Three Approaches to Regulating Cryptocurrencies

Updated: Nov 6, 2019


Regulation has been a hot topic in the world of cryptocurrencies, and its relevance grew exponentially along with the explosion of interest in the space over the past two years. As with many other industries at the forefront of technology, such as drones and autonomous vehicles, the regulations governing these spaces were written before the advent of these technologies, leading to rather sizable gray areas with regards to the applicability of existing rules.


Fortunately and unfortunately, the pace of innovation often greatly exceeds the pace of the development and implementation of new regulations. Nevertheless, consumers, developers, traders, investors, and businesses are still eagerly awaiting clarity, which will greatly impact the future development of the space. On the global level, different countries and jurisdictions have taken various approaches towards regulating cryptocurrencies. The various strategies, however, boil down primarily into three general categories: wait-and-see, proactive, and sandboxing. Below is a brief discussion of each.


Wait-and-See


In the case of wait-and-see, regulators spend time educating the public, providing guidance as the situation develops, but they are not actively passing legislation. This approach, of course, hampers the pace of development, but also reduces the risk of “moving fast and breaking things”, with emphasis on the “breaking” (as we have scene quite dramatically in the case of Facebook, especially in recent times).


Additionally, this course allows greater time for input from the many stakeholders in the ecosystem, with the hopes a greater consensus and satisfaction with the regulations will result. The other two approaches - sandboxing and proactive - are of course much more friendly to the rapid development of the space, but allow for the aforementioned risk to present itself.


Proactive

Malta is one country that has embraced cryptocurrency projects and has become one of the leading cryptocurrency hubs. This embrace may explain the recent ascendance of the small island nation to notch some of the fastest growth among EU member states (Eurostat). Should the cryptocurrency space continue to grow, jurisdictions like Malta that have taken proactive approaches could be in prime position to capitalize on their first-mover advantages and network effects.


Sandboxing


In Switzerland, where the cantons wield a relatively high amount of control, the canton of Zug offers a prime example of sandboxing. Sandboxing is a term borrowed from software development that refers to an isolated but fully functional environment for testing. Zug has embraced cryptocurrencies and provided a lot regulatory clarification, which has attracted businesses and top talent to the tiny locality, including the Ethereum Foundation. As such, this picturesque mountain region has earned the moniker Crypto Valley. The success or failure of the cryptocurrency space in Zug will provide the rest of Switzerland, specifically cantons who have taken a more wait-and-see approach, with an excellent case study upon which to base their future decisions regarding cryptocurrencies.


The Question of Who?


Another factor that complicates the development of regulations, especially here in the US, is which agencies will be responsible for the regulation of these new technologies. That leads to an even more fundamental question, though: what is the true nature of cryptocurrencies? Are they commodities, thus falling under the purview of the Commodity Futures Trading Commission? Or are they securities, which would place them in the regulatory jurisdiction the Securities and Exchange Commission (SEC)? What about the alphabet soup of other regulatory agencies like the OCC, CFPB, FinCEN, NFA, and so forth? Will there be overlap between agencies, and if so, how much?


All of these questions, despite some progress, create uncertainty for investors, developers, and companies alike. Furthermore, given the dominance of the US in international trade and finance, as well as the global nature of cryptocurrency, any regulatory action by the US is bound to send shockwaves throughout the entire ecosystem. As such, everyone involved must keep a close eye on US regulators, and carefully balance the risks stemming out of this uncertainty with the desire for reaping the potential rewards of rapid development and first-mover advantage.

For details about the regulatory and legal landscape surrounding cryptoassets, register for the upcoming Blockchain for Enterprise online certificate course with the Berkeley Center for Law and Business at UC Berkeley School of Law.

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