By: Alvaro Maranon
Bitcoin’s popularity has gathered global momentum over the past year, with its unprecedented increase in value that saw its all-time high break the $20,000 mark. With money being made, two questions naturally arose – what exactly are cryptocurrencies and how can they be regulated to protect the players involved? Cryptocurrencies became possible with the development and creation of the Blockchain, and subsequently led to the development of Bitcoin and other cryptocurrencies, ranging from alternative fiat-based currencies to a satirical open source peer-to-peer digital currency based upon the use of Shiba Inus.
On February 6, 2018, the Committee on Banking, Housing, and Urban Affairs held an open session solely focused on Virtual Currencies and the oversight role of the SEC and CFTC. The Chairman of the SEC, Jay Clayton, and the Chairman of the CFTC, Christopher Giancarlo, acknowledged the rapid development and importance of the cryptocurrency market but in turn cautioned investors of the dangers with it being unregulated. Mr. Clayton identified three main takeaways: 1) these are not “currencies” in the traditional meaning and are closer to securities; 2) Initial Coin Offerings (ICOs) have not been registered with the SEC and will be considered as the sale of securities; and 3) be weary of ICOs as they are prone to money-laundering schemes, digital hacks, and “pump and dumps.” Ultimately this hearing marked the first of many hearings aimed at informing regulators of the landscape and how to regulate it.
The 2018 G20 Buenos Aires Summit takes place this March and apart from the anticipation with it being the first summit ever to be held in South America, much of the excitement surrounds the topic of cryptocurrency. Various world leaders and economic organizations have urged that this global phenomenon be discussed in an international setting, which will surely generate a lively debate. Russia has adopted a more adamant approach to Bitcoin, with their Finance Ministry recently enacting plans to regulate these transactions by permitting trade on digital exchanges in order to prevent fraud and make it practical to tax. South Korea and Japan as well have adopted a friendlier model. Following China’s crackdown on cryptocurrencies, these two countries have seen an influx of trading that resulted in Japan becoming the leading global market for bitcoin trading. The Japanese government welcomed this by establishing a licensing system for digital exchanges and payment providers. Both South Korea and Japan are implementing policies to curb tax evasion, money laundering, and other criminal activities associated with crypto trading.
Vladimir Putin reiterated the importance of using this G20 Summit to create an international framework that would incorporate blockchain technology into the financial markets. Furthermore, Putin advocated that the G20 summit should take the lead role in developing policies that would curb money laundering and benefit both regulators and private investors by having a clear set of rules to abide by. France and Germany echoed this sentiment, to which French Finance Minister Le Maire revealed that a joint Franco-German analysis of the risks linked to Bitcoin and regulation proposals would be presented at the G20 summit. Conversely, the European Central Bank President Draghi reinforced the warnings of the SEC and CFTC by cautioning of the dangers of cryptocurrencies with it not being backed by any central bank or government. Moreover, late last week the SEC issued various subpoenas targeting individuals involved in ICOs for potential securities law violations.
Regardless of the perspectives of countries at the G-20 summit, the international framework will certainly be focused on the prevention of money laundering and other criminal activities. It appears likely that a consensus will be reached at this summit to treat these cryptocurrencies as securities. From there, it will become quite difficult to reach an agreement on what type of approach to take, given that the recent subpoenas by the SEC will likely mark the beginning of an increase in aggressive enforcement activity, according to lawyers and industry experts.
The classification of cryptocurrencies as securities or commodities is an important first step towards its regulation, but as these barriers are taken down, more are being constructed. Many of the frequently used cryptocurrency exchanges are located on foreign soil and more importantly, a recent shift towards privacy-based coins, such as Monero, continues to gain support. These privacy coins dropped the public ledger characteristic of Bitcoin that allowed for the tracking of transactions and adopted privacy features that granted anonymity to the amount transferred and people involved in transactions. Ultimately, the question for US and foreign regulators will be how to address cross border transactions of digital securities that are not formally recognized as currencies? Should a tough approach to this technology be applied or will that, in turn, push private investors away from regulators, and closer to the more untraceable currencies that pride themselves in being anonymous?
Note: The views expressed above are solely those of the author(s) and do not reflect any official position taken by the Information Security and Privacy Law Student Group, the Washington College of Law, or American University at large.