Regulating Cryptocurrencies

Cryptocurrencies are digital networks that use cryptography—code writing—to carry out transactions securely. The first cryptocurrency, Bitcoin, launched in 2009. Since then, hundreds of other cryptocurrencies have emerged and billions of dollars have flowed into cryptocurrency systems. Supporters believe that cryptocurrencies can increase the privacy of online transactions and serve as a more durable and secure form of money than existing fiat currencies. Critics attack cryptocurrencies for fluctuating wildly in price and enabling illegal transactions.

As cryptocurrencies continue to proliferate, regulators in the U.S. and around the world have taken notice of cryptocurrencies. This week’s Saturday Seminar highlights a sample of the broad range of regulation targeting cryptocurrencies.

The U.S. Regulatory Climate on Cryptocurrencies

• In an essay for The Regulatory Review, Daniel Araya surveys the cryptocurrency landscape and finds that pressing issues include regulating initial coin offerings, navigating diverging regulatory schemes, and managing blockchain technology.
• Proprietors of cryptocurrencies face uncertainty and conflicting guidance among state regulations, note Matthew Kohen and Justin Wales of Carlton Fields. Even the federal government is contradictory, they claim. The S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCen) argues that cryptocurrency is money, while the U.S. Commodity Futures Trading Commission (CFTC) asserts that cryptocurrency is a commodity. Despite the lack of regulatory uniformity, Kohen and Wales are “hopeful” that states will start crafting effective regulation of cryptocurrencies.
• In a Brookings Institution report, Timothy G. Massad of the Harvard Kennedy School argues that the current level of regulatory oversight of the crypto-industry is insufficient. Massad highlights the growing reliance on financial intermediaries. These intermediaries, unlike banks, are not subject to any regulations barring fraud or misuse of funds. Massad calls on Congress to establish a comprehensive, federal framework to address this unbridled intermediary activity and ensure adequate regulation of the entire industry. A summary of Massad’s paper was previously featured in The Regulatory Review.
• In 2014, the New York State Department of Financial Services created the BitLicense, a business license covering commercial cryptocurrency activity in New York. The BitLicense reached diverse uses of cryptocurrency like custodial services, currency transmissions, and exchanges. Usman Chohan of the University of New South Wales Canberra asserts that after the BitLicense came into effect, various Bitcoin companies stopped operating in New York. Chohan points to the BitLicense’s stringent requirements, with strong “know your customer” requirements and “little differentiation between companies by size, scope, or volume with respect to the license.”
• In a note for the North Carolina Banking Institute, Marion A. Brown argues that the S. Securities and Exchange Commission (SEC) “created a catch-22 for proponents of cryptocurrency-based” exchange-traded products (ETPs) through its application of the Exchange Act of 1934. ETPs need SEC approval but may not be able to get it without demonstrating the underlying market is better regulated, Brown argues.
• An essay by Drew Schaefer in the California Law Review tracks the difficulties of applying the SEC custody rule to the new asset class of cryptocurrency hedge funds and suggests an alternative to the current scheme governing the class. Schaefer proposes allowing hedge funds to manage such assets by implementing additional requirements such as independent administrators, quarterly audits, and insurance.

The International Regulatory Climate on Cryptocurrencies

• A Law Library of Congress report surveys and provides a comparative analysis of the legal and policy landscape surrounding cryptocurrencies in 130 countries as well as some regional organizations. Prepared by the Global Legal Research Directorate, the report identifies emerging patterns in how regulators around the world are reacting to the fast-growing cryptocurrency market.
• European countries vary in their regulatory approaches to cryptocurrencies. For instance, Switzerland fosters a more open regulatory environment to serve as a “sandbox” for cryptocurrency start-up experimentation, with the city of Zug having earned the nickname “Crypto Valley.” Alex Rathod notes that smaller European states like Switzerland actively pursue regulations that facilitate businesses using cryptocurrencies. On the other hand, larger countries including the United Kingdom and France have issued fewer regulations.
• In a report for the European Parliament, Robby Houben and Alexander Snyers of the University of Antwerp advocate stricter regulation of cryptocurrencies to curb illegitimate uses like money laundering, terrorist financing, and tax evasion. In particular, Houben and Snyers recommend several future regulatory policies for the European Union, including a mandatory database of cryptocurrency users and a prohibition on activities designed to shield cryptocurrency users’ identities.
• In a note for the Washington University Global Studies Law Review, Rain Xie argues that China’s complete ban of cryptocurrency has only nominally deterred fraud, contrary to the ban’s intended effect. At the same time, Xie claims the U.S. has taken an approach that encourages technological innovation. Xie explains that “at the moment, the U.S. approach seems to strike a better balance between investor protection and financing technological development,” but recognizes that the U.S. approach may be both over and under-inclusive.