REGULATING CRYPTO: NATIONAL REGULATIONS FOR INTERNATIONAL CURRENCIES

by Jennifer Clarke, CUBE

 

For the early adopters of cryptocurrency, regulation was the enemy. Crypto emerged out of the 2008 financial crisis, with Bitcoin – the most popular digital payment token – created in 2009 as an open source payment method that didn’t require the involvement of central banks. Instead, users could send and receive money peer-to-peer, with the settlement information made public to ensure faith in the system.

Post financial crisis, trust in both regulators and regulators was at an all-time low. As governments moved to improve reputations and ensure a watertight financial system, a deluge of AML, KYC and due diligence laws for the regulated sector were enacted.

Cryptocurrency, a currency created privately, which circumvented norms, and made the identification of both parties to a transaction almost impossible, was born as a libertarian dream. It was the perfect way to circumnavigate big banks and poorly executed regulatory frameworks.

 

Crypto gone mainstream

Crypto couldn’t – and indeed didn’t – stay in the shadows for long. There’s only so long that innovation can evade the regulator’s watchful gaze. Earlier this year, car manufacturer Tesla added Bitcoin to its balance sheet by purchasing $1.5bn of the tokens, prompting chatter as to which other “household names” would open the door for mainstream adoption of cryptocurrency. Other big names – Kim Kardashian being another – have promoted crypto, inspiring a wave of younger (often financially unsavvy) investors.

However, rather than corporations and celebrities giving their endorsement, the Holy Grail for crypto evangelists has long been a decentralized digital token becoming legal tender. Earlier this year those dreams started to come true as El Salvador became the first country to adopt Bitcoin alongside its regular currency. This historic moment also naturally brought about further regulation.

 

Mainstream = regulation

El Salvador aside, most nations have no plans to adopt cryptocurrency as a rival to their own central bank issued money, but instead are considering how best to protect their citizens from financial loss. As the cost of crypto increases, so too have rumours of big-wins (alongside increasing volatility).

With the world’s economy recovering from another market-shaking crisis, depressed interest rates, and ongoing tension over rising inequality, regulators – especially the UK’s FCA – have warned that anyone dabbling in crypto must be prepared to lose all their money.

Traditional stock exchanges keep regular hours, but cryptocurrency can be traded 24-7-365 via online trading houses such as Coinbase and Kraken. In order to offer those services, the exchanges had to submit to existing regulations regarding financial products, and in doing so moved crypto further away from its libertarian roots.

So far, the most favoured approach from global financial regulators has been to expand existing rules to include cryptocurrency – rather than tackling cryptocurrency head on or outright banning it (as China has done multiple times, only to later relent).

As far back as March of 2013, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued guidance explaining which actors in the digital currency space were covered by existing regulations and how they should comply.

The U.S. Securities and Exchange Commission (SEC) considers cryptocurrencies as securities, and it applies existing securities laws as such. Retail investors are obliged to report gains and losses from crypto investments on their annual tax forms or risk a visit from the Internal Revenue Service.

The Commodities Futures Trading Commission (CFTC), by contrast views Bitcoin and the second most popular digital currency Ethereum as commodities. Cryptocurrency derivatives are legally traded on public exchanges regulated by the CFTC. Institutional investment in cryptocurrency involves buying and selling futures contracts, hedging and speculating.

The trend of further legislating is also likely to continue, and there are signs that cryptocurrency in the US may soon be subject to its own specific set of federal laws.

In the UK, the retail investor protection mandate has handed crypto over to the Financial Conduct Authority (FCA), though tax on crypto profits is levied through HMRC. The FCA has a wide remit of powers, and unlike the US it is the sole regulator and enforcer of cryptocurrency activity in Britain.

 

The irony of it all – national regs for international currency

While crypto is generally international in nature, the regulations that will encapsulate it exist largely at the national or sub-national levels.

Due to the more streamlined regulatory approach, crypto banking in the UK is moving faster than across the pond. Last year the UK issued its first Authorized Payment Institution license to a crypto firm.

And the appetite for innovation and alternative currency projects shows no sign of waning; in July, the European Central Bank announced a multi-year project to create a digital version of the euro, while the Federal Reserve has been conducting research on launching a blockchain-powered version of the US paper greenback dollar.

The Bank of England has also floated a central bank digital currency and is part of a task force to develop the UK’s response to cryptoassets and distributed ledger technology.

There is a certain irony that – as wider adoption grows – central banks, who were never supposed to be involved, may have a pivotal role to play in the future of the crypto economy. Is this the end of the libertarian fantasy?

 

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