Does Cryptocurrency Need a New Regulatory Structure?

While cryptocurrency is still a relatively new phenomenon, its popularity is growing. The three largest cryptocurrencies—Litecoin, Bitcoin, and Ethereum—have around 1.5 million daily transactions. The increased ease and transparency drive cryptocurrency’s use it brings to financial transfers.

While streamlining transactions saves consumers time and money, the underlying concept of transferring value has not changed. The overlap with traditional currency should allow cryptocurrency—at least initially–to be regulated by the existing system instead of targeted and potentially unnecessary regulations.

Given the relatively new nature of cryptocurrency and its overlap with fiat currency, it would be a mistake to create onerous regulations prior to observing how the technology functions under existing rules.  In the future, if consumer or societal harms materialize, or there is strong potential for harm in a way that is distinctive from traditional currency, then new regulations might be needed on an instance by instance basis. 

When Satoshi Nakamoto introduced the world to cryptocurrency through Bitcoin in 2008, his white paper was the beginning of an evolution in the monetary system as consumers moved into new modes of exchanging value. Eventually, blockchain and Bitcoin would inspire additional digital currencies that would become regulators’ focus.

Despite being based on mineral-backed currency, with the digital mining of finite numbers of tokens mirroring monetary backings like the gold standard, which the U.S. officially left in 1971, lawmakers still struggle with how to define this technology. By extension, they are also unsure how to properly regulate the burgeoning currency.

Cryptocurrency exists on the blockchain, which is an uneditable public ledger. This ledger is cheaper as traditional wire transfers are between $35­-50 on average, while Bitcoin transfers average around $23, although this depends on the congestion of the ledger. With over 15 million wire transfers occurring last February those savings add up. Additionally, while traditional wires average 1-3 days, the cryptocurrency Bitcoin has an average time under 2 hours.

Ultimately, cryptocurrency represents a less expensive option to send and receive money, opening finance to more consumers.

Additionally, cryptocurrency’s transparent ledger system benefits consumers increasingly interested in supply chain transparency. According to a report from the Massachusetts Institute of Technology, supply chain visibility boosts consumer trust and can lead to increased sales. The transparent nature of blockchain enables consumers to trace a product through the supply chain, increasing consumers’ confidence and helping a company attract customers.

Overall, cryptocurrency offers streamlined transactions, increased visibility, and targeted increased efficiencies. However, if cryptocurrency is unjustly burdened through additional regulations beyond what currently exists, many of these benefits will disappear.

In the original paper, Satoshi Nakamoto stated that the advantage of a peer-to-peer transaction system is that it allows for the transfer of digital currency without the need for a third party to mediate transaction disputes. The technology’s focus on the transaction side suggests that the revolutionary aspect is how users can send and receive currency, not that currency is being reinvented and worthy of new and targeted regulations.

Currently, different agencies regulate specific aspects of cryptocurrency. When regulators define cryptocurrency as a security, the U.S. Securities and Exchange Commission (SEC) has authority. One complaint is that there is no black and white test to determine whether something is a security, and as such, regulators must rely mainly on subjective tests.

According to Chris Brummer, a professor at Georgetown University, if crypto does not fall under the SEC, then the de facto regulatory body is the Federal Trade Commission (FTC). Additionally, there are many other agencies at the federal and state level that could potentially regulate cryptocurrency. Some examples include the Commodity Futures Trading Commission, the Internal Revenue Service, or the Financial Crimes Enforcement Network. Further murkying the waters,  states such as Wyoming have also passed cryptocurrency legislation.  

The lack of clarity regarding regulatory authority creates unnecessary confusion for those trying to use the technology; however, traditional assets can also fall under different agencies. The lack of clarity in and of itself does not distinguish cryptocurrency enough to warrant new regulations. Cryptocurrency is an evolution of economic changes that have been occurring for years. While unique in some respects, online currency is not new, and cryptocurrency should be treated like other forms of payment. Discussions surrounding new regulations or new regulatory agencies risk burdening a payment system whose ease and transparency offer many consumer benefits. The existing regulatory agencies should first try to integrate the technology into the existing framework, prior to creating targeted rules.

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