Where’s all the cryptocurrency regulation?

Cryptocurrency's unique nature is an obstacle for holistic industry-spanning regulations.

• Cryptocurrency is all at once a currency, asset, infrastructure and more, which makes holistic regulation difficult.
• The US typically takes a global regulatory lead, but its scale makes it difficult to introduce suitably expansive regulations, while smaller countries can be more nimble.
• These factors may currently be inhibiting regulatory moves, but global bodies are consolidating around cryptocurrency standards instead.

Cryptocurrency regulation will have to wait, says Kenneth Rogoff, professor of economics at Harvard University, speaking at Davos on the Building a Sustainable Crypto-Architecture panel on the second day of the World Economic Forum. It's just too small, he said.

That's not to say regulators are dismissing it, so much as they have bigger fish to fry.

"I've spoken to the regulators and they very candidly say, 'Well, there isn't really that much value going on in the transactions, a lot of it is speculation. It's a very interesting innovation, let's let it roll and see what happens.' They’re not necessarily planning to let it continue to roll after it does well, but they're planning to sort of see where the innovations go," Rogoff elaborated.

But despite bitcoin's libertarian origins, this isn't necessarily a popular opinion in an industry that's clamouring for additional regulatory clarity and the growth it can bring.

Are you regulating an asset, digital infrastructure, a currency or what?

The unique elements of cryptocurrency mean it's probably better for regulators to take a proactive approach, says Nydia Zhang, chairman and co-founder of the Social Alpha Foundation blockchain impact investment nonprofit.

"As opposed to FX or capital markets where the assets and the infrastructure are separate, crypto markets and the blockchain technology it rides upon are inextricably linked. It is for this reason that regulation at the early stages is necessary - it guides not only the market construction, but helps to order the infrastructure as well," she said. "Despite its small market size, cryptocurrency regulation at this early stage is constructive to laying the foundation for a robust digital economy."

To the extent that regulatory clarity can drive infrastructure development, cryptocurrency can go further, faster with regulations than without, Zhang says.

While this point suggests that regulation is needed to encourage cryptocurrency growth, it's also a confounding factor. Cryptocurrency and blockchain straddles different industries and categories of all kinds, and so doesn't really fit neatly under any one US regulator's umbrella.

The difference, of course, is that we did not previously need to decide if every e-mail message was possibly a security with potential for capital gain and loss, or report the number of emails we sent on our tax returns."

This sentiment was noted by former JPMorgan blockchain program manager, Zcash board member and Clovyr founder Amber Baldet in a presentation to US congress, urging for mindful top-down regulation of the fledgling industry.

The treatment of cryptocurrency as an asset "cannot be completely decoupled from the treatment of the internet" she said. According to Baldet, the trick is for regulators to be ambitious and mindful of the momentous responsibility landing on them.

"Imagining a mature, interconnected global ecosystem of such markets feels like standing in the 90s, looking at a pre-World Wide Web electronic bulletin board system and trying to imagine Netflix streaming on your phone. The prospect seems so fanciful as to be impossible, but here we are," she said. "We are at the precipice of the same concerns for cryptoasset networks as for the Internet... the difference, of course, is that we did not previously need to decide if every e-mail message was possibly a security with potential for capital gain and loss, or report the number of emails we sent on our tax returns."

Whose job is it to regulate cryptocurrency?

The problem in the United States might be that there is no one agency able to introduce appropriately holistic regulations. Cryptocurrency and blockchain still crosses a lot of different areas and there has been little unification between them.

• The SEC (which regulates investments) is mostly concerned with consumer protection and AML enforcement.
• The CFTC (which regulates assets, commodities and their trading) is cracking down on market manipulation and dodgy trading activity.
• The IRS (which is the IRS) just wants to make sure you pay your taxes on cryptocurrency earnings.
• The FCC (responsible for regulating Internet providers and infrastructure) has been ripped apart from within by a hostile fifth column. It allegedly had its tattered authority prostituted to the highest bidder and is currently primarily concerned with driving massive profits to the very entities it's meant to be regulating, while catering to the partisan whims of political donors.
• The Federal Reserve (which is responsible for fiscal policy and monetary stability) doesn't yet see cryptocurrencies as being within its purview because it's just too small next to the US dollar and bigger concerns.

Smaller countries don't have these problems, and so have been able to leverage their nimbleness to pass more comprehensive local regulations. And they're already feeling the benefits, says Nick Cowan, managing director and founder of the Gibraltar Stock Exchange Group Limited.

"The benefits of adopting the right regulatory approach continue to be showcased here in Gibraltar, where the technology's ascent in our economy has been accelerated since the implementation of the world's first purpose built distributed ledger technology (DLT) regulatory framework," he says. "Regulation, informed by the needs of industry, is the key to unlocking the boundless potential of blockchain technology, as a mechanism to improve business operations and the daily lives of citizens."

Plus, there have been a lot of regulatory developments over the last year and beyond and these developments arrived with good reason, Cowan says.

"The suggestion that the global blockchain ecosystem isn’t ready for regulation doesn’t take into consideration the significant strides that have been made on the regulatory front over the last 12 months, and the impetus for such advances."

The reason for further regulation and the benefits have already started showing themselves, which might encourage more proactive moves from different institutions.

The cryptocurrency industry is still eyeing the United States in the hope of some more comprehensive regulations to pave the way for the rest of the world. Given its prominence and influence, the USA tends to export regulatory standards, but in this case the uniquely multifaceted nature of cryptocurrency might see the USA lag a bit.

On the plus side, international bodies have been stepping up to partly fill the gap. The G20 countries have formally recognised the potential of non-bank financial intermediation, while the FATF – the global anti money laundering watchdog – has said it will be releasing clarified international guidelines for cryptocurrency exchange regulation by June 2019.

Global regulatory clarity and the confidence it can bring to the cryptocurrency industry might be slow going, but it's coming.