Attempting to understand the current state of crypto-regulation is a difficult endeavor. Cryptocurrency is a constantly evolving industry, and regulation on the topic around the world is fragmented and decentralized. Few formal guidelines have been issued in legal actions, and those that have are on a case-by-case basis.
Despite this murkiness, there are three broad approaches governments are considering: isolation, integration or regulation. Former Commodities Futures Trading Commission (‘CFTC’) Chairman Gary Gensler introduced these approaches at a recent MIT blockchain event. Understanding each approach and regulatory attitude towards cryptocurrency will provide guidance for good actors and advocates as they navigate and plan for cryptocurrency regulation.
Isolation entails government entities and regulatory bodies imposing loose guidelines to promote innovation and allow cryptocurrencies to evolve naturally. This attitude is in line with the “Do No Harm” regulatory approach towards the development of the internet in the 1990s and early 2000s. Essentially, as with the internet, allowing the space to evolve without heavy regulation promotes innovation and growth.
As explained by current CFTC commissioner, Christopher Giancarlo, “Governments and regulators should avoid undue restrictions, support a predictable, consistent and simple legal environment and respect the ‘bottom-up’ nature of the technology and its development in a global marketplace.”
This self-regulatory viewpoint is often echoed by well-known blockchain and cryptocurrency entrepreneurs, investors and professionals. Others, however, see isolation of the market as providing an opportunity for bad actors to easily conduct fraudulent schemes.
Several major national governments are attempting to integrate cryptocurrencies into existing regulatory and economic frameworks. However, even though there is limited adoption of integration policies, government involvement is at historic highs for a burgeoning industry.
If integration becomes the dominant approach, the range of regulatory bodies may struggle with overlapping policies, definitions and sentiment. Even now, various regulatory bodies in the United States have applied conflicting and overlapping frameworks to cryptocurrencies and initial coin offerings (“ICOs”). Cryptocurrencies are considered property by the IRS, money by the Treasury Department / FinCEN, commodities by the CFTC and securities by the SEC (if issued via ICO).
Regulation, as opposed to isolation, involves the heavy participation of government and regulatory bodies. While regulation aims to protect investors and ensure fair and efficient markets, regulators must be cognizant of stifling innovation with onerous checks, balances and requirements. Historically, regulators in the United States have responded forcefully when fraud has been shown to be pervasive.
In the United States, the SEC has continued to educate itself on the topic to better understand which approach to adopt. It has requested information of industry participants, including issuers, funds and exchanges, to understand whether there is a need for new rules or laws. Additionally, the SEC has not been afraid to halt ICOs where securities are offered to the public without the required registration or qualifying for an exemption.
While regulators worldwide are struggling with the various approaches to the cryptocurrency space, regulators have already taken action against bad actors. Nevertheless, good actors and advocates should always be prepared to work side-by-side with regulators to establish best practices in this nascent and evolving industry.
The Blockchain Task Force is a cross-functional group serving Duff & Phelps and its clients on emerging blockchain technology and cryptocurrency. Additionally, the task force acts as thought leaders in the space by participating as panel members, podcast guests, columnists at national media outlets, and authors in industry publications. If you have further inquiries, please reach out to James Brennan.