International regulators are slowly but surely fixing reins to what for years has been a relatively untethered cryptocurrency boom — attempting to add a degree of predictability and security to assets that have at times been prone to wild valuation swings, theft and illicit transactions.
In the past several months alone, bitcoin, among the most popular cryptocurrencies on the market, has lost more than half of its value, with the price of one coin dropping from nearly $20,000 to fewer than $7,000. The downturn is believed to be weighing on the fledgling digital investments as a whole, with other mainstream cryptocurrency options such as Ethereum suffering similar losses as lesser-known upstarts such as VeChain waver but to a much smaller degree.
These are typically not the sorts of lightning-speed booms and busts associated with more traditional and centralized currency options, which international regulators watch closely to maintain some semblance of order among international transactions.
But such regulators walk a fine line in caging — or at the very least restraining — a class of cryptocurrency assets that have been heralded for their opaque decentralization, relative anonymity and versatility. The drive to at least partially corral the industry is driven in part by its rapid growth in popularity, say analysts: Born out of the blockchain technology, experts estimate the global cryptocurrency industry, even in the midst of its recent downturn, could soon approach $1 trillion in valuation.
“There’s a big dance going on right now, and that’s a dance between regulators and the public,” says Robert Wolcott, a professor of innovation and entrepreneurship at Northwestern University’s Kellogg School of Management. “You want to be seen as protecting the public. But at the same time, you don’t want to go so far that you obviate economic activity.”
The flurry of regulatory activity seen around the world in the aftermath of bitcoin’s initial rise has been difficult to ignore. Venezuela announced plans to roll out its own oil-backed cryptocurrency, which, if successful, could potentially help it circumvent international sanctions. Officials at a March summit of leading and developing nations called for international regulatory proposals to be submitted for consideration by mid-year.
Even the U.S. Securities and Exchange Commission has begun taking action, earlier this year issuing a round of subpoenas in an effort to ferret out fraudulent initial coin offerings.
“These markets are new, evolving and international. As such they require us to be nimble and forward-looking; coordinated with our state, federal and international colleagues; and engaged with important stakeholders, including Congress,” SEC Chairman Jay Clayton and Commodity Futures Trading Commission Chairman J. Christopher Giancarlo wrote in a January op-ed published by The Wall Street Journal — appropriately titled “Regulators Are Looking at Cryptocurrency.”
China, meanwhile, has gone out of its way to restrict cryptocurrency’s expanse within its borders, banning initial coin offerings, limiting energy-intensive bitcoin mining operations and blocking residents’ access to foreign crypto exchanges. The goal appears to be limiting Chinese exposure to the inherent financial risk that comes with such a nascent industry, though Chinese officials have expressed at least some openness to the assets, laying out national standards that are expected to be finalized by the end of 2019.
In mid-June, the China Electronics and Information Industry Development research institute — which falls under the country’s Ministry of Industry and Information Technology — also unveiled an index that essentially ranks the value the organization sees in a variety of cryptocurrency assets. EOS and Ethereum placed first and second, respectively, while bitcoin ranked 17th.
“We’ve really seen people step up in a few different directions. One is ‘We’re going to shut it down for awhile.’ That’s China, South Korea,” Wolcott says. “Regulators are trying to figure out what the political structure within their country or jurisdiction wants to see and why — and what is also going to be most effective in the long run from an economic perspective for their society.”
How to Classify Cryptocurrencies?
But international government officials face a slew of challenges — not the least of which is the difficulty in categorizing cryptocurrencies as a whole under an individual asset class.
“When you stand back, that starts to look a little bit like crowdfunding. They’re not giving you any equity,” Wolcott says. “Regulators have a standard that if it looks, feels and acts like an investment, then we have to start thinking about it like a security, even if it’s a utility token.”
The CFTC’s Giancarlo touched on this dilemma during a February hearing before the Senate Committee on Banking, Housing and Urban Affairs. He noted that several types of cryptocurrencies have “characteristics of multiple different things,” according to CNN Money, and that it would be difficult for the SEC or the CFTC to individually swoop in and broadly regulate the entire market.
“What we will do and what we are doing is looking for fraud and manipulation. And we intend to be very aggressive,” Reuters quoted Giancarlo as saying.
Because of the sheer number of new cryptocurrencies that have cropped up in recent years — the most popular of which are bitcoin, Litecoin and Ethereum — and their fluctuating values, it’s difficult to reach an accurate estimate of just how much money investors have lost to theft and fraud. Ernst & Young earlier this year analyzed nearly 400 initial coin offerings and found that hackers and thieves were able to make off with more than 10 percent of funds raised — resulting in losses of hundreds of millions of dollars just within its sample pool.
SEE: [There’s A Cryptocurrency for Anything You Can Imagine]
Theoretically, a more active regulatory presence could help stem theft — and the use of cryptocurrencies in unlawful transactions. The “Silk Road” captured headlines several years ago as a marketplace for drugs and other illicit dealings through the use of cryptocurrencies such as bitcoin, which can in some instances be particularly difficult to trace to an individual buyer or seller on the “dark web.”
“The crypto sector — which is approaching a market capitalization of $1 trillion — is rapidly growing and this trend is only likely to gain momentum,” says Nigel Green, founder and CEO of the financial consultancy deVere Group. “As such, there needs to be a robust regulatory framework in order to protect both institutional and retail investors. It will also help combat illicit activity.”
But an enhanced regulatory presence could be a double-edged sword in that new rules risk scaring off investment and stifling innovation and creativity. Lower-regulation countries such as Switzerland and Liechtenstein and territories such as the Cayman Islands have increasingly tried to position themselves as crypto-friendly places for investment — offering traditional financial safe-havens a renewed flow of investment as regulators throughout North America and Europe have moved to crack down on tax evasion and an international sheltering of assets.
Switzerland has a unique position in the world by having a special regulatory structure for banking, Wolcott says. “It’s natural they would try to take a leading role. My personal opinion is it will benefit Switzerland quite a bit, and it also benefits the blockchain cryptocurrency markets quite a bit to have credible locations like that.”
Should the U.S. or any other major economy move too slowly in adopting reasonable regulatory barriers and clear rules, crypto investment may end up flocking overseas while U.S.-based operations struggle.
“We actually see increased regulation as a great thing. The challenge for entrepreneurs is the lack of regulation. If the market is uncertain and you don’t know exactly how to operate, you’re much less free to build the regulation that you’d like to see,” Galia Benartz, the co-founder and head of business development at Bancor, said in a recent interview on CNBC’s ” Street Signs.” “We all know that’s good for the industry, good for the projects, and good for the space. And I think another really exciting thing about the accessibility of cryptocurrencies to the masses, to the public, is accountability and looking into the projects you want to participate in.”
It’s a particularly fine line for international regulators to walk. There are plenty of risks associated with being the last country to arrive at reasonable crypto regulations. But there are also risks associated with being the first ones to the party.
“An economy like the United States, like China, like the EU, like Japan, some of the larger economies, ultimately they’re going to benefit from this and people have to figure out how to deal with it if they want to do business there,” Wolcott says. “That said, they probably will forego some of the benefit by not being there early. They also forego some of the risk.”
As crypto regulation discussions move forward in the U.S., many expect a series of broad federal guidelines to help guide state-level policies that could end up varying widely across the country. California — which accounts for nearly half of the top 10 U.S. cities in terms of cryptocurrency holdings per person, according to a recent report from Smart Money — is already considered to be among the most crypto-friendly states in the country. And Arizona legislators earlier this year attempted to pass a bill that would have allowed residents to use bitcoin and other cryptocurrencies to pay their taxes — though the final version of that bill didn’t explicitly lay out an opening for crypto tax payments in the near term.
Still, concern has arisen among some international experts that greater cryptocurrency adoption — which would theoretically be facilitated by the perceived legitimacy of light regulatory frameworks — could disrupt long-established financial sectors. Christine Lagarde, the managing director of the International Monetary Fund, warned in September that cryptocurrencies could “give existing currencies and monetary policy a run for their money.”
“For now, virtual currencies such as bitcoin pose little or no challenge to the existing order of fiat currencies and central banks. Why? Because they are too volatile, too risky, too energy intensive, and because the underlying technologies are not yet scalable,” Lagarde said at the Bank of England Conference in September. “But many of these are technological challenges that could be addressed over time. Not so long ago, some experts argued that personal computers would never be adopted, and that tablets would only be used as expensive coffee trays. So I think it may not be wise to dismiss virtual currencies.”
Wolcott says he believes cryptocurrencies will “undoubtedly have an impact” on fiat currencies such as the dollar, which for decades has represented the world’s most dominant reserve currency.
But he says any potential significant shakeup is likely a ways off and those concerned about the dollar’s standing on the international stage have bigger things to worry about in the near term.
“There are so many other factors that are influencing and that will influence the value of the dollar relative to other currencies or stores of value in the world that the impact of cryptocurrencies is going to be relatively minor for at least the next three to five years,” he says. “If I had to worry about something with respect to the dollar and my options were a huge budget deficit and rising U.S. debt and cryptocurrencies, I can tell you that I’d be concerned about the debt.”
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