The $2 Trillion Cryptocurrency Market Is Drawing Interest From Investors, Scrutiny From United States Regulators.
WASHINGTON— As cryptocurrencies go mainstream, prices for bitcoin and other digital tokens are increasingly being presented on cable news tickers and finance applications as if they were conventional stocks, bonds, or oil futures.
They're not. As a result, they provide a challenge to financial regulators in the United States.
The regulation of cryptocurrencies, which first appeared in 2009, is patchy. Regulators in the Biden administration are seeking to clarify rules for a market that is expected to more than treble in value by 2021, attracting millions of new investors and raising concerns about financial stability.
Here are some of the most important issues to consider when setting those regulations:
What is the difference between cryptocurrencies and other assets?
The traditional financial system is built around intermediaries such as banks, brokerages, stock or commodity exchanges, and asset managers. Investors are protected, fair and orderly markets are promoted, financial bubbles are avoided, and crimes such as money laundering and tax evasion are prevented by government and industry regulators.
There are costs associated with this oversight. Banks and brokerages must set aside money for potential losses and must know who their customers are; in exchange, account holders are covered by government-backed insurance. Companies that trade publicly must adhere to conventional accounting methods and publish information about their finances and operations in exchange for access to tens of trillions of dollars in stock and bond markets.
Cryptocurrency supporters believe that technology can replace such intermediaries and eliminate the need for trust.
This is how such an arrangement goes down: Bitcoin allows everyone in the world with an internet connection to send money to anyone else in the world in a matter of minutes. Transactions are recorded in a blockchain database. It can be seen by the general public on networks of computers that are running distinct copies of the same programme. This should prevent anyone on the network from forging the cryptocurrency or spending the same bitcoins again.
Is it necessary to regulate cryptocurrencies?
Some claim that cryptocurrency assets don't need to be regulated like banks, securities, or investment funds because they diminish the role of traditional middlemen.
But, according to authorities and experts, human humans are nearly always at work beneath the surface.
The majority of new cryptocurrency investors use trading platforms like Coinbase Global Inc. or Gemini Trust Co. LLC to enter the market. These businesses receive money from investors and convert it into bitcoin, ether, and a variety of other digital tokens. Fees are charged, assets are held in custody, and items are released that occasionally provide a return to investors.
Decentralized finance refers to a fast developing range of cryptocurrency programmes that allow some users to vote on how they run. Software developers frequently support them, and they charge transaction fees.
Even though networks like bitcoin can process transactions without the need for a middleman, there is still a small number of programmers known as maintainers who can update the underlying code if errors arise.
The presence of people in all of these systems, according to policymakers, raises the possibility for conflicts of interest and demands control.
Many cryptocurrency transactions are popular with scammers and criminals because of their irreversibility and anonymity, and the assets have spurred a boom in ransomware assaults like the one that targeted Colonial Pipeline Ltd. in 2021. Concerns about the cryptocurrency market's rapid expansion, self-governance, and hazy linkages to the broader financial system have also been expressed. While the crypto market has mostly been free of glitches, the risk of spillover effects into the real world could increase as more people invest their assets in the asset class.
In December, Securities and Exchange Commission Chairman Gary Gensler noted at the Wall Street Journal CEO Council, "Few technologies in history, since antiquity, can exist for long periods of time free of public policy frameworks."
Who would be responsible?
Financial institutions and markets are regulated in the United States by an alphabet soup of federal and state agencies.
The Federal Reserve, the Office of the Comptroller of the Currency, and state banking commissions all regulate banks. The SEC regulates brokerage firms, asset managers, and stock exchanges, as well as setting disclosure standards for publicly traded companies. The Commodity Futures Trading Commission regulates futures and other derivatives trading venues.
State governments issue licences to money-transfer firms like Western Union.
These authorities develop rules and regulations, monitor financial markets, dispatch inspectors to assess firms' compliance with the law, and prosecute corporations or executives suspected of breaking them.
It's still up in the air which jurisdictions should govern cryptocurrencies and who should be in charge of them. Existing statutes have gaps, according to several top policymakers, who have asked Congress to fill them. Meanwhile, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have taken the lead in prosecuting cryptocurrency projects or trading platforms that they believe are breaching the law or defrauding investors.
What agency is in charge of bitcoin regulation?
So yet, no government has claimed full jurisdiction over the two most popular cryptocurrencies, bitcoin and ether, which together account for more than 60% of the market.
This is because the CFTC lacks legislative power to oversee commodities cash markets, which is the asset class that some authorities and judges have suggested bitcoin and ether belong to. There is no overarching financial regulator for cash markets, which are markets where commodities or securities are paid for and received at the point of sale.
For the CFTC to achieve such powers, Congress would most likely have to adopt legislation.
Many investors utilise platforms to buy and sell bitcoin, and the Treasury Department considers these platforms to be money-transmission enterprises. To operate, these businesses must obtain state permits, know who their customers are, and take particular procedures to avoid money laundering. They are, however, subject to significantly fewer regulations and control than traditional stock or commodity exchanges.
The CFTC, on the other hand, has the jurisdiction to investigate and prosecute fraud in bitcoin markets. It also regulates exchanges that list bitcoin and ether futures contracts, such as the Chicago Mercantile Exchange Inc.
How are other types of cryptocurrencies viewed by regulators?
It is dependent on their attributes.
For example, the Biden administration intends to regulate stablecoin issuers in the same way that banks are regulated, though regulators have asked Congress to first pass comprehensive legislation. Stablecoins are a rapidly growing subset of cryptocurrencies that peg their value to a national currency like the dollar.
The most pressing topic for the cryptocurrency business is whether an asset qualifies as a security, which is defined as a "investment of money in a common enterprise with a reasonable expectation of rewards to be received from the efforts of others." If the definition is met, the issuer, as well as any trading platforms that provide such assets and brokers that sell them, must register with the SEC.
How straightforward is it to pass the SEC test?
Mr. Gensler, the SEC's chairman, claims that the law is already clear. The Supreme Court established the legal rule for determining whether something is a security in 1946, and the SEC issued guidance in 2019 on how to apply it to cryptocurrencies. In numerous of actions against defendants who issued unregistered securities in so-called initial coin offerings, the government has won.
Mr. Gensler has refused to say which, if any, cryptocurrencies aren't securities and thus fall beyond the agency's purview. However, he has asked big cryptocurrency exchanges to register with the government on numerous occasions, claiming that it is highly likely that they are offering securities on their platforms.
Have crypto platforms taken him up on it?
The process of registering as an exchange with the Securities and Exchange Commission (SEC) is time-consuming, expensive, and bureaucratic. There are currently no large cryptocurrency trading platforms that have done so.
Instead, some have attempted to discontinue serving consumers from the United States. Others, on the other hand, adopt a different approach. For example, Coinbase only allows trading of assets "for which we think there are reasonably solid justifications to establish that the crypto asset is not a security," according to the company.
The issue exposes large cryptocurrency-trading platforms to SEC enforcement measures, which might result in fines, the delisting of popular coins, or the reimbursement of client losses. It's a risk they're ready to take in exchange for the chance to earn quickly in a hot market.
"It's highly profitable to list things that could be securities but aren't securities," says Douglas Borthwick, chief business officer of INX Ltd., a cryptocurrency company that claims to have worked with the SEC to establish a regulated trading platform.
