different cryptocurrencies. Whereas the intra-cryptocurrency market is the competition between different service providers like cryptocurrency exchanges, miners, wallets, and payment services.
Although the intra and inter-cryptocurrency markets are fairly small, they have grown rapidly over the last several years. There are now thousands of cryptocurrency tokens and a variety of service providers competing with one another.
Inter-Cryptocurrency Competition can be Measured via Bitcoin’s Market Share
Today, there are a large number of cryptocurrency tokens in the market due to the boom of initial coin offerings (ICOs) in 2017. The variety of tokens adopted by the public also increased significantly in 2017.
The authors of the report measure the overall level of competition in the inter-cryptocurrency market by the decrease in Bitcoin’s market share, which has diminished significantly over the past few years. In 2015, Bitcoin accounted for 86 percent of the cryptocurrency market capitalization but had decreased to 72 percent in March 2017. However, the market is still fairly concentrated since Bitcoin and Ethereum currently make up 88 percent of the total cryptocurrency market capitalization.
Permissioned Cryptocurrencies Promoted by Banks can Shake-Up the Entire Industry
While the inter-cryptocurrency market is predominantly dominated by cryptocurrency startups and organizations, according to the Police Department for Economic Scientific and Quality Life Policies, the EU believes that “the arrival of permissioned cryptocurrencies promoted by banks, even by Central Banks, will reshape the current competition level in the cryptocurrency market, broadening the number of competitors.”
While a cryptocurrency supported by the Central Bank could disrupt and increase the current competition levels, the report also mentions that banks may, however, use their influence and power in the traditional banking industry to limit and prevent more competition from seeping into the cryptocurrency market by acquiring other tokens and startups or implementing predatory pricing schemes.
Although the cryptocurrency industry is growing rapidly, it appears as though the industry remains heavily tied to the existing banking system. Decisions from banks, whether they be Central Banks interested in launching their own cryptocurrencies or retail banks denying cryptocurrency-related businesses the ability to conduct business, would have a significant impact on the industry.
The Network Effect and Interoperability can Lead to Anti-Competition in the Crypto Space
The report also noted that, while the network effect, interoperability, and standardization are all positive terms for the cryptocurrency community, these features could easily lead to a build-up of power and influence in a certain organization, company or token.
These anti-competition characteristics are important to take into account. While they may propel the technology forward, they may also have a negative impact on the growing cryptocurrency economy.
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