Crypto’s Wild West Days Are Coming to an End

Cryptocurrency has been a wild digital west for over a decade. In the last 13 years, bitcoin alone has minted tens of billions of dollars, and a trillion-dollar industry has risen to serve cryptocurrencies that proponents call the future of finance. At the same time, fortunes were lost due to scams and fraud. As all of this happened, cryptography evolved too fast for regulators to catch up.

That is about to change. Slowly but surely, both regulators and legislators have been investigating the industry. While there is polarized uncertainty about how to do the job better, what is clear is that the days of the cryptic Wild West are coming to an end.

To understand how, first consider the U.S. Securities and Exchange Commission. It seeks to classify most cryptocurrencies as securities rather than digital currencies. Most coin-issuing companies would have to meet the same standards as stock-issuing companies, and the SEC would have the power to restrict the activities of non-cryptocurrency companies.

To that end, the SEC has opened an investigation into Binance, the world’s largest cryptocurrency exchange. The commission is investigating whether BNB, Binance’s cryptocurrency token, should have been classified as a security at its launch in 2017. The SEC has already been involved in a 16-month case against Ripple, making a similar allegation that XRP’s currency Ripple should be treated as a security and not as a virtual currency.

Then came the legislative side. On Tuesday, two senators, New York Democrat Kirsten Gillibrand and Wyoming Republican Cynthia Lummis, proposed a comprehensive bill that would create a broad framework within which the entire industry could be regulated. The bill, called the Responsible Financial Innovation Act, is expected to change shape over the next year, but reflects the bipartisan desire to integrate cryptocurrency into the country’s financial and legal systems.

That regulatory push has been seen across the country over the past six months. The Democratic-controlled New York Senate, in an attempt to address environmental concerns, approved the two-year moratorium on cryptocurrency mining. Republican Sen. Pat Toomey proposed in April a governing body to oversee stable currencies, and that was before. Terra USD has fallen and vaporized $ 15 billion from the crypto market. Desire goes to the top: In March, President Joe Biden issued an executive order calling on the Treasury to develop a policy to protect Americans from the dangers of investing in cryptocurrencies.

“The need to take regulation seriously is key here,” said David Shafrir, CEO of Secure Digital Markets, a cryptographic brokerage firm. Shafrir said the industry cannot afford “another Mt. Gox,” a reference to an infamous 2014 hacking of the Mt. Gox who saw $ 460 million stolen in bitcoins, which caused the stock market bankruptcy and customers to completely lose their investment.

“You can’t have this kind of fraudulent activity very clear, because if you do, it completely discredits the industry as a whole.”

Senators Cynthia Lummis and Kirstin Gillibrand on Tuesday released a bipartisan bill, which proposes a broad framework for regulating cryptography. Some have called it too soft for the industry, but it represents an important starting point for setting rules in a hitherto chaotic space.

Bloomberg / Getty

Regulated, but by whom?

Regulating cryptocurrency is much easier said than done. Bitcoin and ether account for about half of the entire $ 1.2 trillion cryptocurrency market, and both are open source. Neither is operated by one company, and both can operate interlocutorily, which means they do not require an intermediary exchange. The main point of these technologies is that they are decentralized; so how do you regulate when there is no central entity to regulate?

Instead of taking over the technology, regulators have so far sought to confront certain companies that have sprung up around them. Binance and Ripple, both investigated by the SEC, are easier targets than developers working on open source ethereum code. If regulators can target people and businesses, Shafrir points out, they serve as a proxy to regulate the technology itself.

“If the brokers, the executives, the employees of all the major players in the industry operate under the guise of a regulated industry, then by default the vast majority of everything that is going to happen on the periphery of the industry will behave in a regulated manner,” he said. .

However, just because there is consensus on the need to regulate does not mean that there is consensus on the details. At the moment, there are largely two fields that address cryptography. One believes that cryptocurrencies should be treated as securities and another thinks that they should be classified as commodities.

It sounds dry, but the way these cryptographic tokens are categorized will determine who regulates them. The goods are under the Commodity Futures Trading Commission, which many argue will give the industry much more margin and less control than the Securities Exchange Commission.

Lummis and Gillibrand’s bill makes many suggestions, including that assets paid for with cryptocurrencies below $ 200 are tax-free, but the most controversial is their proposal to classify most cryptocurrencies as commodities. The positive reaction from many within the crypto industry, as well as the fact that Lummis herself owns six-digit bitcoins, has raised eyebrows.

“As far as the goal of both investor protection and financial stability is concerned, this bill is a deregulation of the status quo,” he said. tweeted Hilary Allen, professor of law at Washington College of Law at American University. “It gives the CFTC greater competition over cryptographic assets, which has no investor protection mandate and far fewer resources than the SEC.”

Others argue that the SEC would stifle innovation. Patrick Daugherty and Louis Lehot, cryptocurrency experts at the Foley and Lardner law firm, support the bill’s proposal to classify cryptocurrencies as commodities.

“The CFTC has a strong track record of reflective and collaborative regulation over the industry and with other jurisdictions,” Daugherty and Lehot said in an email. “The SEC, on the other hand, has focused on enforcement tools that have served to inhibit the growth of a legal digital asset industry from the beginning, and is doing everything in its power to block further development with unprecedented regulation.”

The SEC declined to comment on the story. The CFTC did not immediately respond to a request for comment.

A spokesman for Binance told CNET: “We have been working diligently to educate and assist law enforcement and regulators in the United States and internationally, while complying with the new guidelines. We will continue to meet all regulatory requirements.” .

Crypto’s explosive wild west days may be coming to an end. But the dispute over who governs the territory can bring moments of tension.

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