As cryptocurrency evolves, so does its relationship with government.
While lawmakers in some countries seek to suppress a financial force they don’t understand, in the U.S., the reverse appears to have started to take hold, indicating an opportunity is at hand for a dialog between the industry and lawmakers.
In a Senate Banking Committee hearing this month on virtual currencies, the chairmen of the Securities and Exchange Commission and Commodity Futures Trading Commission asked Congress to consider expanding federal oversight over bitcoin. But they emphasized consumer protection without a heavy-handed ban on development of cryptocurrencies. In response, the jump in bitcoin’s price marked a gain of more than $2,000 in just over a day.
Shortly before last week’s hearing, bitcoin fell below $6,000 to $5,947.40, its lowest since Nov. 13, amid a plunge in U.S. stocks. Many observers held their breath as the committee hearing began, expecting calls for a government clampdown on cryptocurrency trading.
But instead of fear, cryptocurrency investors reacted with glee. The day brought a 26 percent recovery to bitcoin, while Ethereum managed to achieve a 30 percent return. Altogether, the cryptocurrency market cap surged by $89 billion, a 24-hour increase of 29%. Bitcoin has since been inching upward, currently hovering around $9,000.
Regulatory Issues Aren’t Black And White
While regulation is often seen as a negative by cryptocurrency enthusiasts, companies hoping to make money in this area have been looking for more guidance on cryptocurrencies. Yesterday’s hearing indicates that time could be coming soon.
Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo won the hearts of bitcoin enthusiasts with comments yesterday that appeared to be hat tips to the bitcoin community. Toward the end of the hearing, he contradicted the common misconception that bitcoin is riding the coattails of blockchain technology. He said that if there were no bitcoin, there would be no blockchain.
Lawyers who work with companies involved in cryptocurrency expressed optimism after last week’s hearing, expecting that government involvement will bring thoughtful – as opposed to overly onerous – regulation, according to Barron’s .
Bitcoin’s Generational Impact
Comments by Giancarlo and another banking committee chairman, U.S. Sen. Mike Crapo, D-Idaho, indicated the generational impact that bitcoin is having on some policymakers, as demonstrated in a Streamable video from the hearing.
Giancarlo, the father of three college-aged children, said he tried to get his children interested in the financial markets at an early age, only to realize he was fighting a losing battle.
“Something changed in the last year,” he said. “Suddenly they were all talking about bitcoin. They were asking me what I thought and should I buy it.”
“It strikes me that we owe it to this generation to respect their enthusiasm about virtual currencies, with a thoughtful and balanced response, not a dismissive one,” he said.
Crapo said he had similar conversations with his own children.
“This is an incredibly interesting but growing new area of financial challenge, particularly among my children and yours,” Crapo said.
The hearing touched on a broad range of regulatory concerns related to cryptocurrencies and blockchain technology, including ICOs, trading platforms, derivatives and exchange-traded funds (ETFs), and the assets’ perceived use to perpetrate financial crimes and subvert international sanctions.
The chairmen also said Treasury Secretary Steven Mnuchin is bringing together several federal agencies to coordinate regulation of the fast-growing industry.
Regulatory Changes Needed
Both Clayton and Giancarlo expressed concern about the fact that cryptocurrency exchanges are currently regulated at the state level rather than the federal, and each reiterated that, at some undefined point in the future, Congress may want to increase federal regulators’ ability to oversee the spot markets.
Clayton continually shifted the conversation back to ICOs, noting that he has not seen an ICO that should not be classified as a security under federal regulations.
He also provided insight into why the SEC has resisted fund sponsors’ attempts to list bitcoin ETFs, explaining that because ETFs primarily target retail investors and are largely one-sided markets, rules governing their creation must be stricter than those for futures contracts, which are overseen by the CFTC. He said that if these rules are satisfied at a later date, the SEC will then be open to reviewing its stance on Bitcoin ETFs.
While cryptocurrency was invented to prevent centralized control of currency, its mainstream acceptance largely depends on its ability to integrate with the existing financial ecosystem. Cryptocurrency enthusiasts have been urging the SEC to approve a bitcoin ETF. Such a vehicle would allow investors to trade in financial securities tied to bitcoins without necessarily owning bitcoins. SEC approval would bring massive amounts of financial resources to cryptocurrency.
Observers have noted for some time that for a bitcoin ETF to be approved, the cryptocurrency will need a regulated ecosystem.
The cryptocurrency industry should not waste its opportunity to learn more about what U.S. regulators are thinking.
Featured image from Shutterstock.