Until 2017 cryptocurrencies weren’t really on most people’s radar, but then bitcoin hit the headlines with its near 20-fold increase in value and repeated mood swings and people couldn’t help but notice.
Also noticed was the fact that bitcoin and all the other cryptocurrencies were operating by their own rules and that there was very little comeback if things went wrong.
Many influential figures have made it clear that this cannot continue and that virtual currencies cannot expect to remain beneath the regulatory radar.
The IMF’s chief Christine Lagarde has said that it is “inevitable” that cryptocurrencies will come under “international regulation and proper supervision”.
Yves Mersch, a member of the executive board at the European Central Bank, and Agustin Carstens, general manager of the Bank for International Settlements, have both likened cryptocurrencies to Ponzi schemes. They want virtual currencies to be subject to the same rules as other exchanges and financial products.
Initial criminal offering
The increase in popularity of cryptocurrencies has led some to see them as a licence to mint money, with initial coin offerings a particular favourite.
Some ICOs have been plain fraud; others extremely wishful thinking. Research by bitcoin.com puts the total funding raised by failed ICO projects in 2017 at $233m.
Then there was the inadequate security. An Ernst & Young report found that cyberattackers had taken 10% of the total value of ICOs between 2015 and 2017, helping themselves to more than $400m.
Daniel Aranda, managing director of cryptocurrency Ripple says: “I think in the first half of 2018, we will see regulators worldwide come down very hard on many illegitimate, fraudulent ICOs and the people behind them. Lawsuits, fines, and jail time would not be a surprise.”
Hackers have also taken a liking to raiding currency exchanges. Last month Japanese currency exchange Coincheck lost $500m this way.
While regulation does seem inevitable, consensus on the form that regulation should take seems far less likely as countries already have diverse approaches to cryptocurrency trading.
South Korea has acted early to regulate trade in virtual currencies. Part of the appeal of cryptocurrency investment is the anonymity of it all - it is difficult to track transactions.
Last month the country ruled that virtual coin purchases could only come from named bank accounts, citing its anti-money laundering rules.
Other countries have gone further. China is reported to have blocked all websites relating to cryptocurrency trading and ICOs, including foreign platforms. India does not recognise cryptocurrencies as legal tender.
Japan, on the other hand, recognises bitcoin as a legal payment method and has issued operating licences to its bitcoin exchanges. Denmark, Sweden and Estonia also allow trading.
Some joined-up thinking?
Some agreement on what should be done about cryptocurrencies may be found at the G20 meeting in Argentina later this month.
There, France’s minister of the economy, Bruno Le Maire and governor of the Bank of France, Francois Villeroy De Galhau, plus Germany’s acting finance minister Peter Altmaier and president of the Deutsche Bundesbank, Jens Weidmann, plan to raise the matter. They want “trans-boundary” action to regulate cryptocurrencies.
They will have to look somewhere other than the European Central Bank, though. Its president, Mario Draghi, has said that regulating bitcoin is “not the ECB’s responsibility”.
The governor of the Bank of England, Mark Carney, has been dismissive of bitcoin, saying that it has “failed” as a currency.
Any regulation of bitcoin and other virtual currencies would be decided by the Treasury and Parliament’s Treasury Committee has just launched an inquiry into digital currencies.
It will cover the role of digital currencies in the UK, including the opportunities that digital currencies may bring to consumers, businesses and the government and the risks, including volatility, money laundering and cybercrime.
Chair of the committee, Nicky Morgan MP said: "People are becoming increasingly aware of cryptocurrencies such as bitcoin, but they may not be aware that they are currently unregulated in the UK, and that there is no protection for individual investors.”
Regulation in the US seems to be a matter of wait and see. Rob Joyce, White House cybersecurity coordinator, stated during an interview with CNBC that officials are still a long way from developing an official regulatory framework.
“I think we’re still absolutely studying and understanding what the good ideas and bad ideas in that space are,” he said. “So, I don’t think it’s close.”
There is a limited scheme in New York, with the New York State Department of Financial Services granting licences to cryptocurrency companies with connections to the city. Just three licences have been issued.
The Securities and Exchange Commission has so far focused on dubious ICOs, including last month stopping Texas-based AriseBank from trying to raise $600m from its AriseCoin ICO.
With a lack of cohesion around international regulation, might self-regulation help? Seven UK crypto companies have formed a trade body called CryptoUK. The group includes the Coinbase exchange and trading platforms eToro and CryptoCompare. Members of the body have to abide by a code of conduct.
Brian Quintenz, a commissioner with the Commodity Futures Trading Commission, has suggested self-regulation in the US. Speaking at the Yahoo finance event he called on the investment community “to create some type of self-regulatory organisation that can develop standards around cyber policies, data retention, record keeping, financial records obligations, insider trading, ethics, codes of conduct,”
Although bitcoin and the rest are commonly referred to as cryptocurrencies, not everyone agrees with that definition.
While KFC and the Republican Party of Louisiana will both take payment in bitcoin, the ECB’s Yves Mersch has said that cryptocurrencies are “not money, nor will they be for the foreseeable future”.
And Mark Carney has said that bitcoin “is not a store of value because it is all over the map. Nobody uses it as a medium of exchange.”
Israel has decided that cryptocurrencies are definitely not money and has classified them as property.
As there is little agreement about what the second part of cryptocurrency actually means, it seems likely there will also be little agreement about how to regulate cryptocurrencies.