The future of cryptocurrencies greatly depends on the future of regulation in the financial technology (fintech) industry. Bitcoin, the most popular cryptocurrency, is currently worth around $9,000,[1] which is a significant drop from the cryptocurrency’s value at the end of 2017 that nearly reached $20,000. However, as The Economist aptly points out, “Bitcoin is still worth seven times what it was just a year ago.”[2] Examining the value of bitcoin from its inception to present day exemplifies the cryptocurrency’s success and potential for the future.
Although the Financial Stability Board noted that cryptocurrencies do not yet “pose risks to financial stability at this time”,[3] blockchain technology and advanced developments in the fintech industry provide accessible platforms to global market participants, making cryptocurrencies (also referred to as crypto-assets) an ideal investment. CoinDesk disclosed that initial coin offerings (ICO) raised $6.3 billion in just the first quarter of 2018.[4] Although agencies around the globe, such as the Securities and Exchange Commission (SEC) and Europol, have been diligent in detecting, preventing and eliminating fraudulent ICOs and other criminal activity that uses cryptocurrencies to launder funds, raising money through ICOs has proven to be efficient and appealing to investors and entrepreneurs.
The question remains whether global financial leaders and agencies will work together to regulate this booming industry. Regulators so far have been unable to agree on a functional definition for cryptocurrencies. Even without a clear definition, certain countries have banned the use of cryptocurrencies altogether while others have encouraged its growth and potential. The Economist asserts that first, “regulators must find sensible answers to three questions: what are crypto-assets? How should day-t0-day risks be managed? And what threat do they pose to financial stability?”[5] The Swiss regulator, FINMA, has applied an adaptive approach to determine how cryptocurrencies should be regulated as opposed to using cookie-cutter policies. FINMA looks at the function of the token to determine how it should be classified, such as whether it is being used as a currency or investment. In the U.S. the SEC has treated cryptocurrencies and ICOs as securities, however, this is not always their true function.
Currently U.S. District Judge Raymond J. Dearie is hearing arguments for Maksim Zaslavskiy who was indicted by the U.S. Department of Justice for “allegedly making fraudulent statements to lure in ICO investors”.[6] The question before the court is whether the ICO is a security and therefore subject to U.S. securities laws and regulations. So far, the SEC has placed all ICOs under their umbrella of securities regulations and the Security Act of 1933. Unfortunately these older laws and approaches do not appropriately regulate modern developments such a cryptocurrencies. Although it is unlikely that Judge Dearie will dismiss the SEC’s action, before the SEC changes how it regulates ICOs, there will need to be a court ruling to determine that ICOs do not automatically fall within their jurisdiction. The fintech industry needs a ruling that “a particular digital coin isn’t a security … to alter the current landscape in which the SEC has treated virtually all ICOs … If you get one of those [rulings] that says this is not a security, then everyone will latch onto and structure their token offering like that one.”[7] This case highlights the gap between technology and regulation. Although the Swiss have found a balance, global financial leaders will need to come to an agreement on what cryptocurrencies are, how they should be regulated, and how to deter criminal activity.
[1] Coindesk. Bitcoin Price on May 4, 2018. Available at: https://www.coindesk.com/price/. Accessed on May 11, 2018.
[2] The Economist. (April 26, 2018) “How to Regulate Crypto.” The Economist Print Edition. Available at: https://www.economist.com/news/leaders/21741143-three-questions-overseers-digital-assets-how-regulate-crypto. Accessed on May 4, 2018.
[3] Jones, Huw. (March 18, 2018) “G20 Watchdog Focuses on Rules Review, Holds Fire on Cryptocurrencies.” Reuters. Available at: https://www.reuters.com/article/us-g20-regulations-carney/g20-watchdog-focuses-on-rules-review-holds-fire-on-cryptocurrencies-idUSKBN1GU0SF. Accessed on March 22, 2018. Per Mark Carney, FSB Chair.
[4] Op. Cit. n2.
[5] Op. Cit. n2.
[6] Prial, D. (May 9, 2018) “Ruling On What Isn’t A Security Needed For ICO Clarity” Law360. Available at: https://www.law360.com/articles/1042159/ruling-on-what-isn-t-a-security-needed-for-ico-clarity. Accessed on May 11, 2018.
[7] Op. Cit. n6.