$ 2 trillion cryptocurrency market sparks investor interest and scrutiny from U.S. regulators


WASHINGTON – As cryptocurrencies go mainstream, prices for bitcoin and other digital tokens are often displayed on tickers and financial apps as if they were stocks, bonds or futures on ordinary oil.

They are not. And that makes it a challenge for US financial regulators.

The oversight of cryptocurrencies, which began in 2009, is patchy. Regulators in the Biden administration are working to clarify the rules for a market that roughly tripled in value in 2021 to more than $ 2 trillion, attracting millions of U.S. investors and increasing concerns about to financial stability.

Here are some of the key questions regarding the establishment of these regulations:

What is the difference between cryptocurrency and other assets?

The traditional financial system is built around intermediaries: banks, brokerage houses, stock or commodity exchanges and asset managers. Government and industry regulators monitor these companies to protect investors, promote fair and orderly markets, guard against financial bubbles, and prevent crimes such as money laundering or tax evasion.

This forgetting comes with compromise. Banks and brokerage firms are required to set aside money for potential losses and are expected to know who their customers are; in return, their account holders are protected by government-backed insurance. Public companies must follow standard accounting practices and disclose information about their finances and operations; in return, they gain access to tens of trillions of dollars in liquidity in the stock and bond markets.

A key belief among cryptocurrency advocates is that technology can substitute for such intermediaries and eliminate the need for trust.

Here’s how this kind of arrangement works: Bitcoin allows two people, anywhere in the world with an internet connection, to transfer value in minutes without an intermediary. Transactions are recorded on a database, called a blockchain. It is publicly visible on networks of computers running separate copies of the same program. This should ensure that no one on the network is counterfeiting the cryptocurrency or spending the same bitcoins twice.

Should cryptocurrencies be regulated?

Because cryptocurrency advocates say assets reduce the role of traditional intermediaries, some argue they don’t need to be regulated like banks, securities, or investment funds.

But beneath the surface, say regulators and experts, there are almost always humans at work.

Most new cryptocurrency investors enter the market through trading platforms such as Coinbase Global Inc.

or Gemini Trust Co. LLC. These companies take investor money and convert it into bitcoin, ether, or dozens of other digital tokens. They charge fees, hold assets, and deploy products that sometimes provide a return to investors.

A rapidly growing set of cryptocurrency applications known as ‘decentralized finance’ typically allows certain users to vote on how they operate. They are often supported by software developers and charge transaction fees.

And while networks like Bitcoin can perform transactions without a middleman, there is still a small group of programmers, called maintainers, who have the flexibility to change the underlying code if bugs appear.

Policymakers say the presence of people in all of these systems creates the potential for conflicts of interest and requires monitoring.

The irreversibility and anonymity of many cryptocurrency transactions make them popular for crooks and criminals, and the assets have fueled an increase in ransomware attacks like the one that plagued Colonial Pipeline Ltd. in 2021. The rapid growth of the cryptocurrency market, its self-governance, and obscure links to the wider financial system have also raised concerns about stability. Although the hiccups have largely been contained in the crypto market, the potential for real-world ripple effects may increase as more people invest their savings in the asset class.

“Few of the technologies in history, since ancient times, can persist for long periods of time outside of public policy frameworks,” Securities and Exchange Commission Chairman Gary Gensler said at the Wall’s CEO Council. Street Journal in December.

“Few of the technologies in history since ancient times can persist for long periods of time outside of public policy frameworks,” said Securities and Exchange Commission Chairman Gary Gensler.


Evelyn Hockstein – Pool via CNP / Zuma Press

Who would be responsible?

In the United States, an alphabet soup of federal and state agencies oversees financial institutions and markets.

Banks are regulated by the Federal Reserve, the Office of the Comptroller of the Currency, and state banking commissions. Brokerages, asset managers, and exchanges are overseen by the SEC, which also sets disclosure requirements for publicly traded companies. Futures and other derivatives trading platforms are regulated by the Commodity Futures Trading Commission.

Money transfer services, such as Western Union,

are authorized by state governments.

These agencies write rules and regulations, monitor financial markets, send inspectors to examine companies’ compliance with the law, and take enforcement action against companies or executives suspected of violating them.

Deciding which ones should regulate cryptocurrencies and which would be their authorities is a work in progress. Some prominent policymakers have said there are loopholes in existing laws and urged Congress to fill them. Meanwhile, the SEC and CFTC have taken the initiative to crack down on cryptocurrency projects or trading platforms that they believe are breaking the law or defrauding investors.

Which agency regulates bitcoin?

So far, no agency has claimed full jurisdiction to oversee the two largest cryptocurrencies, bitcoin and ether, which together account for over 60% of the entire market.

This is because the CFTC does not have the legal authority to regulate the spot commodity markets, which is the asset class to which some regulators and courts have suggested bitcoin and ether enter. Spot markets, or a market where commodities or securities are paid for and received at the point of sale, do not have a comprehensive financial regulator.

Congress would probably have to pass a law for the CFTC to obtain such powers.

The Treasury Department considers the platforms that many investors use to buy and sell bitcoin to be money transmission companies. These companies generally need to obtain licenses from state governments to operate, know who their customers are, and take certain steps to prevent money laundering. But they face far fewer demands and less scrutiny than traditional stock or commodity exchanges.

However, the CFTC has the power to control fraud in the bitcoin markets. He also oversees stock exchanges, such as the Chicago Mercantile Exchange Inc.,

which list futures contracts for bitcoin and ether.

How are other types of cryptocurrency viewed by regulators?

It depends on their attributes.

For example, the Biden administration plans to regulate stablecoin issuers – a rapidly growing subset of cryptocurrencies that peg their value to a national currency like the dollar – in the same way as banks, although regulators have asked Congress to provide comprehensive legislation first.

But the biggest question the cryptocurrency industry faces is whether an asset meets the legal definition of a security or an “investment of money in a joint venture with a reasonable expectation of profits.” to draw from the efforts of others “. If the definition is met, then its issuer is required to register with the SEC, as well as all trading platforms that offer such assets and the brokers who sell them.


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How simple is this SEC test?

Mr. Gensler, the head of the SEC, says the law is already clear. The legal test used to identify a security was established by the Supreme Court in 1946, and the SEC provided advice on its application to cryptocurrencies in 2019. The agency has also prevailed in dozens of lawsuits against defendants who have sold unregistered titles in what is called the initial. coin offerings.

Mr Gensler declined to clarify which cryptocurrencies, if any, are not securities and therefore fall outside the agency’s mandate. But he has repeatedly urged major cryptocurrency exchanges to register with the agency, saying they are very likely to offer securities on their platforms.

Have crypto platforms embraced it?

Registering as an exchange with the SEC is slow, expensive, and bureaucratic. No major cryptocurrency trading platform has done this.

Instead, some have tried to stop serving American customers. Others take a different approach. Coinbase, for example, says it only allows trading in assets “for which we determine there are reasonably strong arguments for concluding that the crypto asset is not a security.”

The situation leaves major cryptocurrency trading platforms open to the possibility of SEC enforcement action that could require them to pay fines, withdraw popular tokens, or reimburse clients for losses. It is a risk they were willing to take for the opportunity to reap quick profits in a hot market.

“It’s very profitable to list things that can be securities but don’t call them securities,” says Douglas Borthwick, chief commercial officer at INX Ltd., a cryptocurrency firm that says he worked on setting it up. instead of a trading venue registered with the SEC.

Write to Paul Kiernan at [email protected]

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