Cryptocurrency has moved from a fringe interest to a prominent player in global financial markets. Unfortunately, American lawmakers are struggling to keep up, resulting in contradictory regulations and creating a hostile regulatory environment. Lawmakers need to create clear and transparent rules to facilitate cryptocurrency’s growth and establish the U.S.’ leadership in global markets.
Under minimal regulation, cryptocurrency has boomed in the U.S., with 16 percent of Americans reporting having used or invested in cryptocurrency, with usage rates being almost twice as high, at 31 percent, for populations 18 to 29. This suggests that cryptocurrencies will become even more prevalent in the future.
While the use of crypto is on the rise, regulators are struggling to keep up due to confusion regarding which federal agency possesses regulatory authority.
When used as an investment, regulatory authority falls to the Securities and Exchange Commission (SEC). However, whether or not a transaction is an investment is determined primarily through the buyer’s intent, which is difficult to determine from a transaction alone. As a result, consumers can purchase the same type of crypto with multiple goals, not all related to investment or securities.
Additionally, crypto transactions could also fall under the Commodity Futures Trading Commission (CFTC). As a guideline, CFTC claims regulatory authority over transactions when the traded items are delivered within 28 days. The 28-day rule is intended to distinguish short-term transactions from long-term investments, which the SEC covers.
In addition to transactions, the institutions processing cryptocurrency transactions may be subject to rules derived from the Bank Security Act (BSA). However, rules such as anti-money laundering and know-your-customer are difficult to enforce on decentralized platforms where users benefit from high levels of anonymity.
Confusion regarding rules and regulatory authority creates a gray area for courts when settling legal complaints. Because the rules for cryptocurrencies aren’t clearly set, the courts are filling the void by contributing to the rule-making process through the legal precedent.
Setting rules by legal precedent isn’t conducive to growth and creates uncertainty. Following a court battle over whether the cryptocurrency company Telegram’s offerings should be classified as a security, the company ended up announcing it would discontinue operations in the U.S. due to disagreement with the verdict.
The current climate is repelling businesses as shown by Telegram, and firms such as Etherum and Shapeshift have left the U.S. due to the regulatory uncertainty.
For consumers, the digital nature of cryptocurrency makes international transactions and remittances easier by eliminating the intermediary role previously filled by companies such as Western Union. Eliminating the middleman reduces the transaction burden on lower income consumers, and improves the ease of these transactions.
The World Economic Forum believes that crypto can lead to alternative finance options for those who are underbanked or unbanked. In the U.S. this represents a potential option for the approximate 7.1 million Americans that were unbanked as of 2019. Alternative financial options are vital to access credit for Americans who can’t afford the fees or deposit requirements of traditional systems.
Additionally, cryptocurrency platforms provide security benefits such as immutable records that can show proof of payment, and protection over personal data. While the currencies themselves fluctuate in value, many view these options as a way to diversify their risk from inflation of fiat currencies.
Cryptocurrencies also provide incentives for businesses to adopt new forms of currency. Cryptocurrency protects the business from fraud, ensuring consumer data remains out of the hands of cyber criminals. According to a recent study by Forrester Consulting, the average purchase from cryptocurrencies is twice the value of ones made with credit cards. The study also found that while integrating cryptocurrencies has an upfront cost, the average business experienced a return on investment of over 300 percent.
Without clear regulations, businesses and crypto could follow the lead of companies like Telegram and decide to leave the country and take these benefits with them. By establishing clear rules of operation, lawmakers can reverse the current confusion and set the U.S. up as a leader in the global crypto marketplace.