Op-Ed: Cryptocurrency's future in hands of regulators — like it or not

Posted Feb 9, 2018 by Ken Hanly
Inevitably those in the cryptocurrency world will need to interact with regulators. The darker aspects of the cryptocurrency world cause governments to develop policies to regulate the area.
File photo: Burges  a self-styled cryptocurrency trader and former software engineer from London  ho...
File photo: Burges, a self-styled cryptocurrency trader and former software engineer from London, holds a placard to protest against Mt. Gox in Tokyo
Toru Hanai, Reuters
Digital coins are notorious for not fitting into traditional regulations such as for securities. A recent article by Mike Orcutt in the MIT Technology Review argues that what bureaucratic policy makes do to regulate the industry will determine its direction from now on.
The regulation issue is important
Many billions of dollars are on the line. The security of exchanges needs to be ensured so that investors do not lose money through hacks as has already happened several times. Prevention of money laundering through the system and other illegal activities is also a goal of governments. Scam initial coin neofferings (ICOs) need to be caught and prosecuted. ICO's are used to raise money for projects. This may require new regulations.
Even many critics of cryptocurrency still believe that the associated blockchain technology is significant for the future.
Clampdowns are already happening
China has banned any new ICOs and, at least for now, has banned exchanges. It may also clamp down on cryptocoin mining, a big business in China. South Korea has also banned ICOs and threatens further regulatory moves. Japan has introduced a licencing requirement for cryptocurrency exchanges. Japan was where the notorious Mt. Gox exchange fiasco took place in which many investors lost money
However, regulators are still wrestling with how to define cryptocurrencies, and in most countries there is still a noticeable lack of oversight of the whole area.
The situation in the United States
In the U.S., cryptocurrencies are classified as commodities — which puts them under the jurisdiction of the Commodity Futures Trading Commission(CFTC). While the CFTC can regulate futures trading on the two futures exchanges for bitcoin it does not have the power to directly control cryptocurrency exchanges.
J. Christopher Glancarlo the CFTC chair said at a recent U.S. Senate hearing that the CFTC did not have the power to require cryptocurrency exchanges to register with the government, report transactions, or even comply with cybersecuriy checks. In fact, Giancarlo held that under current law no federal agency held such power.
Regulation of the cryptocurrency area is at the state level
This fall-back does not work since cryptocurrency trading inevitably crosses state lines. The state regulations deal with money transmission services. Definitions of what these are vary from state to state. Cryptocoins are more than money and often not very useful as money. The result is confusion. Many technological entrepreneurs are discouraged by the situation. For this reason, many in the cryptocoin area welcome regulation if it suits their needs.
The problem of ICOs
Chair of the SEC Jay Clayton testified to the U.S. Senate that simply calling something a coin did not mean it was outside the jurisdiction of the SEC. He noted that ICOs looked like securities since they are promoted as investment opportunities, with being a medium of exchange very much a secondary characteristic. Yet ICOs have already raised over $4 billion with none being registered with the government.
Regulation is very much a work in progress.
What to expect
The SEC will increase enforcement against suspicious possible sham ICOs. The U.S. Congress may need to pass new legislation according to both Clayton and Giancarlo. Given the Trump administration's negative views on regulations, this may be difficult to pass.
Seven U.S. states have agreed to join forces to regulate exchanges.
France and Germany are pushing for international regulation of the cryptocurrency area at the upcoming G20 summit in March. It remains to be seen if the Trump administration with its U.S. first policy will join in such regulation.
Businesses and governments are beginning to recognize the value of the new blockchain technology. At the same time many in the cryptocurrency area such as Ripple are now stressing their value as platforms to be used by business and governments. Those coins that prove their value for government and business are likely not only to survive regulation but prosper as a result.