The Potential Paths Cryptocurrency Regulations Could Take (And Which One’s Most Likely)
The Three Swords of Damocles
Disclaimer: This is not financial advice. I am not a financial advisor. What follows is my personal, subjective, biased opinion.In an ancient, Greek anecdote, Damocles of Syracuse lamented his king’s great fortune, for he seemingly had it all: power, fame, luxury. To show Damocles it’s not all fun and games, king Dionysius offered Damocles his throne during a royal dinner.
However, once Damocles sat down and reveled in the king’s conveniences, Dionysius had a sword hung right above Damocles’s head. Attached to only a single thread of horse hair, ever-looming impalement quickly left a bad taste in Damocles’s mouth, no matter how good the food. Eventually, he asked to be dismissed of his new, ‘fortunate’ position and the pressure that comes with it.
Anyone who bought cryptocurrencies for speculative reasons in November or December is Damocles. Investors got to sit in the king’s throne, but now that the market has turned and regulators are making moves, everyone wonders whether to get up and leave, for the policy hammer might soon come down.
As the US Senate, US Congress, the G20, and plenty of other officials are starting to debate the issue, I see three potential paths through which crypto regulations might emerge.
Let’s look at the crossroads we’re facing.
1. The ‘That Box’ Approach
In last Wednesday’s Congress hearing, Mike Lempres, Chief Legal and Risk Officer of Coinbase, pushed for more clarity from regulators in his testimony:
“Much clarity would come from coordination amongst regulators on this issue. Instead, today’s environment calls to mind the parable of the blind mice and the elephant — each agency looks at tokens from its own narrow perspective:
- the SEC says these assets, particularly ICO’s, are probably securities;
- the CFTC says tokens are commodities, unless they are securities;
- the IRS says they are property;
- FinCEN says tokens are money; and
- other agencies see tokens through their own lens.This lack of coordination can be shown by the inconsistent tax treatment that hinders the development of this new asset class.”
So far, each regulatory financial body of the US concerned with the topic has classified virtual currencies as whatever box of financial instruments they’re regulating. That’s mostly because otherwise, they wouldn’t have any capacity for enforcement, and who wants to take themselves out of the game?
However, this creates the problem that several entities of similar power might soon be haggling over who gets to steer the train. This would slow down the process tremendously and probably lead nowhere, until a decision from somewhere even higher up the chain is made, placing cryptocurrencies in one of the many predefined boxes we have for financial instruments.
Chances are they won’t fit in any of them, because they have characteristics of all the asset classes mentioned above. As a result, crypto would always be overtaxed or underregulated, leaving us to a long string of legal updates and an eternal back and forth until eventually, trading has either tapered off or moved elsewhere.
Then, there’s the other end of the spectrum.
2. The ‘We’ve Got This’ Approach
Last Tuesday, the Winklevoss twins, early backers of Bitcoin and founders of the 17th largest crypto exchange Gemini, put forth a proposal for a so-called Self-Regulatory Organization (SRO) for the U.S. virtual currency industry. Historically, they’ve been proactive in working with regulators, and their business has benefitted from it.
They believe in ‘thoughtful’ regulation, and, as such, suggest creation of the Virtual Currency Association (VCA), so that industry leaders can come up with their own set of rules and standards, that they can then uphold. The VCA would be a non-profit organization, focused on regulating virtual asset exchanges.
Members would have to be certified regarding sound practice of certain rules, such as responsible financial management, transparency, keeping records for cyber and information security, surveillance to detect fraud and manipulation, cooperating with regulators, and proper legal analyses of tokens before listing.
Among all this political talk, it’s easy to forget that policy makers are, above all, humans. And for humans it’s hard to argue with someone who takes the initiative and shows goodwill. Whatever form the SRO might take, only good can come from exchanges speaking up and saying “this is what we’ll hold ourselves responsible to.” Of course there will be additional legislation, but chances are it’ll be much less stringent than what we’d get if investors, market operators, and thought leaders didn’t raise their hands.
CFTC commissioner Brian Quintenz already congratulated the Winklevoss’s to their move, saying:
“Ultimately, a virtual commodity SRO that has the most independence from its membership, the most diversity of views, and the strongest ability to discover, reveal, and punish wrongdoing will add the most integrity to these markets.”
Lastly, there’s what we’ll most likely get: a little bit of both.
3. The ‘Mix & Match’ Approach
Leading up to G20’s meeting regarding cryptocurrencies taking place on March 19th & 20th, Mark Carney, Chairman of the Financial Stability Board, which spearheads recommendations for global financial regulation, sent a letter to the participants, stating that:
“As its work to fix the fault lines that caused the financial crisis draws to a close, the FSB is increasingly pivoting away from design of new policy initiatives towards dynamic implementation and rigorous evaluation of the effects of the agreed G20 reforms.”
This comes off the back, at least in part, of the past decade of economic growth we’ve had, thanks to tighter rules and regulations after the 2008 crisis. As the economy recovered, policy makers slowly inched back. It seems they continue to be mostly in retreat mode, looking at the US rolling back Dodd-Frank, global GDP growth being at a 6-year high and stock markets posting all-time highs as well.
Propped up on such solid, economic ground, regulators can afford to sit back, watch carefully, and wait, thus waiting for the true technological impact of blockchain to unfold, rather than stifling growth too early. If this attitude continues circulating among regulators in Western markets, which tend to lead the global conversation, self-imposed regulation, like the Winklevoss’s VCA approach, has a good chance of helping to shape the rules by which the markets will ultimately be governed.
Regulatory bodies could then take existing frameworks, amend them according to what guidelines and rules SROs have already established among a large share of marketplaces, and then let history run its course.
Either way, the faster all these potentially falling knives disappear, the better.
Keep it crypto,
Nik
