We’ve all heard the saying, “Such a small world.” And, it’s true; it really is a small world. We have the technology to travel around the world and the ability to call or video chat with anyone, anywhere with the push of a button.
We also have the ability to send each other money with the push of a button, with apps such as Venmo, PayPal, and Cashapp; but, these apps often result in transaction fees and extra charges, and have limitations on international use.
Virtual currency, however, allows for the transfer of money without any of these limitations. Cryptocurrency allows you to track your money on your smart phone, send money instantly to friends and family, and make money while doing it all.
The concept of cryptocurrency first emerged in 2008 when a man who identified himself as Satoshi Nakamoto posted a proposal of his idea for Bitcoin on a mailing list for cryptography. Cryptocurrency was intended to be a form of virtual currency that gives the general public full control of their money, by allowing them to directly transfer money to their peers, without having to go through the restrictions of a financial institution. All transactions that occur are recorded, signed, and verified by the owner of the cryptocurrency coin being traded.
Cryptocurrency exchanges are recorded on a blockchain, a public ledger that permanently records all transactions. This promotes honest, incentivized, and technologically advanced exchanges and interactions; and, the blockchain also solves the double-spending problem, where currency could be traded more than once rather than physically passed from payee to payee.
Although this all sounds great, many people are hesitant to use cryptocurrency due to its intangibility and resulting unfamiliarity. Because it is intangible, cryptocurrency is highly susceptible to fraud and manipulation. Hackers can slightly change the code of pre-existing coins, such as Bitcoin, to create coins that look reliable but are used to scam people out of money. The Securities Exchange Commission (SEC) posted a website of a fake coin they created, called the HoweyCoins, in order to show investors how easy it is to mask fraudulent coins and scam investors out of their money. The HoweyCoins website includes fake whitepaper, fake celebrity endorsements, and a fake team working on the Initial Coin Offering. If investors were to click “Buy Coin Now,” they would be transferred to the SEC page on investor education.
In order to protect investors from the potential of fraud and manipulation, there needs to be clear and uniform regulations for cryptocurrency. This seems like a simple solution. However, because cryptocurrency is intangible, it can be used in many ways, and therefore it cannot be clearly defined as a currency, a security, or a commodity. Therefore, it is difficult to determine who should regulate it.
This is a problem, especially in the United States, because the U.S. government designates multiple divisions to handle its financial matters. The United States Department of Treasury (DOT) handles the printing and distribution of money and the management of federal financial budgets. The SEC regulates “securities” through the Securities Act of 1933 and the Securities Exchange Act of 1934. And, the Commodity Futures Trading Commission (CFTC) regulates the trading of commodity futures through the Commodity Exchange Act. Cryptocurrency does not neatly fall within the definition of “money,” “securities,” or “commodities,” and therefore not neatly in the purview of any of these regulatory agencies.
The solution to this problem is for the U.S. government to implement a self-regulatory organization specifically for handling cryptocurrency. A self-regulatory organization is a non-governmental organization that has the power to create and enforce regulations and standards for a specific industry, through authority given to it by a government agency. The purpose of a self-regulatory organization is to allow for a specific industry to be monitored by a smaller authoritative organization, in addition to being broadly overseen by a government agency. Because of this, self-regulatory organizations help prevent fraud and manipulation from occurring within certain industries.
The self-regulatory organization, specializing in cryptocurrency, would receive its authority from both the SEC and the CFTC. Because cryptocurrency is intangible, the DOT would not have to regulate its printing and distribution. However, based on how it is used, cryptocurrency most resembles either a security, under the SEC, or a commodity, under the CFTC, at different points in transactions.
For instance, companies can create and register their cryptocurrency coin through an initial coin offering (ICO), which works similar to an initial public offering (IPO) for securities. An ICO allows companies to publicly announce their coin, in order to allow investors to buy it. ICOs must be registered with the SEC. In addition to regulating ICOs, the SEC also heavily regulates ETFs. Cryptocurrency can also be traded as an exchange-trade fund (ETF) where a portfolio of cryptocurrencies are traded through one token. Therefore, the self-regulatory organization must receive authority from the SEC.
Additionally, the self-regulatory organization must also receive authority from the CFTC. Cryptocurrency can be traded on its future value. When traded on its future value, cryptocurrency is being treated as a commodity, and therefore subject to regulation by the CFTC.
The self-regulatory organization would serve as an industry-sponsored organization, made up of financial institutions that specialize in cryptocurrency technology, and would oversee the cryptocurrency marketplace. A membership made up of specialized financial institutions would allow the organization to be run as a not-for-profit. The members would know how the technology works. This would allow for quick and accurate regulations and guidance. The members would also be able to identify how the cryptocurrency is being traded in each transaction – as a security or as a commodity – in order to know whether to report to the SEC or the CFTC for further guidance on enforcement actions.
This type of regulation will allow cryptocurrency technology to develop from being a futuristic technological advancement that people are hesitant to use, to a reliable, regularly-used economic system. In a time of rapidly changing technology, cryptocurrency will provide a way for people to take ownership of their money and adapt to the evolution of the market.