A Look into US Cryptocurrency Regulation with Peter Van Valkenburgh on Epicenter
Over the past year, as cryptocurrencies and ICOs have gone mainstream, we have seen a huge surge in regulatory activities. In the US, many different regulatory bodies including SEC, CFTC and FinCEN stepped forward to regulate crypto projects. Seemingly contradictory statements have added to confusion and fear of a broad crackdown looming. In this Epicenter episode we were joined by CoinCenter Director of Research Peter Van Valkenburgh to shed clarity on recent developments and understand where things are heading. We summarized the key insights from this conversation below.
Peter Van Valkenburgh joined us straight after participating in the recent US Congressional Hearings on cryptocurrencies, which marked the first time Congress tackled the regulatory issues surrounding ICOs. One of the key developments from those hearings was Chairman Clayton’s proposition of a conceptual distinction between tokens referred to as “pure cryptocurrencies” — over which SEC doesn’t hold jurisdiction, and tokens pursuant of ICOs — which do qualify as securities.
Despite an emerging coordination and the clear division of labor between Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC), given that no fewer than 9 federal regulators and 52 states hold jurisdiction over financial products, the biggest challenge faced by regulators is the jurisdictional fragmentation and, consequently, severe coordination issues. Moreover, establishing which entity represents the right investor protector — SEC or CFTC — is particularly problematic. The big questions are whether Coinbase or any other Bitcoin exchange are money transmitters, and if so — do they need to get licensed in all 52 states?
These challenges could be solved by establishing a new federal law which would preempt money transition licensing with respect to cryptocurrency exchanges on the state level, and putting in place an alternative regime where one federal regulator would act as supervisor and grant licenses. According to Peter, CFTC is best suited for this, and should use its expertise and play a proactive role in protecting investors with cryptocurrencies by regulating the exchanges — while SEC should stick to the role of protecting investors from issuers of new tokens by supervising ICOs.
The question of regulating decentralized exchanges remains complicated, given that different types of tokens — some of which could be deemed securities, some commodities — are traded on the same platforms. The SEC has a very broad definition on what qualifies as a broker dealer for a national securities exchange, and they expect people facilitating trades of securities to be registered — just like in case of the NY Stock Exchange. For this reason, a decentralized exchange trading securities will very likely become a target of the SEC, unlike exchanges trading tokens with real functionality and without any promises of profit attached to them.
Peter emphasised the characteristics of the serious and credible projects in the space, for whom fundraising is not the primary reason for selling tokens. These projects recognize that the main purpose of issuing tokens is to create an open market for participation in whatever their service aims to accomplish, as well as — in case of PoS networks — to act as an economic weight in the consensus. For this reason, finding a way to get tokens widely distributed is important for advancing the technology, and developers should show good faith by giving tokens away, or using them as a reward for honest participation in the system — whether it is via mining or an airdrop.
Comparing the US and European regulatory landscapes, Peter believes that while projects in the US are facing regulatory scrutiny right now, if a “light-touch” CFTC regulations of the commodity-like tokens will be successfully implemented, the US can still become a friendly home to those projects. Given the different legal traditions, common law in the US and civil law in Europe, American regulators can act faster, but their European counterparts will catch up eventually.
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