What Does Great Cryptocurrency Regulation Even Look Like?

Acting director of the United States Consumer Financial Protection Bureau (CFPB), Mick Mulvaney, said on Wednesday that crypto-regulation needs to thread the needle and find the “sweet spot” between overly harsh and overly lenient.

Mulvaney is a classic American capitalist and a Bitcoin enthusiast, noting he “was one of the founding members of the Bitcoin caucus and blockchain caucus.” He emphasized the government should not be preventing potential investors (or developers) from exploring Bitcoin or other digital asset investments. At the same time, he recognizes the need to protect investors from shady or outright criminal behavior, invoking Mt. Gox and explaining:

We knew at an early point in bitcoin that as with any developing financial technology we needed to find that sweet spot … if Mt. Gox became a regular occurrence it dramatically undermines confidence in the markets and prevents innovation. And if we over-regulate and discourage people from entering the marketplace, that has bad consequences too.

Mulvaney went on to discuss the importance of ensuring existing laws geared towards traditional finance are not applied to cryptofinance in a way that has a “perverse or absurd result.” Crypto advocates should be encouraged to hear such sentiment. There is always a tendency by regulators to force old, existing rules onto new technologies; it’s easier than creating new legislation and allows for the rationale and cover of “established precedent.” This follows what might be a new pattern of the US federal government making a course correction on crypto regulation from “wait and see” to a more friendly stance, particularly given the recent ruling that Ether isn’t subject to SEC regulation.

Many in the crypto community have come around on the idea of regulation generally, provided it is implemented with a deft touch. Like any market or game, no one wants to participate in a rigged system (unless of course you are in on the rigging). After countless allegations and investigations into price manipulation at exchanges across the globe, crypto needs to clean up its reputation if it wants to attract new investors. Good faith regulation, as has been argued before on this blog, is one path to that end.

But those following the space may be quick to point out that calls for sober regulation seem to end there, without providing details on what specific form it might take. So, what does great crypto regulation look like?

1) For starters, it’s important to note that the specter of regulation may be having some effect. With the spotlight on government watchdogs, even if they are slow to roll out specific measures, many speculate that bad actors are lying low now that the eyes of the enforcers are everywhere.

2) The first material step should probably be more clarity on ICOs. While some countries have outlawed ICOs entirely, others like Bermuda have embraced them. The result has been an influx of fintech companies into Bermuda, eager to engage in the new marketplace. Without more guidance, the US risks falling behind other countries in terms of blockchain innovation.

Bermuda’s approach involves having potential ICOs disclose certain information about their sale to the government before gaining approval, thus helping weed out both scammers and companies who are not serious about their ICO. Perhaps something similar could work in the US.

3) Cryptocurrency exchanges present another opportunity for regulation. While the major US exchanges like Kraken, Gemini, and CoinBase Pro have not been implicated in major hacks or schemes so far (though they have had their share of smaller issues), they need to be demonstrably different from the sketchy exchanges of the world until the taste of Mt. Gox is out of everyone’s collective mouths. This should likely include increased customer support (notoriously bad at US exchanges) and further customer protections than already exist. It bears mentioning that the Winklevoss twins, leaders of the Gemini exchange, are actively calling for regulation, though they would prefer exchanges be self-regulating.

The best approach the American exchanges could take is to work proactively with legislators to scope out solutions in a collaborative manner. The US, for all its unique issues, is proudly capitalist. Although the current administration views regulation as a patently bad thing, this is not necessarily the case. If done correctly, thoughtful regulation can increase free market participation and vault the US back to the forefront of the cryptocurrency revolution.

Disclosure: This post, as with all Crypto Economist branded posts, is a personal opinion written for informational purposes only. This post does not constitute investment advice, legal advice, tax advice, or any other sort of advice. Likewise, the information herein should not be interpreted as any endorsement, recommendation, or sponsorship of any particular company, token, or security.