Calls to restrict the growth of the cryptocurrency industry persist, especially in the aftermath of the highly publicized collapse of the cryptocurrency exchange FTX. It’s understandable that politicians and regulators are concerned with the stability and reliability of the emergent digital asset space amid volatile prices and companies defaulting.
However, these developments shouldn’t immediately trigger restrictions on or redesigning of the digital asset landscape. Rather, they should raise questions to promote a better understanding of cryptocurrency so that lawmakers might create a streamlined framework in which the market can operate and thrive.
The cryptocurrency industry is almost a $2 trillion market. As of 2022, about 21 percent of American adults have owned cryptocurrency. Many buyers are attracted to it as a way to diversify their investments, and are more confident in these assets than others. Cryptocurrency’s blockchain technology provides a cheaper means to send and receive money than traditional wire transferring, which expands finance to more consumers. Not only does this technology afford savings for consumers, but it also provides supply chain transparency, which boosts their sense of trust.
Overall, cryptocurrency can offer consumers the benefits of transactional freedom, security and ease of transaction.
The cryptocurrency market has seen drastic price fluctuations recently, which has only added to many consumers’ and regulators’ worries. Within 2022, many currencies saw significant drops in prices. Among some of the largest cryptocurrencies, Bitcoin’s price dropped 63 percent, Ethereum by 67 percent and Cardano by 55 percent. Not only that, but at the end of 2022, one of the world’s largest crypto exchanges — FTX — went bankrupt, reducing confidence among consumers and authorities in the security of this market.
Due to these chaotic events, policymakers and others have been indignant at the biggest actors in the market for their “greed” and are calling for new misguided laws or for them to come into compliance with existing securities laws. However, these proposed solutions don’t reflect the central problem that’s causing all the confusion and calls to regulate.
That problem rests in how to properly define and classify cryptocurrency, and which federal agency possesses the authority to regulate it. A single generally accepted framework doesn’t exist. As the American Consumer Institute (ACI) points out, crypto transactions can fall under the oversight of various regulatory institutions, including the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) as securities/investments, the Treasury’s Financial Crimes Enforcement Network under the Bank Security Act (BSA) as currency and the Internal Revenue Service (IRS) as property.
This fractured delegation of authority has created ambiguity. Yet some still insist on relying on legal precedent — particularly, securities laws — rather than creating a streamlined regulatory framework. The grounds for whether cryptocurrency can be defined as a security based on the Howey test are weak, as the Cato Institute suggests. Moreover, there’s cross-entity agreement that cryptocurrencies aren’t securities, notwithstanding SEC Chair Gary Gensler’s opposing remarks.
In December 2020, the SEC sued Ripple, a fintech company that sells XRP cryptocurrency tokens, alleging that their tokens were unregistered securities. Ripple countered this suit and claimed that XRP is a virtual currency and not an investment contract, and therefore shouldn’t be subject to securities laws.
Similar pursuits have pushed companies such as Telegram, Ethereum and Shapeshift away from operating in the U.S. and toward operations abroad, according to ACI.
At any rate, cryptocurrency doesn’t need to be classified and subjected to securities laws, nor does it need new regulations. Rather, what’s necessary is a clear framework that classifies cryptocurrency discretely and establishes which regulatory agency has authority over the industry. Laws that encourage transparency and greater attention toward the protection of existing anti-fraud and criminal laws would also be beneficial.
The Digital Commodities Consumer Protection Act of 2022 seems like a good starting point to provide such a framework. As ACI points out, if passed, it would define cryptocurrency as a commodity — specifically, a digital one which is “a fungible digital form of personal property that can be possessed and transferred person-to-person without necessary reliance on an intermediary.” The bill mentions Bitcoin and Ether, but its definition of digital commodity would allow for other tokens as well. Lastly, the legislation would establish that cryptocurrencies fall under the purview of the Commodity Futures Trading Commission (CFTC).
Regarding transparency, Howard Adler and Alex Pollock strongly suggest in one article that if a regulatory system for cryptocurrency were to emerge, entities should be subject to financial statement requirements as accounting disclosure. That way, investors know their risk.
The call to further regulate the cryptocurrency landscape has ramped up as it continues to evolve. Rather than relying on the current confusing legal precedent or additional laws, the industry needs a clear framework that classifies cryptocurrency, establishes a regulatory agency for oversight and encourages security. This framework will reduce confusion and offshoring, increase company investments and maximize benefits for investors.