Although cryptocurrencies have been around for nearly a decade, 2017 was clearly their breakout year. Total market capitalization for all cryptocurrencies rose from around $20 billion at the outset of 2017 to nearly $600 billion at time of press.
To put this in context, consider a PwC study from this past March, which ranked the world's 100 richest companies. According to PwC, if total cryptocurrency market capitalization represented a single company, that company would be the second richest on Earth at the time of the study.
This prompts the question, would regulators let a company that large and influential run amok in international markets while still relatively unregulated? Moreover, the jurisdictional competition between regulators, especially in the US, makes understanding the laws surrounding cryptocurrency ambiguous.
So what exactly is changing and how do we understand this moment in the larger scheme of regulation and technological innovation?
The US Regulation Kaleidoscope
Catherine Wood, CEO and CIO at Ark Invest, recently elaborated on the regulatory conundrum surrounding cryptocurrency in the US, while sitting on a panel hosted by Credit Suisse. "The first thing we want is regulatory clarity. We have six financial regulators in the US, and they don't agree with each other as to what we are dealing with here."
Wood's comments echo the jigsaw puzzle of regulation in the US, where the growing number of corporate and commercial cryptocurrency pioneers must piece together guidance from different regulatory institutions to glean a complete picture of disparate legalities.
Issues like classification, taxation, extortion, and money laundering, among others, have created a situation where financial regulators are scrambling to impose their individual mandates on what they're still trying to define. For example, while the IRS might be interested in cryptocurrency as a new kind of property for tax purposes, the CFTC may classify some as commodities, and the SEC says some are securities.
Compounding the issue of regulatory clarity are the myriad crypto financial products that have recently manifested.
Approaching Crypto-Related Products
One of the financial products driving mass adoption is Individual Retirement Accounts (IRAs). Chris Kline, COO of Bitcoin IRA in Sherman Oaks, California, told ETHNews: "When you get this exponential inflow of volume, you have to figure out how to deal with it, not just for yourself as a business but for your vendors." Kline, far from the wheeling-and-dealing bitcoin evangelist, is looking to regulation to make sense of this new world for the average investor. "Business is booming but we need better regulation ... Regulation is a tenet of mainstream adoption," he explained. "This stuff takes time for people to understand and evolve into. Mainstream adoption will really come when regulation puts that kind of stamp of approval on it."
Until the largest financial regulators – namely the central banks – reveal substantial positions on cryptocurrency, other financial watchdogs in most nations will have to approach matters on a case-by-case basis. In turn, this leaves people like Kline with the rudimentary option of seeking out the highest forms of professional consultation to help clarify the gray areas. To this end, Kline enlisted the services of Edmund Moy, previously the 38th director of the United States Mint, to understand the complexities of issuing cryptocurrency IRAs.
Moy told ETHNews: "I wanted to let the public know that Bitcoin and other cryptocurrencies are a legitimate class of alternative assets. They can be appropriate in an investment portfolio or for retirement, as long as the investor knows the speculative nature and risks involved."
Regulation End Game
Can the Fed find a common link that ties territorial comments from lesser financial watchdogs together, forging a comprehensive legal framework? To better understand what could be the ultimate regulatory action by central banks, ETHNews spoke with Kartik Hegadekatti, who is presently a divisional manager with India's ministry of railways and a renowned blockchain expert.
Hegadekatti believes there are three possible scenarios that central banks like the Fed should consider when regulating cryptocurrencies:
Endgame Scenario 1: "Bitcoin (as a representative of all cryptocurrencies) will be totally banned by all governments. This may seem simple on paper, but in practice, implementing it may be so difficult and costly so as to negate the ban itself. Therefore it is highly unlikely that bitcoin will be banned totally altogether."
Endgame Scenario 2: "The second possibility is that bitcoin will not be regulated in any manner. Now, governments will find it difficult to ignore a $600 Billion crypto-market that is rapidly coming on par with fiat money. Moreover, there is a lurking danger that unbridled and unregulated, bitcoin may be utilized by criminal elements, filling in a power vacuum created by non-entry by Governments. On the other hand, Governments, without due process, can't openly recognize bitcoin as a currency; as issuing currency is the sole right of the Sovereign Authority (that is. the Central Bank, representing the Government)."
Endgame Scenario 3: "That brings us to the third possibility: Studied Regulation. 'Studied,' because, the technology is new and its use cases are evolving quickly. Therefore, the Governments need to put a lot of thought into first studying, then understanding, and later implementing regulation which can benefit the people. This will take some time. Therefore, expect the Governments to impose 'evolving' regulations i.e., regulation which keep improvising and adjusting itself to new market stimulus occurring in the Crypto-world."
How and when the US Fed will decide to comment is gradually becoming the central question surrounding cryptocurrency regulation.
Because cryptocurrency is a digital asset, a tamper-proof record, a consensus network, a fuel, and much more, the Fed's position will largely influence the consolidation of guidance from other agencies.