This past Tuesday, the U.S. Commodity Futures Trading Commission (CFTC) addressed regulating cryptocurrencies. For many this was a welcome, albeit somewhat belated event; for others it signaled the possible end to what has made the cryptocurrency space so appealing, the relatively free interaction available to participants along with an open road for innovation, without the restrictions surrounding fiat currencies and as well as other asset classes.
Still, after a relatively traumatic week of watching Bitcoin prices plummet, at one point even below the $6,000 benchmark, it was neither unexpected nor unwarranted. As well, one remark made by commission Chairman J. Christopher Giancarlo gave hope to even the most die-hard crypto enthusiasts:
“We owe it to this new generation to respect their interest in this new technology with a thoughtful regulatory approach.”
How quickly will regulation actually be implemented? What should cryptocurrency investors be aware of going forward?
Like the Wild West
In the current, relatively unregulated environment, everyone has been doing mostly what they want, notes Martin Wos, co-CEO and CVO of Block Stocks. Obviously, this provides its share of opportunities, but also delivers substantial risk. Wos characterizes it as tiresome, likening the existing crypto-scene to the lawless Wild West.
“On one hand, it is easy to understand that most governments say or do little and take a back-seat approach to fully observe the situation. On the other hand, others cover themselves and will first try to prohibit anything new and then implement new regulations in order to protect investors, as is the case in China, for instance (even if China has other reasons for those actions as well). In addition, some governments are very slow and take a long time to reach any decisions, which - in my opinion - is fatal with regards to the fast-growing crypto-scene.”
Singapore and Switzerland Favorable
It should be noted, however, says Wos, that there are already favorable regulations in certain parts of the world. The government of Singapore, in a series of statements released this past Monday indicated that it wanted to remain a permissive environment for both cryptocurrency trade and blockchain innovation. Similarly, Switzerland. The European country's economics minister recently told journalists Switzerland wanted to be "the crypto-nation."
Dr. Jeppe R. Stokholm, a Danish attorney based in Zurich specializes in crypto law. He points out, via an example of regional uptake, how crypto-friendly Switzerland has become:
“In canton Zug, crypto payments are allowed for government services, including train tickets and bus fares. Several crypto ATM machines can be found, where the digital currency can be bought or converted into cash, and even florists, hairdressers, restaurants, hotels, bakeries, providers of leisure activities and shoe shops are advertising with their ability to accept crypto currencies as payment. No wonder that canton Zug is known as “Crypto Valley” and attracts crypto developers and entrepreneurs from all over the world”.
However, he warns that the legal status of digital currency payments varies from jurisdiction to jurisdiction and is still undefined or in flux in many of them. There is not yet a uniform approach shared by states for dealing with legal issues related to crypto currencies nor do international standards exist.
Command Economy Legacy Means More China Regulation
Of course, as most cryptocurrency investors likely are aware, not every government is as friendly as the two cited above. Some, like China, have been banning crypto activity for months now. Eiland Glover, CEO of Kowala, a firm building an autonomously digital currency using the Kowala Protocol, focuses on the broadly more regulated environment in the world's second largest economy:
"China comes from a command economy legacy, and the regulatory authorities have made it clear in word and deed that they intend on squelching any cryptocurrency activities that might undermine the government's power over the economy. I expect the Chinese regulators to ban all but official—or de facto official—cryptocurrencies and to pioneer the surveillance potential of this technology.
U.S. regulators tend to take a lighter hand and step in as abuses occur. The nebulous wording of U.S. securities and commodities laws gives U.S. regulators wide latitude—their challenge will be to interpret these laws in a ways that will dissuade and punish bad actors without driving innovators into the arms of another country or, worse, underground.”
Volatility Forcing Regulation
Still the recent wild spikes and dives in cryptocurrency prices, along with the rapid proliferation of new cryptocurrencies, has been forcing regulators to become more proactive. Angela Walch, an Associate Professor at St. Mary's University School of Law in Texas and a Research Fellow at the Center for Blockchain Technologies at University College London, says:
“For a number of years, it has been possible for regulators to watch cryptocurrencies largely from the sidelines, as these systems have been relatively small, isolated from the mainstream financial system, and unlikely to affect Main Street in a significant way. Regulators have pursued clear fraudsters and scammers, but have generally allowed the crypto ecosystem to grow, in keeping with their oft-stated goal of allowing innovation to flourish.
Simultaneously, regulators and policy makers have clearly tried to demonstrate their support for 'blockchain technology,' creating working groups, welcoming tech experts to educate them, and writing reports exploring the potential of the technology in countless fields.”
However, the growth of ICO activity, including a small number of fraudulent ICOs as well as the possibility of scam trading, in conjunction with the growth of the cryptocurrency industry in general, which capped $700 billion in January, leads Walch to believe we will see significant regulatory action over the next year. The time to watch crypto innovation bloom without consequence may have passed. On the other hand, the Swiss model could prove to be both more resilient and for developed markets at least, more economically feasible.