How Will the United States Regulate Cryptocurrencies and Blockchain Technology?
Regulators with the Financial Stability Oversight Committee (FSOC) have called for increased oversight of “distributed ledger systems,” claiming the technology could pose systemic risks if usage keeps growing. The recommendation comes in the wake of “The DAO” heist which might cost investors millions of dollars due to the exploitation of a loophole in the smart contract of what was meant to be a decentralized, democratic, venture capital fund with rules determined by code.
The FSOC isn’t the only federal agency monitoring developments in this space. The Internal Revenue Service (IRS) has declared that Bitcoin is property, while the Commodity Futures Trading Commision (CFTC) regulates it as a commodity and Federal Reserve Chairwoman Janet Yellen has stated the central bank has no authority to regulate the cryptocurrency. The Securities and Exchange Commission (SEC) approaches classification of the technology on a case by case basis.
The SEC’s deputy director of trading and markets said of the DAO incident:
“This highlights a number of concerns that are really core to the SEC’s role, which is not only issues of disclosure, investor protection,” but also includes “the technology and the systems that underpin the markets”
Besides watching for risks to the financial system, which won’t be substantial until the technology is adopted by mainstream consumers; there are other issues regulators should keep in mind.
A group of CPAs recently wrote a letter to the IRS, noting that their unclear guidance poses tax problems for those trying to stay in compliance. Non-profit policy research group Coin Center argues that without clarity at the national level, the U.S. risks losing its global competitive edge in financial technology (Fintech). Digital currency startups in the U.S. face two major barriers in a murky regulatory environment.
- Baanks are afraid, and often refuse to serve them.
- Firms that control customer funds must obtain separate money transmission licenses in each of the 50 states. It’s an expensive, cumbersome process that many startups can’t afford, and “control” of digital currency is not a well defined concept in our legal system.
This can be contrasted with the situation in places like Switzerland, Singapore, and the U.K., where clear guidelines and light touch regulation have created safe homes for some of the most innovative companies and experiments in the space.
New York, Delaware, and North Carolina are enacting state-level legislation designed to provide clarity. Coin Center has called on the Office of the Comptroller of the Currency (OCC), an independent branch of the U.S. Treasury, to issue a National Fintech Charter.
Here’s a brief overview of the state level approaches, Coin Center’s proposal, and the groups likely to play a key role in regulation of the technology.