Each week, I will be posting my notes from MIT’s Blockchain and Money course to keep myself accountable for my learning.
Is more regulation in the cryptocurrency space needed?
In public policy, there are 3 main guard rails around its framework:
- Guarding against illicit activities. Although definitions vary by jurisdiction, it includes activities such as terrorism financing, money laundering, human trafficking and tax evasion.
- Financial stability. Concerned with maintaining overall stability of the economy, fiat currency and the commercial banking system.
- Protecting the investing public. Promoting economic activities that people can have confidence in. Ensuring integrity, lack of manipulation and transparency in price in the market.
In the world of crypto-assets, different governments are taking different approaches to deal with the emerging market. In the words of Mark Carney, governor of the Bank of England on March 2018:
“Authorities need to decide whether to isolate, regulate or integrate crypto-assets and their associated activities.”
Guarding against illicit activities
Out of the 3 pillars, guarding against illicit activities seems to have the most agreed approach between different countries.
For tax compliance and reporting purposes, in most parts of the world, Bitcoin is treated as a property (like stocks and bonds rather than currency). For Bitcoin mining, it’s treated as income.
However in the United States, to include cryptocurrency under bank secrecy act (which enforces reporting around large transactions), it has also been labeled a “virtual currency”.
Some challenges in this space include tracking sources of funds, made difficult by psedu-anonym addresses, privacy coins and mixers or tumblers.
Crypto-to-crypto transactions and decentralised exchanges are also difficult to enforce compliance and reporting.
Financial stability
In 2018, the general consensus was that the cryptocurrency market was not big enough for it to have a direct impact on undermining financial stability, with a market capitalisation of about $250B. In 2021, the cryptocurrency market is about 8 times as big as its size in 2018, but still a shy volume compared to other markets (the global equity market was over $100T in 2020).
That being said, for countries who have strict capital controls (limiting the flow of foreign capital), cryptocurrency can give a back door for getting money in and out of the country.
Protecting the investing public
The cryptocurrency market is more susceptible to frauds, scams and manipulation.
The goal of investor protection is to enforce full and fair disclosure from the issuers, prohibit fraud and deceptive practices, promote price transparencies in secondary markets and minimise conflict of interest.
There is a wide range of views on ICOs (initial coin offerings), and there is an interesting reading about comparative analysis of legal regulations of ICOs in selected countries.
The big debate is still whether the different cryptocurrencies are securities, commodities or others, as there are different public policies around each of them.
This is an important question as the answer will determine how the industry will be regulated in the years to come.
Generally speaking, being classified as a commodity could mean softer regulations, while being classified as a security could mean harsher regulations.
While the line between classifying different cryptocurrencies as either a security or a commodity is blurry, the Howey test (1965) is a heuristic determine whether something is a security:
- Is it an investment of money or assets?
- Is it an investment in a common enterprise?
- Is there a reasonable expectation of profits?
- Is it reliant on the efforts of others?
If the answer to all of these questions is yes, then it is considered a security.
In 2018, about 75% of the crypto market was declared not securities by the US Securities and Exchange Commission (SEC), the main reason being that they are decentralised without a single entity in control of them.
Recently in the United States, there has been an increasing level of scrutiny in the less-understood, fast-growing market.
There are many different views on whether regulation in the cryptocurrency market is a positive or a negative.
Currently, is the unfortunate fact that too many people are losing their life savings from scams in the cryptocurrency space.
However, giving the government too much influence can undermine the foundational vision of a truly autonomous and independent society powered by blockchain technology.
This will be an important debate to follow in the coming years.
