Looking past the sensational reports of millions being gained or lost in months, there is no doubt that block chain technology and digital cryptocurrencies are here to stay. Whether the future framework will include the pioneering bitcoin currency is anyone’s guess, but we can be sure that its progeny will be as much a part of our lives tomorrow, as the internet is today. These would include Ethereum, Ripple and Litecoin among many others.
This prospect holds both promise and peril depending on what segment of the financial system you are operating. By their very nature, cryptocurrencies are disruptive, and that does not sit well with traditional financial institutions. Aside from cutting into capital from today’s investors, the cryptos threaten to capture the treasures of millennial and younger generations. Just ask any 20 or 30 year-old about bitcoin and he will tell you how many of his buddies made thousands of dollars in last year’s run-up. All without a broker, bank account or the typical rigmarole that goes with traditional investing.
On the other hand, we are now learning of not-so-smart investors who have borrowed against their houses and taken out loans to jump into the bitcoin wave. By now, many have lost their shorts as the volatile market has retracted to mid-2017 levels. But this sort of ebb and flow should be expected, as cryptocurrencies will experience one bubble after another in their long march to respectability.
While I generally eschew government regulation in favor of industry self-regulation, there are five key reasons why the federal government needs to regulate the cryptocurrency market sooner rather than later. These factors may change over time, but today, they mandate a clear role for U.S. government oversight and enforcement. Cryptocurrency will survive, but it will need regulatory protection to thrive.
Cryptocurrency will be used and relied upon increasingly by people outside the traditional banking system. Whether by choice or circumstance, millions of people today do not use banks to conduct business in the traditional sense. According to research by Business in the Public Interest, that number is expected to grow by 30 percent or more over the next five years. As the cryptocurrency system matures, it will become an even more attractive method of commerce and could become the default choice for many people throughout the world.
Leaving out the criminal class, cryptocurrency has tremendous appeal to those on the economic margins. No need for credit. Minimal identification required. Limited (or no) personal interaction with an authority. Maximum flexibility. Almost as good as cash, which is a favorite of working people who also tend to be less sophisticated financially, and maybe more lucrative than gold as an investment. If we care anything about protecting the unbanked, then rules and standards will be necessary.
The initial curiosity over cryptocurrency has subsided; Wall Street well understands its value and role in the financial ecosystem and has already figured out how to capitalize on the crypto craze. Whether cryptos are characterized as assets or something else, individual and institutional investors are demanding that crypto trading be made much easier. This will require clear rules from both the SEC and Treasury, in addition to coordination with other agencies. While the foundation has already been laid with the establishment of a Bitcoin Trust, there is much more to be done. We have barely crossed the threshold of a new and exciting territory.
Empowering federal agencies to establish protocols for trading and investing in cryptocurrency will smooth the way for well-developed financial instruments.
At its core, block chain technology is the driver behind cryptocurrency. But its true value lies in providing both new and existing companies with hyper-secure delivery modes for data and services on a global basis. Adding regulation to the system will give companies great comfort in using the technology and will spur even more innovation. Federal regulation will preempt any state schemes that seek to govern block chain movement and trump inconsistent rules on the issuance of cryptocurrencies by companies.
The retail market
With sensational news coverage of bitcoin’s dramatic rise, the investment market for cryptocurrencies is alive and growing. But it is terribly inconsistent and inefficient. Most of the cryptocurrency trading platforms have at one point or another slowed down, suspended operations or been compromised. And yet, investors remain interested, involved and intrigued by cryptocurrency.
Less developed is the retail market for the acceptance of cryptocurrency as a means of exchange for products and services. If, for example, consumers plan to buy a car or pay for their dental bills in bitcoin, we have a long way to go. This utility is something that would benefit from regulation, as it has the broadest possible application.
In the absence of regulation, chaos will roam freely. During periods of chaos, criminals, including terrorists have a greater chance of usurping unsupervised systems. If we want to choke the funding from criminal and terrorist enterprises, the government must regulate cryptocurrency. This will require immense coordination with the FBI and international law enforcement agencies, in addition to international financial institutions.
Although some of these measures may be in the early stages of implementation, there has been a fundamental lack of coordination. Other countries are pursuing heavy-handed bans on cryptocurrency, while the U.S. policy is inchoate. Congress needs to act, and act soon, to avoid the dire consequences of rampant and unregulated cryptocurrency and at the same time give life to a promising new way of doing business.
Adonis Hoffman is chairman of Business in the Public Interest, and CEO of The Advisory Counsel, Inc. He provides legal, regulatory and policy counsel to private equity and institutional investors in the telecom, media, and fin-tech sectors. Full disclosure: Hoffman is long on Bitcoin, Ethereum and Ripple.