The future of cryptocurrency regulation in the United States remains uncertain. The lack of a clear regulatory framework makes it difficult for market participants to act without fear of reprisal. The guidance issued and actions taken by the U.S. Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and Congress in 2019 provide a road map for how cryptocurrency regulation will develop in 2020. Here are five of the most significant regulatory milestones that we’ve seen this past year.
1. The SEC Released Guidance to Token Issuers
In April 2019, the SEC released guidance to token issuers explaining the factors that make a digital asset a security. Under the SEC’s guidance, a digital asset is likely to be a security if (1) it gives the holder the right to share in the enterprise’s income or profits or to realize gain through capital appreciation; (2) it is transferable through a secondary market; or (3) it will appreciate based on the efforts of a centralized organization.
SEC Chairman Jay Clayton has consistently stated that bitcoin is not a security. Other digital assets, however, have not been so designated.
In an October 2019 complaint, for example, the SEC halted Telegram’s initial coin offering. The complaint alleged that Telegram’s planned token, Gram, was a security because “investors expect to profit from Telegram’s work: the development of a TON ‘ecosystem,’ integration with [Telegram Messenger], and implementation of the new TON Blockchain.” Telegram has refuted the SEC’s allegations and the matter is pending in federal court in the Southern District of New York.
2. The SEC Denied the Latest Attempt for a Bitcoin ETF
In October 2019, the SEC Division of Trading and Markets rejected an application for a bitcoin ETF filed by Bitwise Asset Management and NYSE Arca — the exchange upon which the bitcoin ETF would be listed. The SEC’s denial rested upon its uncertainty in the integrity of the bitcoin market and the lack of regulation over the major cryptocurrency exchanges.
The SEC found that bitcoin was not “uniquely resistant to manipulation” because a large segment of the market consisted of fake and noneconomic activity. The SEC further found that NYSE Arca’s surveillance-sharing agreement with the Chicago Mercantile Exchange futures market was not sufficient because of the lack of an interrelationship between the proposed bitcoin ETF and the bitcoin futures market. On November 18, 2019, the SEC announced that it would review the October denial by the Division of Trading and Markets.
3. CFTC Chairman Touted a Principles-Based Approach to Cryptocurrency Regulation
In November 2019, CFTC Chairman Dr. Heath P. Tarbert touted a “principles-based approach” to lawmaking around cryptocurrencies. Tarbert explained that principles-based regulation fosters efficiency and flexibility in the development of new products while mitigating risk to consumers. It is a more adaptable form of lawmaking and supervision which allows market participants to determine the method used to reach a desired regulatory outcome. It remains to be seen how Tarbert’s ideas will influence crypto regulation in 2020.
4. Congress Introduced a Bill Focused on Stablecoins
On November 21, 2019, Congress introduced a bill that classified certain stablecoins as securities under the Securities Act of 1933. Stablecoins have received increased focus since Facebook’s June 2019 announcement that it was creating its own cryptocurrency, Libra, that was backed by a basket of currencies and U.S. treasuries. Regulators and politicians expressed concerns about privacy, money laundering, and national security. While the bill is far from becoming law, congressional action will likely influence regulators and the cryptocurrency market in 2020.
5. The SEC Approved a Closed-End Fund Based on Bitcoin Futures
In December 2019, the SEC approved an application from New York Digital Investment Group to offer institutional investors a closed-end fund based on bitcoin futures. Dalia Blass, the Director of the Division of Investment Management at the SEC, explained the reasons for approving the fund: (1) It does not hold digital assets directly; (2) it has prominent risk disclosures; and (3) it does not have daily redemptions, which tempers the risk of unexpected liquidity demands. The approval signals that the SEC is open-minded about approving innovative and new crypto-based products.
Federal regulators and Congress showed an increased focus on cryptocurrencies in 2019. As we move into 2020, expect discussions to escalate as more pressure is put on the SEC, CFTC and Congress to come up with a federal regulatory scheme that fosters innovation while mitigating risk to consumers.
The looming 2020 presidential election also promises to influence cryptocurrency regulation. Current democratic hopeful Elizabeth Warren has expressed concerns that crypto consumers could be harmed by initial coin offerings (ICOs) and stated that cryptocurrency is “easy to steal.” While the other leading democratic candidates have been silent on the issue, the election outcome will surely have an impact on the future of cryptocurrency regulation.
This is an op ed contribution by Andrew Mount. Opinions expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc.
Andrew Mount is an associate in the Financial Institutions practice at the law firm of Bressler, Amery & Ross (firstname.lastname@example.org).