Federal officials in Washington are scrambling to get a handle on the sudden boom in cryptocurrencies as questions swirl about their place in the financial system.
The two top U.S. federal agencies for regulating cryptocurrencies both say they want tighter oversight of the currencies, which have exploded in popularity and are increasingly used as an investment vehicle.
The heads of both the Securities and Exchange Commission (SEC) and Commodity Futures Trade Commission (CFTC) testified this week that they would like to work with each other, the Federal Reserve and state regulators on a “coordinated” strategy for bringing stability to the lightly regulated cryptocurrency market.
Their effort comes amid a larger push for increased regulation by both the U.S. government and governments around the world.
The sense of urgency has been heightened by wild swings in the value of cryptocurrencies over the past year.
“We should all come together, the federal banking regulators, the CFTC and SEC — there are states involved as well — and have a coordinated plan for dealing with the virtual currency trading market,” Jay Clayton, chairman of the SEC, told the Senate Banking Committee on Tuesday.
Clayton’s call was echoed by CFTC Chairman J. Christopher Giancarlo, as well as some of the senators at the hearing.
Currently, cryptocurrencies are regulated as commodities by the CFTC, but other aspects of them, including the digital markets that they are traded on, have no clear regulatory oversight.
Cryptocurrency advocates, who fear that too much regulation could stifle innovation, said that they largely didn’t have qualms with what regulators said in the hearing.
“Having worked on these policy issues there was nothing in the Chairman’s remarks that were concerning for me,” said Peter Van Valkenburgh, a director of research at Coin Center, a Washington, D.C.-based cryptocurrency advocacy and research group.
Van Valkenburgh said he shared Clayton’s view that in cases where unregistered securities are masquerading as initial coin offerings (ICOs), action should be taken.
“All the work the SEC has done on cryptocurrencies so far, I agree with,” he said.
Bill Shihara, the CEO of Bittrex, one of the world’s largest cryptocurrency trading platforms, called the hearing an “important step,” also signaling that the company is not opposed to regulatory efforts.
Peter McCormack, a cryptocurrency trader and blogger, characterized Clayton’s congressional testimony as “bullish” for the fate of the technology. In a series of tweets, he said the agency appeared to be showing interest in protecting investors without inhibiting development the development of cryptocurrency.
The SEC has been taking enforcement action against multiple ICOs it believes are actually unregistered securities and other cryptocurrency scams.
The CFTC has reportedly subpoenaed Tether — the company behind a digital currency tied to the value of the U.S. dollar — and the SEC has taken enforcement action of its own against ICOs.
Both the agency and the company have not publicly commented on the reported probe, but critics of Tether believe that the subpoena has to do with the company not yet providing proof that its currency is actually backed by a reserve of U.S. dollars, as it claims. Tether has a $2.2 billion market cap.
The questions about Tether have highlighted the potential for abuse in cryptocurrency markets.
Those with a vested stake in cryptocurrency say that they understand the potential for abuse and want regulation to prevent it, but also caution that they don’t want to stifle enterprise.
“We need a more proactive approach by the U.S. government to provide a runway for the U.S. to maintain its leadership role in technological innovation,” said Amy Davine Kim, global policy director and general counsel at the Chamber of Digital Commerce, a lobbying group whose members include cryptocurrency organizations.
“This includes clear guidance and support as this industry seeks to develop new and innovative approaches to generating utilization and capital,” she added.
In Asia, South Korea and China are taking their own steps to rein in cryptocurrency markets.
Unlike the U.S.’s approach of focusing on bad actors, China has taken a more heavy-handed approach, banning both domestic and foreign cryptocurrency markets.
South Korea is taking a different approach, allowing investors in the country to purchase cryptocurrencies, but in a much tightly regulated manner.
While regulatory pushes in the U.S. have been met with relative optimism, China and South Korea’s moves have stoked pessimism in cryptocurrency markets, helping contribute to their recent fall in value.
Even with new attention and action, oversight in digital currencies is still nascent and regulators, especially in the U.S., have given firm answers on how they will proceed.
Despite the concern for potentially onerous regulation in the future, cryptocurrency supporters say they welcome the interest from the government.
“It’s nice to not be dismissed by traditional financial regulation folks,” Van Valkenburgh said. “Because this community has been dismissed a lot. We’re used to that, but it’s still cool to see regulators taking us more seriously.”