In more than a decade since Bitcoin was created, cryptocurrencies have become subject to wild fluctuations. Regulators are trying to figure out the best way to monitor and classify them, with many disagreements and fine points to consider.
Some say regulation is needed to protect investors; others worry that it will stifle competition and innovation.
Gary GenslerChairman of the Securities and Exchange Commission (SEC), has said that current financial regulations are robust and enforceable enough to handle cryptocurrencies, although, as critics point out, some of those rules were established in the 1930s.
In the meantime, Hester Peirce, a commissioner of the Securities and Exchange Commission, has said that the regulation should be amended as needed to account for the unique ways crypto operates. Peirce was among several speakers who examined the state of cryptocurrency regulation at the recent MIT Fintech Conference.
“What I would like us to do as regulators is try to step back and stop thinking about how particular rules can be applied and think more broadly about the goals that we are trying to achieve,” he said. “And then looking at how we can work with aspects of the technology that make our job easier as regulators and also allow for exemptions from rules that don’t make a lot of sense in this space.”
The Biden Administration intervened in crypto regulation on March 9, signing an executive order that will develop a robust plan to regulate cryptocurrencies and develop a digital currency.
Here are the talking points raised by the panel, which took place two weeks before the White House announcement:
Determine how to classify cryptocurrencies
It has been more than a decade since bitcoin was created, however, regulators are still debating thorny and important issues.
One of the biggest challenges is resolving the question of whether cryptocurrencies are an asset or a security.
When people use cryptocurrency to raise money to build a company, for example, “We think it looks like a security and say, ‘well, we have the authority on that,'” Peirce said. But that opens the door to more questions, he said, “because we have all kinds of rules about how securities can be bought and sold and who can do what with them.”
“I think we have a lot of work to do,” Peirce said, especially when it comes to stable coins, a digital currency usually pegged to a government currency. Banking regulators have begun to suggest that they may have authority over stablecoins, a burgeoning $183 billion market for an estimate.
But Peirce said there are implications if stablecoins end up labeled as securities. “The two worlds don’t merge very well, the world of securities and this world of people trying to build networks,” he said, referring to the blockchain-based decentralized payment system that underlies bitcoin and other cryptocurrencies. “How are we going to allow those networks to build and grow and decentralize and allow people to participate in them?”
Do not try to include cryptocurrency in existing regulations
Should cryptocurrencies comply with the same regulations as securities, or should new rules be tailored? Gensler has been quoted like saying Howey’s test from the 1940s still applies, but others are not convinced.
Many of the regulations that business owners must comply with were written nearly a century ago, he said. Stephanie Desangessenior manager at PayPal’s global business and market development for blockchain, cryptocurrencies and digital currencies.
“That was a time when the technology was dramatically different, and the way our financial system was structured and operated was also dramatically different,” Desanges said.
Market integrity, consumer protection and financial stability “are still very important goals,” but the methods to achieve them “are quite different now in 2022 compared to what we had in the 1930s,” he said. “I think we’re really looking for the willingness to reinvent and reconsider what might be possible given the technology that we have now.”
Peirce agreed, saying there hasn’t been much willingness to imagine how technology can be used in new ways to achieve investor protection and stability.
“My global and general concern about where the regulation is is that it seems to be hindering progress rather than facilitating progress and experimentation,” he said.
angela daltonCEO and founder of Signum Growth Capital, a brokerage that provides M&A advisory services for blockchain companies, said it is important to consider competition when designing regulation so that new entrants can easily enter.
“My fear is that we end up accidentally harming competition through regulation,” he said, pointing to a increased presence of well-funded lobby groups in Washington.
Established players could “invest in moving things in a direction that hurts the competition and prevents exciting new projects from coming out that can compete with them and help them eat lunch,” he said. “I want to make sure we’re not bailing out incumbents, because I think that’s something that’s happened in the past with the financial system.”
Prioritize global coordination
Cryptocurrency is an industry that is based on having no borders and “goes where it wants to go,” he said. Sandra Ro, CEO of the Global Blockchain Business Council. As such, the regulatory environment is a patchwork of rules, “and that’s definitely problematic.”
Regulations for cryptocurrencies vary substantially around the world, and global coordination among regulators would be helpful, said Ro, who currently collaborates with regulators in Nigeria, Kenya and South Korea.
“We need more, and it’s not just a conversation between the United States and Europe,” he said. “You need everyone to participate.”
Using technology to streamline regulation
Entrepreneurs often use cryptocurrencies to raise money by starting a company, but it’s not easy in the US where “there are a lot of different pieces of the crypto regulatory puzzle right now,” Peirce said.
The SEC has authority over everything related to securities, while the Commodity Futures Trading Commission manages the regulation of the crypto market, and this confusion has a detrimental effect.
“I think the average person, especially the average crypto technologist, doesn’t really know how the rules and regulations work in the US,” Dalton said. “A lot of people are deciding to leave the US because they really don’t know how to get on the regulation highway.” Some industry insiders hope technology can help resolve this confusion.
neha naruladirector of the Digital Currency Initiative at the MIT Media Lab, said she has been working with John Clippingresearch scientist at the MIT Media Lab, on new applications of artificial intelligence to automate the measurement of decentralized autonomous bodiesor DAO. (A DAO is made up of a group of people who have signed a contract with a common goal in mind, usually to raise funds for a specific purpose.)
Narula said the goal of the project is to understand “how decentralized a project could be to ease the burden on technologists of figuring out all this regulation” and to help ease the regulatory “turbidity” between the actual launch of an entity and its full decentralization.
“We need to do some assessments or maybe quantitative metrics to be able to take that burden off the projects and just be able to clearly assess where this project is in decentralization so that we know what regulatory authorities it should operate under,” he said.
Meanwhile, Ro said empowering regulators with technology can help them regulate more effectively once what the rules are has been established.
“In fact, I see a world where a lot of the rules, once clarified, will be automated, and regulators will still be there to monitor and enforce when things go wrong,” Ro said.
What’s next for cryptocurrencies?
Things are moving fast this year. Even before the March 9 announcement, the federal government has been studying the creation of an American digital currency which would be backed by the Federal Reserve. Federal regulators are also trying to figure out how DAO police and deal stablecoins.
Peirce warned that regulation must be designed in a way that works for everyone, not just a few organizations, “as has sometimes been the case in financial regulation.”
“What I’m hoping for is a framework that incorporates basic protections but at the same time allows people a lot of freedom to build things, experiment and try new things,” Peirce said.
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