Regulators and policymakers around the world still haven’t come close to getting their heads around cryptocurrencies, but they are trying.
The G20 meeting of finance ministers and central bank governors, which met in Buenos Aires in March, acknowledged their growing importance in the world economy, calling on “international standard-setting bodies to continue their monitoring of crypto-assets and their risks, according to their mandates, and assess multilateral responses as needed”.
The G20 communique acknowledged that “technological innovation, including that underlying crypto-assets, has the potential to improve the efficiency and inclusiveness of the financial system and the economy more broadly”.
However, it warned of the increased risks around consumer and investor protection, market integrity, tax evasion, money laundering and terrorist financing.
“Crypto-assets lack the key attributes of sovereign currencies,” it states. “At some point they could have financial stability implications. We commit to implement the Financial Action Task Force (FATF) standards as they apply to crypto-assets, look forward to the FATF review of those standards, and call on the FATF to advance global implementation.”
The scale of this challenge is perfectly illustrated by the confusion among US regulators regarding who is responsible for this oversight – and even what it is exactly they are overseeing.
The SEC is on record describing tokens – cryptocurrencies broadly defined – as securities, but in March the Financial Crimes Enforcement Network offered a different interpretation, calling them a form of money. The next day the Commodity Futures Trading Commission compounded the confusion, declaring them a commodity.
Consequences of confusion
This confusion has real consequences for companies on the ground handling cryptocurrencies.
If tokens are securities, they must be registered, but money raised by issuing them is not subject to taxes and there is no need for issuers to obtain a money transmitter licence.
If they are assets, the money raised through issuance is taxable, but there is no need for securities registration or a money transmitter licence.
If they are a currency, there is no need for security registration or tax payable on issuance, but issuers require a money transmitter licence.
“We have no idea which of these scenarios are true. They cannot all be true, yet we are under threat of all of them being true.”
|Gabriel Dusil, Adel|
Gabriel Dusil, CEO of Adel, a blockchain technology incubator, says many are in a similar boat – not just in terms of what is expected of them, but in terms of what they can or can’t do in their everyday operations.
“Cyber actors currently walk a tightrope of what may or may not be legal,” he says. “What may be tolerated today may become illegal in the future.”
By referring to the market of “crypto-assets”, the G20 offered a clue as to its prevailing sentiment. While the Fincen [The Financial Crimes Enforcement Network] is certainly not alone in classifying crypto assets as currencies, most governments are gravitating towards treating them as a form of commodity.
Marshall Taplits, chief strategy officer and co-founder at NYNJA Group, a blockchain platform, says: “Governments in general prefer to control the currencies of nations and so by accepting that cryptocurrencies are currency, they are opening an entire can of worms.
“By declaring it as property, it’s much more simple to govern under existing regulations.”
It also means countries can charge capital gains tax when they are traded against domestic currencies, he adds.
|Travin Keith, Agavon|
Bitcoin, Bitcoin Cash, Litecoin, SmartCash, Dash, Monero and Zcash have characteristics that look like currencies, he says, but Ardor, Nxt, Byteball, Ethereum, Waves, Komodo and Lisk are better defined as platforms. They provide their technology as a service, with their coins’ value deriving from a mix of utility value and speculation, he adds.
The more cryptocurrencies that are launched, the more differences there are between them all, and the more outdated the idea they are all essentially variations on the bitcoin theme becomes.
Meanwhile, bitcoin’s dominance is being swiftly eroded: at the beginning of 2017, bitcoin represented 87% of the market cap of cryptocurrencies. This had fallen to 38.5% by the beginning of 2018 and has continued to fall since.
While some see little value in the plethora of new cryptocurrencies coming to market, they all have different inherent characteristics, strengths and values, making them useful in different ways for different people and organizations, says Nigel Green, founder and CEO of deVere Group.
However, it also gives them different risk profiles.
“The economics behind each coin can be completely different and as such impact very differently the economy and potential investors,” says Vivien Fuhrer, CEO of EZYcount, an accounting solutions provider for SMEs that uses blockchain tech.
This strongly argues against a one-size-fits-all approach to regulation.
“Not making separate classifications will only make things more difficult for regulators down the road when creating regulations, as they will be faced with the challenge of creating them and have them apply to both types,” says Agavon’s Keith.
Stephen Englander, head of research and strategy at Rafiki Capital in New York, distinguishes between cryptocurrencies that are anti-money-laundering compliant and those that are not, with those offering some form of anonymity proving most popular.
“There will be a growing distinction between cryptocurrencies that operate fully within the global financial system and those that facilitate outside the system transactions,” he says.
Guardian Circle’s Jeffrey argues cryptocurrencies need new laws and regulations, along with a new agency to oversee them.
“Since crypto defies classification under existing laws and agencies, it seems obvious to me that [it] is a new species of thing – a new asset class,” he says. “So I applaud what the G20 is trying to do, and think they are on the right track classifying them as an asset.”
Taplits at NYNJA, on the other hand, believes classifying them as currencies is the more progressive approach, arguing countries that do will be more likely to become fintech and blockchain hubs.
“Countries with less flexible regulatory environments will fall behind and their societies will remain dependent on non-programmable money during one of the greatest advances in human history,” he adds.
Whatever the classification, the market needs clarity more than anything. The regulatory climate in the US is now so chaotic it risks being left behind in the next stage of global economic development, warns Jeffrey.
“The most important technology revolution since the internet is under way and the place it is least accessible to on the entire planet is the US,” he says. “It’s like if the US barred angel investing in internet and mobile companies back in 1998: Google, Facebook, Amazon and Uber would have happened everywhere else. That is where the US is headed right now with blockchain.”