The growth of the cryptocurrency market has seen an entirely new methodology to the financial services industry and with this expansion has come an array of challenges for the world’s most prominent regulators.
Regulatory complexity around the globe has stunted significant growth in digital assets, with institutional investors awaiting full clarity before investing in cryptocurrencies.
Though many have been welcoming of the digital assets and willing to work with the market through working groups and consultations, few have an official line yet.
Colleen Sullivan, CEO of CMT Digital, believes regulators need to find the perfect balance between consumer protection and providing the required breathing space for innovation.
Sullivan says that the biggest regulatory hurdle for crypto-focused companies starting out in the United States is the patchwork of regulatory requirements and bodies that touch the crypto space.
“We have 50 states governing crypto assets as if they are currencies under their existing money transmitter licensing regimes,” Sullivan says.
“At the Federal level, we have FinCEN governing cryptos as currencies, the IRS saying cryptos are property, the CFTC saying cryptos are a commodity, and the SEC viewing certain crypto assets are securities. That is a lot to try and manage from a regulatory standpoint.”
Each country’s national regulator has a stance; most are supportive with caution, though few have an official legislation in place. Some of those most welcoming thus far have been Switzerland, Japan and the UK, while at the other end of the spectrum, China has outright banned crypto exchanges.
In the UK, despite no official regulations having been passed, the Financial Conduct Authority (FCA) has been lauded by market participants for its openness and willingness to speak to the industry about regulating cryptocurrencies.
Sullivan believes Switzerland, Estonia, and Gibraltar are arguably more ‘crypto-friendly’ than the United States. However, through self-regulation, industry participants can help prevent the US from losing business to Europe and Asia.
“The industry realises there’s a problem and can self-govern by putting out best practices and standards that regulators can hopefully implement when filling regulatory gaps in the crypto space,” she says.
Chris Yoo, portfolio manager at the crypto exclusive hedge fund Black Square Capital, sees slight differences rather than distinct comparisons between US regulators and their foreign counterparts.
“I wouldn’t say one country is more or less crypto friendly than another, I just see the US as crypto cautious,” says Yoo. “Regulatory bodies are currently gathering data to make informed policies and statements in this rapidly evolving market.”
The director of the division of corporate finance at the SEC William Hinman, told delegates last month at the Yahoo Finance All Markets Summit: Crypto conference in the US that, based on the regulator’s understanding of the cryptocurrency, it does not fall under the securities category.
The decision by the SEC brought a huge amount of relief to the crypto community, many of whom were concerned that a different stance could have caused mass panic across the industry and market. It also marked one of the first forms of regulatory clarity from the US regulator.
“Recently the SEC chairman, Jim Clayton, made a similar statement about Bitcoin but seemed forthright in this belief that all ICOs were securities,” says Wayne Lloyd, senior manager and crypto advisor for Publicis.Sapient.
“This led many in the community to raise concerns that all digital assets, apart from those assets forked off the Bitcoin network, would suffer an unprecedented ‘black-swan’ event that would spark panic selling and price depreciation right across the crypto asset market. For institutional investors, such an event would have made investing unappealing to say the least,” he says.
The banning of initial coin offerings (ICOs) by regulators from the People’s Republic of China has been another area of concern for the crypto industry.
According to the South China Morning Post, after Chinese regulators banned domestic ICO operations, it has been extremely difficult for crypto start-ups in the region to grow, leaving a huge demand for fundraising in the ICO sphere.
While the People’s Bank of China stated that a significant majority of ICO’s launched in the country were based on fraudulent tokens, the ban did leave thousands of ICO operators with no source of funding.
While the uses of ICOs could have huge implications for the future of business development, Derek Urben, head of business at US-based crypto trading platform Coinigy, says they provide huge potential for businesses looking to raise money.
“Anyone in the world with a access to a computer can raise money through an ICO,” he adds. “There needs to be a regulatory framework for capital to come into the industry.”
As of yet, there have been no serious regulatory restrictions concerning ICOs in the United States. In July 2017, the SEC published an investor’s bulletin outlining the potential uses and dangers concerning ICOs but specific regulatory backlash around fraudulent incidents involving virtual tokens has yet to transpire.
While many speculate that the US is still waiting to issue more legislation on ICOs and other crypto products, some members of the crypto sphere see the US as simply ‘risk averse’.
Black Square’s fund manager, Maxim Nurov, also stated that a bigger issue is the lack of qualified custodians in the market; however, several prominent firms in the industry are currently looking at providing services for institutional crypto investors.
While regulatory compliance is a big concern for many participants of the crypto sphere, the industry is growing every day, and as US federal and state legislators try to achieve consolidation, it should not be forgotten that America is still harboring a lot of potential for crypto innovation.