Cryptocurrency and the ongoing regulatory debate

Alison Bloomer 16:57, 9 February 2018

Despite the constant flux in recent months, cryptocurrency investing is still surging with bitcoin remaining the star of the show. Some experts are predicting the market potentially reaching the trillion-dollar mark in 2018.

Jamie Burke, CEO at Outlier Ventures talking to CNBC, said they believed after February the market will likely go on a bull run comparative if not greater than last year before a crypto winter sets in where the market becomes more focused on proper market fundamentals.

Bitcoin began 2017 worth $1,000 per coin but closed the year at more than $19,000.  The head of APAC business development at cryptocurrency exchange Gatecoin, Thomas Glucksmann, said there is no reason why they couldn't see it pushing $50,000 by December.

He added: "Increasing regulatory recognition of cryptocurrency exchanges, the entrance of institutional capital and major technology developments will contribute to the market's rebound and push cryptocurrency prices to all new highs this year.”

A cryptocurrency runs on a blockchain that is a shared ledger or document. Source: Shutterstock

Although Gluksmann believes regulatory recognition will be key to whether or not cryptocurrencies have a bright future, others fear bitcoin prices may fall further if there is increased regulatory scrutiny.

How does cryptocurrency work?

Cryptocurrency is a digital currency that is created through the use of encryption software. It designed to be secure and, in many cases, anonymous. According to blockgeeks.com, a simple definition of cryptocurrencies is: “limited entries in a database no one can change without fulfilling specific conditions.”

It is estimated that there are more than 900 currently active cryptocurrencies that include bitcoin, Bitcoin Cash, Ethereum, DigitalNote, LiteCoin and PotCoin.

A cryptocurrency runs on a blockchain that is a shared ledger or document duplicated several times across a network of computers. The updated document is distributed and made available to all holders of the cryptocurrency. Every single transaction made and the ownership of each cryptocurrency in circulation is recorded in the blockchain. Miners then confirm these transactions and update when a transaction is made.

Regulation challenges

In direct opposition to traditional financial systems, cryptocurrencies do not rely on central authorities to govern transactions and regulate exchanges. As a result regulators have begun to grapple with the challenges presented by virtual currencies that mostly bypass regulated banks, financial firms, exchanges and central clearinghouses.

While many in the financial industry predict it’s just a matter of time until cryptocurrencies are subjected to stiffer regulation, some say a degree of balance will be crucial as over-regulation will stifle innovation.

J. Dax Hansen, a partner at law firm Perkins Coie who leads its Blockchain Technology & Digital Currency industry group, said: “Digital currencies, token sales and blockchain initiatives of all types have ignited a global phenomenon unlike anything I have ever seen. As the technology underpinning these developments disrupts products and services in nearly every industry, lawmakers, regulators and law enforcement are scrambling to keep up."

Watchdog agendas

The European Securities and Markets Authority (ESMA) said this week it expects the rapid pace of financial innovation developments across the EU securities markets to continue in 2018 and therefore monitoring of blockchain technology and cryptocurrency will be a key priority.

This is the first time that the watchdog has included cryptocurrency in its supervisory agenda, signalling the increasing scrutiny the regulator is applying to the growth of cryptocurrency and blockchain technology in the European region.

In a statement, the ESMA said: “These developments influence the way in which securities are developed, traded and supervised. In turn, ESMA is undertaking material analysis on the emergence of such instruments as virtual currencies, such platforms as ICOs and such tools as the distributed ledger technology."

Companies can "do better" than attempt to ride the cryptocurrency train. Shutterstock.com

The news comes weeks after Chairman of the US Securities and Exchange Commission (SEC) Jay Clayton said in opening remarks at a meeting hosted by the Securities Regulation Institute in Washington, DC that companies can "do better" than attempt to ride the cryptocurrency train without the expertise to back such moves.

He warned that companies simply appending the word "Blockchain" to their names to dine out on investor interest will find themselves swiftly on the watchdog's radar.

Yet, at a US Senate hearing this week on the potential dangers of digital currencies as investments, Clayton adopted a more open attitude toward cryptocurrencies. His testimony wasn’t as negative as many cryptocurrency investors had feared.

Is self-regulation an option?

Self-regulation as an option came under the spotlight at the recent Yahoo Finance's cryptocurrency event in New York.

Brian Quintenz, a member of the Commodity Futures Trading Commission, highlighted successful examples of self-regulatory organisations at the event, such as the Financial Regulatory Industry Authority and the National Futures Association.

He said such an organisation would provide necessary oversight of the spot market and exchanges "between now and however long Congress chooses to act.” He added: “We don’t want to be saying no to innovators, or to advancing technology."

This would mirror the stance of Brad Garlinghouse, the CEO of Ripple, who said that the revolution isn’t happening outside the system. The revolution's going to happen inside the system.

 

The permission-less innovation with respect to the internet was one of the keys to its success.Source: Shutterstock.com

The future

Atulya Sarin, a professor of finance at Santa Clara University, said that regulators should learn lessons from the rapid acceptance of the internet when considering legislating the cryptocurrencies. He said in this crypto-world, with no central intermediary, it will be only possible to understand how to properly regulate once the industry matures a bit and has found a purpose in the economy.

He added it would also be an irrevocable mistake to wave a red flag in front of the next potential Google or Facebook.

“The permission-less innovation with respect to the internet was one of the keys to its success. Imagine how much progress would have been delayed — or crippled — if web developers had been forced to acquire a license to set up each new site.

“Security issues and other sinister uses of the web were not a deterrent to its use, but a business opportunity to encourage the market to develop products to protect privacy and tackle fraud.”