Free Minds & Free Markets

Maybe the Government Won’t Screw Up Bitcoin After All

Regulators seem to recognize the need for restraint.

bitcoinsImagine China/NewscomLibertarians generally don't expect much of government regulators. Hearings on the hill about how to approach some new, unregulated activity often boil down to little more than nebulous demands to "do something" and boss people like us around. This is especially pronounced with a revolutionary new technology like bitcoin. For these reasons, a recent testimony by the chairmen of the Commodity Futures Trading Commission (CFTC) and Securities Exchange Commission (SEC) before the Senate Banking Committee provided a welcome breath of fresh air to the cryptocurrency community. Rather than rushing to regulate, these policymakers urged restraint and humility towards financial innovation.

Last week, the cryptocurrency community breathed a collective sigh of relief as two of the most relevant financial regulatory bodies in the United States signaled an unusual understanding of blockchain technologies and explicitly committed to a "do no harm" approach towards cryptocurrencies. In his remarks before the committee, CFTC Chairman J. Christopher Giancarlo told the body that "we owe it to this generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one." SEC Chairman Jay Clayton, while more skeptical about certain cryptocurrency applications and fundraising vehicles, nonetheless praised the technology's promise to "facilitate capital formation [and provide] promising investment opportunities." Both men outlined a regulatory path forward that, while still imperfect (as most things are), would be much preferable to many alternatives.

Contrary to some people's preconceived notions, bitcoin and cryptocurrencies are hardly "unregulated." By virtue of the flexible nature of these technologies—vicariously or simultaneously serving as alternative currencies, payment systems, registries, or even next-generation legal devices—cryptocurrencies touch upon the domain of several regulatory bodies. Thus, a panoply of separate policy guidance documents have emanated from bodies as diverse as the Department of Treasury, Internal Revenue Service, Federal Election Commission, and each of the separate states.

This isn't necessarily a bad thing. If properly constrained, the limited regulatory functions of these dispersed offices could be vastly preferable to the more expansive authorities granted to a hypothetical "Department of Cryptocurrency." The challenge, then, is to ensure that our policies indeed remain properly constrained. The according downside, of course, is that entrepreneurs and cryptocurrency users face regulatory uncertainty as they wait to see how different policymaking bodies will respond.

There have been two large sources of regulatory uncertainty in terms of U.S. financial regulations. One of them concerned how the SEC would approach the burgeoning world of "initial coin offerings" (ICOs). An ICO is a kind of cryptocurrency crowdfunding mechanism. In theory, ICOs would provide promising technology projects with seed funding and reward backers with the project's returns—a kind of democratic, distributed venture capital fund. In practice, ICOs have unfortunately boiled down to little more than a wild west of unaccountable projects and outright scams that seemed to flagrantly skirt established SEC securities regulations.

Even diehard cypherpunks have recognized the problems that fly-by-night ICO scams generate for novice investors and the community as a whole. Yet many have feared that such shady schemes could generate the pretext for onerous regulations that impose innovation-stifling costs on legitimate cryptocurrency projects as well. No one wants to see fraudulent scams proliferate. But we must ensure that the policies put in place to mitigate those problems don't also ensnare beneficial, value-producing developments.

Additionally, many have wondered how the CFTC might approach potential cryptocurrency market price manipulation. While the CFTC does not have jurisdiction over "spot" transaction markets that merely facilitate direct exchanges, it does have the authority to investigate fraud and price manipulation occurring on such markets. The recent pivot of two CFTC-regulated institutional exchanges—CBOE and CME Group–to include cryptocurrency futures trading further embroiled the U.S. futures regulator in virtual currency matters. Then, in late January, it was reported that the CFTC had been investigating the popular bitcoin exchange Bitfinex for its involvement with a controversial dollar-backed crypto-token called "Tether" that critics suspect of being little more than a tool to artificially prop up the price of bitcoin. Some have attributed the recent price slide in bitcoin to this news, but it's always hard to tell. Regardless, the extent to which a regulator like the CFTC would involve itself in cryptocurrency price fluctuations could have a dramatic impact on these markets' futures and potential.

The SEC and CFTC have undertaken pronouncements and actions on cryptocurrency in the past. In 2014, the CFTC first turned its eye to these new technological developments. In 2015, the body formally established that virtual currencies would be considered a commodity and therefore fell under the purview of the Commodity Exchange Act. In 2016, the CFTC began undertaking specific actions against actors suspected of violating those rules. The SEC, meanwhile, has published numerous investor bulletins, alerts, and statements on virtual currencies and ICOs. In December, the SEC's newly-formed "Cyber Unit" dedicated to cryptocurrency activities launched its first suit against an alleged ICO scam.

Earlier in January, CFTC Chairman Giancarlo and SEC Chairman Clayton co-authored a piece in the Wall Street Journal that signaled their new emphasis on "distributed ledger technologies," or DLT. While the op-ed extolled these developments as "productivity-driving innovations" that their "regulatory efforts should embrace," it came with the somewhat ominous title of "Regulators are Looking at Cryptocurrency."

The joint testimony put a little more meat on the bones of just what "looking at cryptocurrency" means.

First, SEC Chairman Clayton did not mince words regarding his office's stance on ICOS: Projects that are security offerings should be regulated like securities offerings, "end of story." Furthermore, in his estimation, every ICO that he's seen so far has indeed met the definition of a regulate-able security in the eyes of the SEC. This could dampen some of the often eyebrow-raising shenanigans in the ICO space, wherein sneaky "crypto-sovereign citizens" attempt to skirt U.S. securities law by incanting the right combination of magic legalese. Exactly what kind of project could constitute a hypothetical non-security ICO is still unclear, although the chairman did intimate that such an arrangement would be possible. And he likewise confirmed that "pure cryptocurrency" projects would not be subject to SEC securities regulations, but again, the definitions here are still a bit murky.

The CFTC, meanwhile, has become somewhat of a cryptocurrency research center over the previous months. Chairman Giancarlo's remarks belied a deep appreciation for the benefits that virtual currencies can bring, along with the according regulatory humility of a responsible policymaker. He first emphasized the need for the regulators to become students of these new technologies, and "learn everything [they] can" before promulgating policies. (Apparently, the chairman has a willing teacher within his own family: During one amusing part of the hearing, Giancarlo revealed that his own niece was an early bitcoin adopter and diehard "hodler," thereby earning the praise and memes of many in the community.) Once regulators have boned up, then they can turn to educate consumers. In a world where so many regulators wish to regulate first and ask questions later, Chairman Giancarlo's explicit embrace of permissioness innovation for cryptocurrencies is a refreshing change of pace.

Perhaps the most interesting path forward proposed by the chairmen had nothing to do with the SEC or the CFTC at all. Rather, both policymakers recognized the problems created by our current patchwork of state money transmission regulations. Libertarians generally support state's rights and decentralization of authority as a guiding principle—and for good reason. But there are some situations where federalism can counterintuitively produce more bad regulations than if the federal government had set a basic threshold of economic freedom at the outset, as even the intellectual champion of modern federalism, Richard Epstein, recognizes. The problems with state-based regulation of virtual currency transmitters were laid out clearly in a recent Coin Center report from Peter Van Valkenburgh. (As a disclosure, I helped Peter with some of the background research and reviewed the report.)

Currently, cryptocurrency exchanges that wish to operate in the United States must become certified in each of the 50 states plus three territories where their customers reside. As a network business, which becomes more valuable as more customers sign up, it is imperative that virtual currency providers cast as wide an operational net as possible. Yet when each separate jurisdiction requires a hefty registration fee and various regulatory hoops that businesses must jump through before getting the green light, achieving the kind of compliance that is necessary can be costly, indeed. Furthermore, a handful of interventionist-minded states can effectively dictate how virtual currency businesses must operate across the entire country by virtue of their onerous regulations in a kind of regulatory race to the bottom.

CFTC Chairman Giancarlo's written testimony explicitly discusses these "shortcomings of the state-by-state money transmission licensure," while SEC Chairman Clayton agreed on the need to bring "clarity and fairness to this space" through possible federal intervention. Clearing up some of the regulatory costs wrought by irrational state-based licensing rules would go a long way to improving competition and innovation in the virtual currency transmission industry.

Overall, the recent bitcoin hearing in the Senate was welcome news for the virtual currency industry. At least in terms of financial regulation, the leading policymakers seem to really grok the technology and appreciate the immense power—for good or for bad—that their rules could wield on this developing community. If only more regulators would follow their steps and develop a healthy sense of humility as well!

Photo Credit: Imagine China/Newscom

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  • Deven||

    I'm still not sold on crypto in its current form.

    With no real means of anonymity, and no efficient use as a cash alternative, what is the point? I can easily digitize my money already.

    Maybe I'm just not grasping it, but it seems the value of crypto is based on some alternate reality where you can bypass government theft without violence visiting you. The other positive is that it is not fiat currency, but most other investments bypass the issues created by a fiat currency.

  • arm||

    if you want a basic course I would always recommend cryptonomicon. It is a great meandering book in and of itself but does, at its core, show you the value of blockchain. Also it predates all of this, which is eerie.

    Any data can be stored in blockchain, it is permanent and cannot be destroyed, now think of the possibilities on your own.

    People that see no value in crypto tech, but see value in banks drives me crazy. What logical reason is there for a physical bank, let alone the thousands in any major city? There is almost no need. Blockchain can do everything a bank can do, for cheaper, faster, more directly without middlemen, with actually more security.

    The US dollar really is crypto, it is about as digital as they come. If anything I hope this forces some country to switch back to an asset backed currency.

  • mcsandberg||

    Exactly! With all transactions recorded for all time in the ledger, if at any time your identity becomes compromised, everything you did can be seen.

  • Mark22||

    With no real means of anonymity, and no efficient use as a cash alternative, what is the point?

    Currently, transactions and contracts are enforced by massive and expensive governmental and corporate structures: banks, the legal system, regulatory authorities, These impose massive inefficiencies on the economy. Cryptocurrencies eliminate those. That is, cryptocurrencies are to banks what ebooks are to publishers or what Uber is to taxicabs.

    Maybe I'm just not grasping it, but it seems the value of crypto is based on some alternate reality where you can bypass government theft without violence visiting you.

    Cryptocurrencies don't need to be anonymous in order to replace existing financial institutions. However, since those institutions are fighting hard to retain their monopolistic powers, anonymity helps in shielding cryptocurrencies from rent seeking and legal overreach. Cryptocurrencies do provide a useful level of anonymity already, and people will likely strengthen that in future cryptocurrency designs.

  • Cynical Asshole||

    Maybe the feds won't screw up bitcoin.


    Good one.

  • jmod46||

    Yes, I'm always amused when an article such as this reassures us that the government is populated by saintly politicians and bureaucrats who only have our best interests at heart. They wouldn't think of using their government boot to grind your face into the pavement, now would they?

    But there's no hurry in going after crypto now. Wait until it's well-established and people depend on it. Then change the rules of the game. It's what government does. After all, a few years from now the opportunities for graft, corruption, and regulatory capture will be so much better.

  • ||

    Furthermore, a handful of interventionist-minded states can effectively dictate how virtual currency businesses must operate across the entire country by virtue of their onerous regulations in a kind of regulatory race to the bottom.

    Fucking meddlesome flyover states.

  • Warren||

  • Brett Bellmore||

    The government scarcely needs to screw up bitcoin, so far as I can tell. It's becoming the digital currency equivalent of Rai stones. Or maybe just tulip bulbs...

  • arm||

    Isn't is just as terrifying to learn that they are the regulators and they are NOW saying they will start to learn everything they can about crypto, and one of the main sources of a chairman's understanding comes from his niece? What if his other family members hate crypto and think it is just a giant ponzi, then what?

    Crypto will have solutions to any problem it faces long before the chairman's niece can think of a solution and relay it through the United States Federal government.

  • ranrod||

    Bitcoin is Paving the Way for a Global Cashless Society
    Bitcoin is driven by greed, it's in no way a rational solution to our monetary problems. It's global, scarce, cashless and soon the first banks will provide usurious lending.
    The lesson is: as long as we hope to breed money from money, not realizing it's usually our own labor that breeds money for those holding a lot of it, we will be fooled by units like this.
    Money must be cheap (interest-free) and plentiful, but stable. Only then can it be a good medium of exchange, allowing the producers of society the benefits of their labor, instead of the providers of capital.
    Bitcoin offers none of these features.
    It has the Money Power's fingerprints all over it.

  • Mark22||

    soon the first banks will provide usurious lending

    And anybody is free not to borrow at usurious rates.

    The lesson is: as long as we hope to breed money from money,

    I don't know of anybody who "breeds money from money". Wealthy people don't own large amounts of money, they own physical properties and businesses.

    not realizing it's usually our own labor that breeds money for those holding a lot of it

    Ah, the Marxist labor theory of value. No, that's not how it works. Producing value and wealth has three necessary inputs: (1) individual labor, (2) physical resources, and (3) coordination and information. All three are traded in markets and all three are necessary. Of those, (3) is becoming more and more important, providing the majority of the value of businesses and delivering the most amount of wealth. And (3) is becoming more and more like a physical resource, since it is increasingly carried out by computers.

  • vek||

    I think cryptos as a store of wealth is a non starter. They may well have a nominal exchange rate at any given time, but it's not the real deal. There is no real value. Even BS government fiat is far easier to predict and rely on for the more stable countries.

    I think where crypto could thrive is just as a massive, FREE to the seller and buyer, payment processing system. Every crypto I've ever seen has been structured wrong, I think because nobody who has ever made one has a clue about monetary issues.

    You'd need a coin that could scale to the point of many trillions of coins if the volume of transactions was there, you'd need near instant verification, with the person who does the processing on the network getting a fraction of a percent payment from NEW coin issued. That way processors make money, but nobody actually pays. The currency would issue new coins exactly in a ratio that could keep the actual value about stable, so no dramatic ups or downs hopefully, but growing perfectly in line with the number of transactions being handled.

    This kind of coin could replace Visa/Master Card/Amex/Discover and half of what regular banks do now. But nobody has made such a setup that I am aware of. They're too caught up in the idea of an appreciating coin that ultimately has no value other than if people use it for transactions...

  • Mark22||

    I think cryptos as a store of wealth is a non starter.

    That's all any currency is. People who think that fiat currency or gold are anything more than that are fools. The current stability of the US dollar is a historical anomaly. In the 1970's, inflation reached nearly 14%, which means that money had a half life of 5 years.

    I think a stable currency is a huge psychological problem because it leads people to confuse dollar value with actual value, to confuse monetary wealth with actual wealth.

  • vek||

    Totally correct. Gold and silver would be impossible to implement globally nowadays, but a single country... Maybe the USA, could re-back our currency. Or perhaps come up with some additional commodities to throw into the basket to back the currency. It's the only way to have a real floor on the value of your money. Technically it's still not a ceiling as people may be willing to pay more than the value of the commodities that it can be turned in for, but it does create a floor.

  • Mark22||

    CFTC Chairman J. Christopher Giancarlo told the body that "we owe it to this generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one."

    Good grief, financial regulation by the feelz!

    No, Mr. Giancarlo, you owe it to the American people not to regulate cryptocurrencies because the Constitution gives you no authority to regulate people publishing large integers.

    You can't seize cryptocurrencies and there is no need for legal contracts, cryptocurrencies don't require courts or laws to operate, and even if they did, courts often couldn't enforce their judgments.

  • Ned Netterville||

    Non-government money is a huge threat to a government's control of its sheeple. Taxation, and especially income taxation, utterly depends utterly upon the state's ability to know everything about the sources of your income and where you stash your wealth. Crypto currencies threatened that state's ability to know your financial affairs, and the process of revealing ownership of crypto assets through government regulations is well along towards elimination, which was one of the truly great promises of block-chain technology.

  • macsnafu||

    On the one hand, it's smart to recognize the reality of government and government regulation, and to recommend better over worse policies. On the other hand, libertarians should hardly be wanting to jump at the chance for regulation.

    First of all, if handled properly, cryptocurrencies should be pretty much untouchable and untraceable to government regulators, so there really shouldn't be anything for them to regulate, unless you do it wrong.

    Secondly, if it's really untouchable by government, then naturally, there need to be private solutions to cryptocurrency scams and other related fraud. And there doesn't have to be just one solution. Let the market develop several solutions and see which ones work better. Isn't that what the market is all about?

  • Granding||

    CryptoBoom is leading media platform covering cryptocurrency, the blockchain, ICO, and the next-gen web. Our company offers information services, latest news, prices, and events to educate and connect the global digital currency community.


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