Cryptocurrencies need an ad hoc and step-by-step monitored and adaptive regulation

The history of cryptocurrencies started before the 21st century: in 1983, David Chaum had already framed the concept behind the today famous Bitcoin, Ethereum, Ripple and day-by-day growing list of existing cryptocurrencies. There is who even traced the rise of cryptocurrencies to Nixon abandoning gold in 1971.

From then to today, the most famous crypto – Bitcoin – reached the highest price of $ 64,863.00.

The recent history of cryptocurrencies has drawn enormous attention, in particular from 2009, thanks to the never-out-of-fashion dream of getting rich easily and in a short time.

In a simplistic definition, cryptocurrency concerns a type of digital asset that uses distributed ledger technology to enable a secure transaction. The supply of such currency is mostly decentralized – not set by a central bank of any State.

However, such a market has shown to be not without risks and of relevant volatility (potentially ten times higher than the volatility of major exchange rates).

It might be interesting enough just to reflect on the impact of Elon Musk’s tweets on Dogecoin and Bitcoin prices and the consequent potential consumer’s losses.

Thus, the above elements and a $ 2 trillion market cap gathered the attention of policy-makers and regulators worldwide.

Moreover, cryptocurrencies regulation does not end in just figuring out how to monitor a volatile and risky market. What hides behind digital money is the attractiveness of the digital financial services around crypto, which might live without traditional financial intermediaries like banks and insurers. The latter, not much loved worldwide.

Recently, the United States is trying to give a heavy and potentially world-changing thrust to the regulation of cryptocurrencies.

Biden Administration aims to impact the crypto economic system with new tax reporting requirements for cryptocurrencies brokers – that would lead the Administration to collect $ 28 billion in ten years.

The brokers term has collected negative feedback and has been defined as problematic. Brokers, as broadly used in the proposal, would include sellers of hardware and software wallets and the so-called miners and cryptocurrency validators. Such an approach has been compared to taxing modem owners on the number of emails exchanged to make up for the U.S. Postal Service’s lost postage revenue.

An attempt to find a compromise on such definition failed in the Senate and it will now be tentatively discussed in the House of Representatives.

A regulatory definition, as the one above represented, impacts not only cryptocurrencies taxation but also the philosophy that lies under the decentralized system, replaced with a “governmental approach”.

If things will not change, what would happen is a probable running of companies outside the borders. See, for example, what happened in China.

Then, with the US example, other Countries might follow.

All that above does not appear to be the right way to go. A regulation that does not consider what cryptos are, and the actual peculiarities and reasons behind the success of cryptocurrencies, could have the only result of killing the growth of digital asset innovation. 

This does not mean that cryptos do not have to be regulated: they have to, in order to improve transparency, accountability and safety of all involved parties, by maintaining privacy and freedom.

Instead of a blinded eyes regulation, the relationship and intersection between traditional and crypto markets should also be paid attention to. This by also considering that those markets could reciprocally affect each other. 

Caution, cooperation, and neutrality are of first-rate importance whilst approaching cryptos regulation, by leaving apart the belief of either cryptocurrencies being a fraud, bubble or only for nerds’ revolution. A technology neutrality approach is essential in the decision-making process that leads to regulating cryptos.

Moreover, such an innovative market – with an unknown potential future impact, should also not be interested by a limiting, strict and twenty-years not changing regulation. It should be an ad hoc fit for purpose bill, and able to adapt rapidly to future and probable needs. In order to achieve such goal, a cross-border regulatory cooperation should also be taken into account.

Another element of evaluation appears to be which Agency should take the lead in cryptos regulation.

Indeed, rumors of an internal discussion on the matter between SEC, CFTC and CFPB have been reported. This is also in light of the fact that there is still an ongoing debate on if cryptos should qualify as securities, commodities, or per se currency.

Likely, the chosen Agency should be none of the above mentioned but a division supervised by all of them – at least at the beginning, in a transition and study phase.

Then, with a greater understanding of the subject, a decision might be taken on which should be the leading and monitoring Agency.

Luca Megale
is a PhD Student at LUMSA University of Rome 

and tutor of the European Master in Law and Economics - EMLE (Rome term).