Regulators Struggle to Identify What Exactly Cryptocurrency Is
In less than a decade, cryptocurrencies have moved from the fringes of financial market activity to a $300 billion asset class traded on exchanges and owned by mainstream investors. The technology underlying Bitcoin and Ethereum has spawned more than 1,600 new platforms designed to compete with established providers.
Yet a great deal of regulatory uncertainty still surrounds cryptocurrencies, particularly when it comes to whether cryptocurrencies are securities — which affects who can buy and hold them, who can deal in them and keep custody of them, and what disclosure laws pertain to them.
For example, one former regulator from the Commodity Futures Trading Commission (CFTC) has suggested that the second-most-popular cryptocurrency, Ethereum, is a security to which securities regulations should apply retroactively. However, this view has been recently contradicted by a top official at the Securities and Exchange Commission (SEC), who stated that the decentralized nature of the Ethereum network means its cryptocurrency does not fit the established definition of a security.
An overzealous application of securities laws to cryptocurrencies could raise barriers to investor access and capital formation, which would have a chilling effect on the development of cryptocurrency technology and markets. As a sitting regulator recently warned, cryptocurrencies’ many novel features can lead policymakers to focus excessively on their potential harm rather than on their likely benefits.
A clear, reasonable, and appropriate definition of what qualifies as a security would allow the market for cryptocurrencies to develop while also enabling securities regulators to properly fulfill their mission to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.
