While no one can be certain how the market will shake out, it does appear that blockchain technology–and the myriad cryptocurrencies that have developed concomitantly–are likely to endure.
Their advent has the potential of reducing the cost of undertaking various financial transactions, which would be a boon for investors as well as the U.S. economy, as its financial markets would become more competitive against overseas competitors.
At the same time it is worth noting that the current environment, with its lack of regulatory certainty, also present risks to its users: for instance, no one can be certain which of the myriad currencies will survive a potential market shakedown, which could render their crypto investments worthless.
Cryptocurrencies also pose potential problems for the government: it would not only like to take steps to protect investors from putting their money into dubious assets but it would also want to ensure that crypto transactions not be used for illegal activities. To accomplish this the government must not only decide how to regulate these assets but also which government entity will take the lead in doing so.
The latter may seem of interest only to those who revel in the arcana of bureaucracy but it is actually the key determinant for the ultimate shape of a future regulatory framework.
For instance, the Securities and Exchange Commission recently announced that it would soon provide more guidance on when it considers an initial coin offering a securities offering, as well as some indication as to how it would treat secondary market offerings. The SEC’s director of Corporation Finance, William Hinman, opined that existing securities law suggests that a cryptocurrency can be defined as a security if its ledger is “centralized.” However, SEC Chairman Jay Clayton has declared that Bitcoin, which by its design is becoming increasingly centralized, is not a security.
Others in the regulatory space–most notably former CFTC Chair Gary Gensler–have opined that XRP, a digital tool for business applications used by companies like Ripple, could be a security, despite the fact that its ledger is increasingly more decentralized. This incongruity could be a portent of future regulatory incoherence.
There is simply too wide a diversity among the more than 2,000 different cryptoassets in use to invite regulators to make far reaching conclusions without a framework that fits the realities of a very new technology, and we are not there yet.
While potential investors would undoubtedly welcome greater clarity with regards to future regulatory oversight of the cryptocurrency market, it is worth asking whether such guidance should come from the SEC or from Congress or the Administration.
A wise senator for whom I once worked once explained to me that no one wins elections by solving a problem before voters realize that a problem exists that needs to be solved, so it may be fanciful to assume that Congress has an appetite to provide clarity to this market.
However, the Treasury department recently indicated that it is intently studying the issue and that it intends to soon propose some sort of guidance that would lead to the creation of a single regulatory framework for cryptocurrency. Ideally, this would include input from the Financial Services Oversight Committee, which Treasury Secretary Steven Mnuchin chairs. Federal Reserve Chair Donald Powell, SEC chair Jay Clayton, the director of the Consumer Financial Protection Bureau, and the others also participate in the FSOC.
What we do not want is a turf battle between Treasury, the SEC, and other possible bureaucratic entities that potentially results in redundant or excessive regulations and slows down the growth in blockchain and cryptocurrency development.
It would be equally regrettable if such a development were to delay the development of thoughtful government regulatory actions, because without more certainty in this realm new investors are going to be wary of making excessive commitments in this market.
I would like to suggest a possible regulatory route: In a paper I wrote earlier this year with Robert Jennings and Julie Chon we suggested that the United Kingdom consider pursuing some sort of financial regulatory coherence with the United States as it exits the EU and contemplates its own financial regulatory environment.
While the UK has had to do little to regulate its financial markets since the emergence of the EU, of late it has been very active in its regulatory oversight of cryptocurrency and the use of blockchain.
One potential path for the U.S. would be for it to pursue a similar cryptocurrency/blockchain regulatory structure, starting with the UK’s current regulations.
In this scenario the U.S. government–presumably led by the Treasury–would coordinate input from other agencies and stakeholders and use it to work with HM Treasury to arrive at a framework both countries would find acceptable. This would in turn create a vast, global financial market encompassing two entire financial capitals, and its standards–for cryptocurrency regulation and much else–could potentially serve as the basis for regulatory standards for other markets as well.
Regardless of how it chooses to proceed, it behooves the government to create some sort of regulatory clarity in the cryptocurrency and blockchain environment, and in so doing be amenable to getting input from the leaders in this technology. And the logical way to proceed would be for the Treasury to determine a path forward and for the SEC–and other government agencies–to follow its lead.