It took one of the wildest investment manias in history to jolt them into action, but governments around the world are finally starting to regulate cryptocurrencies. Their approaches have run the gamut, from a massive crackdown in China to an exchange-licensing regime in Japan and a largely hands-off system in Switzerland. Some countries, most notably the U.S., have yet to formulate a comprehensive strategy. But on the whole, oversight is increasing. How the rules evolve will help determine whether last year’s cryptocurrency boom was a flash in the pan, or the start of something bigger.
1. Why are regulators concerned about cryptocurrencies?
The list of worries is long: illegal initial coin offerings, money laundering, tax evasion, cyberthefts, exchange outages, excessive speculation and more. These risks may have been easy for authorities to overlook when Bitcoin and its peers sat on the far fringes of finance, but cryptocurrencies are moving ever closer to the mainstream. The stakes are much higher now that everyone from mom-and-pop investors to Wall Street banks are piling in. Adding to the challenge is the question of how to define cryptocurrencies, with little agreement on whether they’re currencies, commodities or something entirely new.
2. What steps are policy makers taking in the U.S.?
America hasn’t yet developed a broad set of rules for cryptocurrency trading, a point highlighted by the nation’s two top market watchdogs in testimony to Congress in February. That may change if lawmakers give federal agencies more authority, but for now regulators are taking a piecemeal approach. The Securities and Exchange Commission has focused on policing ICOs and has taken a tough stance when it comes to approving crypto-related mutual and exchange-traded funds. The agency on March 7 said for the first time that platforms serving as venues listing digital assets that are securities will need to register as national exchanges or qualify for an exemption. The Commodity Futures Trading Commission allowed two of the world’s biggest exchanges to list Bitcoin futures in December, arguing that the move would help it gain insight into markets where the cryptocurrency is traded. That same month, the CFTC is said to have subpoenaed one of the largest spot trading venues.
3. What about the rest of the world?
China, once the world’s most active market for Bitcoin trading, has taken the toughest stance among major countries by banning both ICOs and cryptocurrency exchanges, and recently targeting platforms that permit domestic trades on overseas venues. While Japan chose a more accommodating path, introducing a law that resulted in 16 licensed trading venues. But in early March it also cracked down, penalizing six exchanges and telling another to revise its management structure among other changes. South Korea, another crypto hot spot, has tightened some trading rules as authorities hammer out comprehensive legislation. While the European Union’s markets authority has warned about the dangers of investing in cryptocurrencies, regulations across the continent have varied. French authorities are clamping down, while Switzerland’s economy minister wants to create a “crypto nation.”
4. What is the financial services industry doing?
Banks -- a key conduit for the flow of funds from traditional currencies into digital assets -- have mostly kept a distance. Firms including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. have barred customers from using credit cards to buy cryptocurrencies. Some lenders have also avoided dealing with crypto exchanges because of know-your-customer and anti-money laundering rules. Bitfinex, the trading venue subpoenaed by the CFTC, saw its relationship with Wells Fargo & Co. end in March 2017, though it has since opened an account with ING Groep NV. One area where traditional financiers have been more willing to get involved: the regulated futures market. But even those contracts have doubters, and volumes so far have been light.
5. How have markets responded to increased oversight?
They’re down, but certainly not out. Fears of of increased regulation helped spur a nearly 70 percent drop in Bitcoin from its peak near $20,000 in December before a rally to around $10,000 in February was followed by further declines. The fragmented nature of regulators’ response may be one reason for the resilience: In the absence of concerted global action, the anonymous and borderless nature of many digital coins makes them tough to control.
6. What does the crypto industry say about regulation?
Responses have varied. In the U.S., organizations including the Bitcoin Foundation, Coin Center and Chamber of Digital Commerce have met with lawmakers to argue against subjecting cryptocurrencies to more rules. Some exchanges have actively tried to avoid oversight, while others have flocked to places like Japan in hopes that an official stamp of approval from regulators will boost their credibility among investors and other counterparties.
7. What should we watch for next?
Cryptocurrencies may be a topic for discussion at the meeting of Group of 20 finance chiefs in March, which could help establish global norms for regulation -- something that the International Monetary Fund called for in January. Korean officials have pledged to come out with comprehensive rules soon and the European Commission is reviewing the bloc’s regulatory framework.
--With assistance from Ben Bain
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