Cryptocurrency regulation – friend or foe?

According to a recent Deutsche Bank report, cryptocurrencies are expected to see a growth of a similar magnitude to the internet boom of the early 2000s. The number of cryptocurrency users is predicted to grow fourfold in the next ten years, reaching 200 million. In terms of monetary value, analysts also expect the Bitcoin to reach a market cap of USD 2.2 billion by 2026.

Deutsche Bank foresees that although cryptocurrencies are at present mere additions to the current money payment system, in the next decade they could become replacements. Such an imminent prospect could represent a variety of meaningful challenges to governments and financial regulators.

By removing financial intermediaries from transactions, Bitcoin and other cryptocurrencies enable investors to circumvent capital controls imposed by government authorities. That, in turn, may possibly help facilitate criminal activities of various kinds (money laundering, financing terrorism, tax evasion, etc.) 

Cryptocurrency enthusiasts, however, are often opposed to the development of comprehensive regulatory frameworks. They typically argue, among other things, that the development of broad reaching legislation could hamper growth, drive down market value, and negatively impact industry innovation.

Market analysts, on the other hand, believe that cryptocurrency regulation, if well targeted, is a largely positive prospect. They agree that competent regulatory frameworks would render cryptocurrencies less volatile, foster greater investor protection, and promote substantial ecosystem transparency. 

Governments across the globe, nevertheless, do not share a unanimous perspective on the matter. While certain countries, such as El Salvador and the Central African Republic, have adopted Bitcoin as a legal tender, major economies are generally wary of such moves as most still lack broad and comprehensive cryptocurrency regulation.

While cryptocurrencies are not considered legal tender in the United States, their exchange is legal, yet unevenly regulated across state lines. At the federal level, most of the focus has been at the administrative and agency level. While there has been significant engagement by agencies such as the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Federal Trade Commission and Department of the Treasury through the Internal Revenue Service (IRS), Office of the Comptroller of the Currency (OCC), and Financial Crimes Enforcement Network (FinCEN), little formal rulemaking has occurred. 

Though cryptocurrency exchange is generally legal across the European Union, exchange regulations differ among member states as they are not currently regulated at a bloc level. In certain member states (such as Germany, France, and Italy), exchanges have to be registered with their respective regulatory authorities. Authorizations and licenses granted by these regulators can then passport exchanges, allowing them to operate under a single regime across the entire bloc.

In light of this ambivalence and global outlook, experts agree that although mistargeted regulation is harmful, the absence of regulatory frameworks is unsustainable. The following policy benchmarks could be an effective answer to this dilemma:

Define whether cryptocurrencies are commodities or securities

Although the United States has over 30,000 Bitcoin ATMs, it remains difficult to actually use Bitcoin and other cryptocurrencies to pay for goods or services. This raises the question of how to best define cryptocurrencies for the purpose of regulation. Cryptocurrencies, as digital currencies, are unquestionably an asset, but there is no consensus as to what type of asset it is. 

If the primary purpose of a cryptocurrency is to be used to pay for goods and services, it would be appropriate to classify it as a commodity. When people use cryptocurrency as a financially tradeable instrument for activities such as raising capital, on the other hand, it would be appropriate to classify it as a security.

This distinction matters, because securities are regulated significantly more stringently than commodities, including, among other requirements, restrictions on price fixing.

Promote global coordination between regulators

The current cryptocurrency regulatory environment is a patchwork of different rules, which partly defeats the premise of borderlessness of this industry.

According to Sandra Ro, CEO of the Global Blockchain Business Council, “regulations for cryptocurrencies vary substantially around the world, and having global coordination among regulators would help.”

Regulation tailored to modern technology

Meanwhile, wherever specific regulatory framework has not yet been developed, cryptocurrency traders are often subject to security and trade-exchange laws that were originally written almost a century ago.

Neha Narula, director of the Digital Currency Initiative at the MIT Media Lab, argues that, “if something looks like a security and acts like a security, it should probably be regulated like a security.” Yet, “there are things that are being developed right now that don't quite fit so cleanly into all of those old rules, because the technology really is new and different.”

Empowering regulators through technology

Once rules are clearly defined, regulators would benefit from the utilization of modern technology for compliance purposes.

Sandra Ro envisages “a world where a lot of the rules, once clarified, will be automated, and the regulators will still be there to oversee and enforce when things go wrong.”