Regulation
Bitcoin prices should not distract from the need for better regulation
Bitcoin reaching record highs should not distract from regulatory needs
Getty Images
With bitcoin briefly touching all time levels in March 2024, bitcoin and cryptocurrency investors have had a lot to celebrate so far this year. After the approval of bitcoin spot ETFs, and after weathering the price declines and public skeptics that followed, the price of bitcoin and many other cryptoassets has seen a rapid increase. Furthermore, regulators outside the SEC appear to have decided that cryptocurrencies are here to stay. Specifically, the head of the CFTC recently commented that, if given the necessary framework and authorization, the CFTC could develop effective regulatory guidance within a 12-month period. This is certainly a departure from previous comments and public statements, which focused on interagency turf wars and lack of cooperation.
Despite these positive trends, however, investors in bitcoin and other cryptocurrencies should not lose sight of a fundamental reality that remains unchanged; The regulatory and operational environment for cryptocurrency entrepreneurs and innovators remains challenging. Despite all the success created by spot ETFs, including the wealth that cryptocurrency investors have amassed during the recent bull market, significant obstacles remain to the industry’s continued growth and development. Hidden by the wealth effect of rising asset prices, these regulatory issues and hurdles continue to present problems that need to be addressed.
Let’s take a look at some of the things crypto advocates need to keep in mind, even as prices recover.
The SEC continues to impede compliance
Even after the SEC approved the issuance of 11 spot bitcoin ETFs, the SEC remains an obstacle to greater token registration and the tokenization of broader financial markets. Statements by Gary Gensler reinforce the mindset and approach that crypto companies are simply choosing not to register. Despite the president’s statements that registration is a simple form and that companies that are not registered do so voluntarily, this cavalier attitude hides a deeper issue that needs to be addressed.
Assuming the registration process is as simple and straightforward as advertised, companies following the advice to register tokens would find themselves at a dead end. Registered tokens, which would reaffirm the President’s position that all tokens are equity securities, can only be traded on registered exchanges via Registered Broken Dealers. While FINRA has approved a handful of institutions to handle crypto tokens, the SEC has not permitted any currently registered exchange or broker-dealer to list, hold, or trade crypto tokens.
Ultimately, regulatory compliance through the SEC remains a virtually impossible task.
OCC criticizes banking innovation
According to the Banking Disruption Index almost 60% of Americans Respondents are dissatisfied with the levels of products and services currently provided by U.S. banking institutions. Given that banking is a profitable global business and that the financial benefits of tokenized payments have been recognized through the adoption of blockchain by major TradFi institutions, cryptocurrency investors may be surprised to hear about continued regulatory hurdles towards a greater banking innovation.
The OCC continues to hinder the efforts of banking as a service as it seeks to grow and offer a more efficient and cost-effective set of services for customers. Specifically, the OCC has been publicly wary of BaaS due to concerns about how these companies handle customer data, monitoring tools for bank secrecy purposes, and how new entrants into the banking industry deal with the multitude of existing rules. In essence, this hesitation has created an environment where TradFi institutions act as gatekeepers, as new entrants into the space looking to make/receive dollar payments must work with licensed financial institutions.
Combined with the fact that the OCC appears opposed to developing specific regulations or new rules for bank disruptors, an environment has been created that severely reduces opportunities for banking innovation and competitiveness.
State innovation should be encouraged
Given the fact that federal agencies responsible for financial markets and banking appear reluctant or unable to embrace new ways of thinking about and treating financial assets or instruments, one interim path would be to embrace state-led innovation. While New York has faced criticism for the composition and enforcement of the BitLicense Regulation, the fact remains that it is a regulatory framework, even if it has proven difficult for companies to comply with. Another example is the state of Wyoming which has passed over 12 laws to integrate blockchain into the business environment, has created and codified special depository institutions for managing crypto transactions, and is currently working on developing a state-level stable token .
These efforts, while encouraging and innovative, are no substitute for federal regulatory changes and, ideally, the U.S. Congress. A patchwork of state-level regulations should be celebrated and encouraged, but if not strengthened with federal follow-up actions it will not be sufficient to create a sustainable and stable environment for the continued growth and innovation of cryptocurrencies.
Bull markets are always a cause for celebration among investors, but they should not overshadow the need for a better regulatory environment.