As we reach the tenth anniversary of the introduction of bitcoin, we stand on ground that shows regulators, and the financial services industry as a whole, are taking a keen interest in the next stage for cryptocurrencies.
They’re asking the critical questions that will aid in regulation, reduce volatility, and encourage acceptance by institutional capital, retail investors and entrepreneurs. As these rules are put in place, it will spur not just acceptance but innovation that could pave the way for countless new products and services.
While the cryptocurrency market has seen plenty of changes in recent years, regulation and legality of cryptocurrency is still very much a patchwork. Acceptance of bitcoin and other cryptocurrencies can vary from country to country. And it’s not necessarily an either/or scenario. Some countries have broad acceptance of cryptocurrencies, some permit it for some uses, while others have outright banned it. As countries look to implement the next phase for regulation, there are even efforts to implement certain global standards.
Regulation can help stabilize investors concerns in a period of uncertainty. On the heels of the Tokyo-based Mt. Gox hack of 2014, in which 650,000 bitcoins (valued at $460 million) were stolen, one might think this would have marked the end in Japan for anything crypto. But rather, it marked a new dawn of regulation. Over the past four years, the country has implemented strong rules regarding capital reserves, customer accounts, and AML practices. This, combined with the tightening of rules deployed in China, has helped Japan become a global leader in crypto trading.
Where is regulation now and where is it heading in the US and Asia?
In the US, regulation is certainly top of mind for key government officials, and it’s starting to dictate actions. While the Commodities Future Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have not settled on who should take the lead in establishing rules for crypto trading, ICOs and other securitized investments are certainly laying the groundwork for what they want to see.
Cryptocurrencies (bitcoin and ether specifically) have multiple features compared to traditional assets such as currency, commodity, property or security. As a result, multiple federal agencies are actively involved in cryptocurrency regulation from different perspective as illustrated in the following table.
Intrinsic Features of Cryptocurrency
Major Federal Agencies
Financial Crimes Enforcement Network (FinCEN)
Commodity Futures Trading Commission (CFTC)
Commodity Futures Derivative Trading
Securities and Exchange Commission (SEC)
Internal Revenue Service (IRS)
Tax Gain or Loss from Virtual Currency
In mid-September, CFTC Chairman J. Christopher Giancarlo told CNBC at the Singapore Summit he wanted lawmakers to tread lightly in the crypto world for fear that anything else would stifle innovation. He said, “The Internet flourished tremendously over a 20-year period because the federal government did not step in too heavily. And I’m advocating the same approach to cryptocurrencies.”
The SEC remains focused on the topic too with a strong position in regulating the ICO market and trading of virtual currency in spot market. First the Chairman Jay Clayton strongly believed that every cryptocurrency should be a security and thus ICOs should follow the same regulatory guideline of IPOs, and trading cryptocurrency should be under the same scrutiny of trading securities. However, in June 2018, the SEC admitted that Bitcoin and Ether will be considered commodities while most ICOs will remain securities.
The IRS views virtual currency as property. It has revised Section 1031 of the Internal Revenue Code to define any cryptocurrency transactions as “disposition of assets,” and thus incur tax liability. The CFTC has, so far, been the most supportive federal agency for blockchain and cryptocurrency overall. Started from the LedgerX listing of Bitcoin Futures in October 2017, CFTC has been supporting trading Bitcoin futures, thus implicitly defining Bitcoin as commodity.
Even last week, the CFTC won a lawsuit in Boston involving an allegedly fraudulent crypto investment scheme, with the judge ruling that the cryptocurrencies involved were commodities. Chairman Giancarlo has repeatedly stated that blockchain technology and virtual currency are at an infant stage and still relatively small, thus regulators should make effort to regulate but not strangle the innovation and push it out of United States.
Looking to Asia, the recent introduction of Gemini Dollar, regulated by the New York State Department of Financial Services (NYDFS), spurred heated discussion among Asian regulators. The idea of borderless transaction on chain through Gemini Dollar casted doubts on whether or not it strengthens the dollar’s impact globally and bypassed the existing banking system. The asian regulators are studying the Gemini Dollar case currently, and also are contemplating the idea of launching a government-backed stable coin similar to Gemini Dollar, in order not to be trailing in the race to have a worldwide adopted stable coin of their own currency.
Who do you trust in a semi-regulated market to trade and manage assets?
The cryptocurrency landscape is still taking shape, and it will continue to do so for some time. During this formative time period, it is critical for blockchain projects, crypto hedge funds and individual investors to manage their assets in a distressed market like we’re seeing now. Very much similar to the financial crisis in 2008, the crypto market is suffering from illiquidity and low valuation with huge regulatory uncertainty. Managing assets in a responsible manner and maintaining comfortable risk exposure should be the priority for all of them to be able to weather the storm.
Leaders in the secondary market are working on creating a trading environment that addresses and mitigates market volatility while being a trustworthy partner for trading and asset management. Having a dedicated sell-side trading desk that can tap into a global liquidity pool for better pricing and asset management is critical to helping the crypto market mature.
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