Cryptocurrencies are ‘unregulated’ and they might trigger the next financial crisis. This seems to be the dominant narrative about cryptocurrencies. The only problem is that it’s not true.
It certainly isn’t true in countries like China where domestic cryptocurrency exchanges are banned, and the promotion of initial coin offerings is too. In the United States, where there is a more balanced approach, cryptocurrencies have been copy and pasted into an awkward mix of state and federal regulatory standards. In the absence of Congress explicitly taking a strong stand one way or another, regulatory agencies have been forced to scramble to deal with new technologies without much explicit direction from their supposed Constitutional superiors.
It’s clear that on this issue as with many others that members of Congress disagree with one another, sometimes quite fervently. Yet faced with a contentious midterm election coming up, the current lame duck session of Congress is focused on keeping the lights on and getting the votes they need to continue as politicians rather than looking to the future.
It’s not like there haven’t been some Congressional efforts on both sides of the debate. On September 2016, both Rep. Jared Polis (D-CO) and then-Rep. Mick Mulvaney (R-SC) announced a new bipartisan “Blockchain Caucus” dedicated to exploring cryptocurrency and other related technologies. Mulvaney, who is now the Trump Administration’s director of the Office of Management and Budget, was quoted as saying “Blockchain technology has the potential to revolutionize the financial services industry, the U.S. economy, and the delivery of government services.” It can’t be hard to extend their view to cryptocurrencies built on the blockchain.
On the other hand, Rep. Brad Sherman (D-CA) called for the total ban of mining and buying any cryptocurrencies for any US citizen, leaning into arguments about the dominant status of the US dollar as the world’s reserve currency.
The only significant movement to address cryptocurrencies in Congress has been to unanimously pass a bill that would create a task force to counter money laundering by terrorists with digital currencies — and you could argue that is less a matter of looking at cryptocurrencies as it is a national security hook that just happens to have bitcoin and cryptocurrencies come along for the ride. Other more substantiative legislation on digital currencies have been tabled for now.
Cryptocurrencies are effectively unlegislated right now in the United States — a new technology without an overarching framework of how to address the new needs, and innovations it brings. Congress has passed no explicit law defining an overarching view on cryptocurrencies.
In contrast, applying old regulations, rules set for quasi-similar historical comparisons, have proceeded aplenty, even if it might be an imperfect match.
FinCEN (The Financial Crimes Enforcement Network, a division of the Treasury Department focused on money laundering) mandates anti-money laundering and “Know Your Customer” compliance for major cryptocurrency exchanges and applies the Bank Secrecy Act to both initial coin offerings and exchanges.
State-by-state monetary transmission authorities regulate how cryptocurrencies are exchanged, meaning that in practice in order for a cryptocurrency exchange to get nationwide coverage, it must bargain with 50 sets of state regulations and regulators.
The Federal Reserve (America’s central bank, responsible for regulating the US dollar) and CFTC (Commodity Futures Trading Commission, responsible for regulating commodities, options and futures markets) have adopted a “do no harm” philosophy around cryptocurrencies, but the SEC (Securities & Exchange Commission, responsible for regulating securities) says initial coin offerings are part of its mandate while maintaining that staples bitcoin and ethereum are commodities to be regulated by the CFTC.
The SEC has pursued cease-and-desist motions and pursued charges against dealers in ICO tokens as unregistered broker-dealers. It clearly regards most ICO tokens as securities under its scope and has started enforcement actions to match its words.
The IRS has also looked closely at cryptocurrencies, submitting a subpoena to major cryptocurrency exchange Coinbase for customer and user data. It’s been fairly well-established that cryptocurrency holders must pay taxes on their gains.
With forensic accounting on unchangeable, public chains of data — federal and state authorities arguably have an easier job of piercing together any wrong-doing on cryptocurrency then with cash. Witness how the proceeds from Silk Road were seized after federal authorities were able to correlate the identity of “Dread Pirate Roberts” with his digital wallets.
There are other countries where there is barely any basic regulation of cryptocurrencies. Then there are countries like Mexico, which enacted a “Law to Regulate Financial Technology Companies” in March 2018, with a chapter specifically devoted to the operations of “virtual currencies”.
The fear in the United States shouldn’t be the former — an empty void of unregulated activities — because that isn’t happening. Rather, the fear should be that there hasn’t been explicit legislation and (partly) because of that void, regulation has proceeded in a way that is unclear and haphazard.
In the absence of Congressional votes and decisions by legislators that are more accountable to voters, executive agencies will continue doing what they are already — applying the regulations of the past as prologue to a technology of the future.
There is almost always a legislative gap when it comes to new technologies, so this is nothing new. The United States saw the same thing with the Internet.
When the Internet emerged, the FCC regulated it like the telecommunications of old but with a lighter touch. Eventually, a law rolled out in 1996 and voted through by Congress actually clarified that lighter regulation (especially on the anti-monopoly front) was correct and implemented guidance going forward.
Added into that Act was the Communications Decency Act of 1996, which sought to regulate pornographic material on the Internet. The censorship clauses were struck down by the Supreme Court, but one critical section remained: Section 230, the basis that content platforms cannot be held criminally liable for content others publish. It has become the cornerstone of the platforms that rule the Internet based on third-party content, from Facebook to Reddit. You could argue that without Section 230, the modern web would not exist.
Small inflection points in legislation can make magnitudes of difference in how technologies develop and the benefits they bring. These are the points worth defining and fighting for, not whether this current void in legislation is sustainable (it’s not) or whether the imperfect patchwork of regulation from different agencies will last (it can’t).
Technologists and ideologues who dreamed that bitcoin and cryptocurrencies were a prologue to a world without government may still win the day in the distant future — but this is the present, and the fight in front of them remains how the government will define its relationship to cryptocurrency and not when.
Likewise, those seeking to paint cryptocurrencies as lawless, unregulated threats should recognize that regulation is being applied, however imperfectly, and the larger threat remains hesitance with how innovators can proceed in an uncertain regulatory framework — similar to the earliest days of the Internet. Technologists and entrepreneurs will choose to move to other states that take the lead on how they implement legislation with regards to cryptocurrencies and have clear regulations.
Cryptocurrencies aren’t unregulated in the United States, they’re unlegislated and will continue to be so in the lame duck session. The latter is a far graver and more realistic concern than the former.