Cryptocurrency has largely operated in a Wild West environment since Bitcoin’s inception in 2009, with little or no regulation of its offerings and activities. That may soon change.
Influential senators are filing a bill that would classify Bitcoin and Ether as commodities and therefore make them subject to regulation by the U.S. Commodity Futures Trading Commission. This would change the world of cryptocurrency in two ways: moving from some form of regulation to some form of regulation, and ending the debate over whether these assets should be regulated as securities rather than commodities.
The most immediate effect on cryptocurrency firms will be additional costs and risks. Regulation will increase costs because of hiring and other compliance efforts, explains Ken Joseph, managing director of financial services compliance and regulation at consulting firm Kroll, and former deputy director of the U.S. Securities and Exchange Commission. In terms of risk, “you raise the risk of noncompliance, enforcement actions, investigations and inspections. … You run the risk that if you violate those rules, there will be consequences,” Joseph said. However, he added, the benefits still outweigh the costs. “The industry needs some certainty, more predictability as to what rules or regulations apply.”
The cryptocurrency industry is likely to benefit from regulation because of what it will do for investors, as regulation “actually provides some investment certainty, some market participant confidence,” Joseph says. “It also provides some transparency and, I think, serves to generally increase and provide a level of confidence, if you want, that there are operators in the space that are aligned with something.”
The transition may present less of a problem for larger crypto companies, according to Jennifer Connors, a financial regulatory and enforcement partner at Baker McKenzie. “Smaller players in the crypto ecosystem may have some culture shock about adopting a regulated status, but larger firms are probably ready and willing to govern once they understand the rules,” Connors says.
Classifying these cryptocurrencies as commodities, and putting them under the CFTC, is a cryptocurrency industry lobbying move for, preferring this path to regulation over the possibility of cryptocurrency declared security that would be regulated by the SEC.
“Firms like Coinbase, FTX and Ripple have spent millions of dollars over the past year lobbying Congress to create a new category of digital commodities and empower the CFTC to regulate it,” the Wall Street Journal reported, stressing that “The agency has about one-sixth of the SEC staff, and its rules, the industry believes, are easier to enforce than securities laws.”
However, Joseph argued that regulation within both agencies is likely to be just as strict: “As a former regulator, I would suggest that if you asked the CFTC if they were less stringent than the SEC, I don’t think you would hear it.”
Meanwhile, Connors believes that regulatory oversight is likely to be split, “I doubt the CFTC will turn out to be the sole regulator; instead, I would expect an outcome more akin to swaps, where the SEC and CFTC share jurisdiction.”
