cryptocurrency, bitcoin, ethereum, crypto
The CFTC calls crypto a commodity, like coffee, beef, or oil.
The IRS calls crypto property, like a car, or stock.
FinCEN calls crypto a “medium of exchange” that’s not “real currency.”
The SEC has only talked about cryptocurrencies on a case-by-case basis, and hasn’t released broadly applicable guidelines.
So who’s right?
All of them. None of them. (See quantum thought).
(Sidenote: this post refers to the currency cryptocurrencies, not cryptocommodities or cryptoassets).
A common refrain of cryptobubble enthusiasts is that crypto will fail because of regulation. Their Ponzi screams proclaim that once agencies crack down, the bubble will deflate.
Yes, there is regulatory uncertainty right now. But uncertainty can be a good thing. Life is a moving train; you can’t stand still, you have to take risks. Regulatory uncertainty may be a symptom of a bubble. Or it could simply be a signal of the risks inherent in progress.
But why the regulatory uncertainty? As I see it, there are four reasons (...or opportunities) that cause it.
One: There Is No There There
First, and most interestingly, US financial regulations are struggling to figure out WTF to do with crypto because there is no central enterprise behind it.
Yes, there are entities built around cryptocurrencies, like Coinbase and ShapeShift. But there is central enterprise to regulate. If a company IPOs, the SEC regulates how that company does it. But (apart from some ICOs), there is no central entity to regulate for pure currency cryptos. That’s, well, kind of the whole the point.
But a lot of financial regulation is targeted at a central actor. For example, the SEC requires that the issuer of stock release certain disclosures. But there is no Bitcoin issuer.
With currencies like Bitcoin, there is no there there. Regulations that function by targeting central actors cannot regulate a decentralized system.
Two: Greater Than the Sum of Its Parts
Second, US financial regulation of cryptocurrency is like the Indian parable of the blind men and the elephant.
Every regulatory agency is looking at a different feature. And similar agencies in different countries may have different goals and frameworks that lead them to different conclusions. They’re all looking at the same thing, but some see a tree trunk, some a fan and a snake.
Three: A Bitcoin is a Bitcoin is a Bitcoin
Third, it’s a new form of … something.
For example, it’s not a fiat currency and it’s not physical property. Any analogies to risk oversimplification. Understanding WTF crypto is requires the creation of new mental models.
It cannot, and should not, be analogized to existing concepts; a Bitcoin is a Bitcoin is a Bitcoin.
For example, the fact that crypto is broadly referred to as “cryptocurrency” does the industry a disservice. “Cryptoasset” is much more accurate.
(And creating new mental models for a cryptographic currency is probably something that a Congress lacking meaningful STEM qualifications will, uhh, have a hard time doing.)
Four: Nobody Puts Bitcoin in a Corner
Fourth, it’s hard to regulate something that was designed not to fall under the purview of any government. China can shut down crypto exchanges….except it can’t.
Because there is no there there to regulate, the US can’t go after a bottleneck. Even with exchanges, there are enough located beyond US jurisdiction to circumvent any crackdown.
And if you try to shut down auxiliary players like exchanges, the hydra will come back with more heads. “Nobody puts Bitcoin in a corner,” if you will.
The Future of Crypto Regulation: Cooperation
Many crypto proponents disdain the idea of working with regulatory agencies. But it’s inevitable. And cooperation does not take away from the libertarian nature of crypto; indeed, crypto is negotiating from a position of power.
The cat’s out of the bag and the SEC can’t put it back in. Being tolerant of and working with US and foreign regulators is not a sign of acquiescence to the powers that be.
Right now, Bitcoin alone has a larger market cap than many reputable financial institutions and more than many countries’ GDPs.
At this point, regulatory cooperation is not capitulation by the crypto community.
It's acquiescence by the regulators.
Thoughts? Questions? Comments? Let us know below.