Crypto (Over) Regulation is Coming
Whether you like it or not, cryptocurrency regulation is on its way this year. Now a $1+ trillion asset class, there is no way that regulation of cryptocurrency will not happen at some point in the near future for the United States.
Regulation of cryptocurrency hasn’t happened yet for two reasons: conflict between the Republican and Democratic parties in Congress, and the previous presidential administration being completely disorganized. The Biden administration is currently focused on an infrastructure bill and after it passes it will likely pass a tax increase for individuals (not corporations) in the top 3%. The White House will push for regulation of cryptocurrency in that tax bill to further “protect” consumers as part of a protection package.
Republicans are known to have a hands-off, laissez-faire approach to regulation, while Democrats have a hands-on approach and tend to be more distrustful of the free market. While this leadership pattern is usually consistent, I recognize these are wide generalizations. There have been some deviations from political leaders; for example, President Clinton repealed the Glass-Steagall Act that separated commercial banking from investment banking. And on the other side, former presidents George H.W. Bush and George W. Bush have both passed financial regulations in the past.
The progressive wing of the Democratic party feels that wealthy elites and corporations have taken advantage of the US tax code for far too long and is pressuring both the White House and Congress to close tax loopholes and increase financial regulation.
This isn’t coming out of nowhere. Recent actions in the cryptocurrency market do justify the need for regulation. Increasing research suggesting that Bitcoin is influenced by fraudulent stablecoins, the recent market manipulation of Dogecoin and Bitcoin from Elon Musk, as well as unstable exchanges from technical issues arising during the market’s drop all indicate that regulation is needed to some degree. DeFi rug pulls and exit scams have made up 99% of cryptocurrency frauds over the past year, with exploits also being popular, like with the recent price pumping of the Venus protocol’s XVS token.
The urgency of this regulation is furthered by the Ponzi-like trading of meme coins like Shiba Token, Safemoon, and CumRocket. Meme tokens have a high risk because of the price being driven by FOMO investors within the crypto community. Additionally, price pumping has become popular within insider trading groups that hold large positions in the market. This hurts those who don’t sell soon enough while making incredibly large profits for others, further demonstrating the need for at least some regulation.
Because of the extreme market manipulation that has taken place, the regulations put on cryptocurrency will likely be heavy handed and end up causing the US to take a backseat to other countries who are more developed in the crypto space.
We already saw this with BitLicense, a business license that must be obtained in order to perform virtual currency activities in New York state. The process to get a BitLicense is an expensive, time-consuming process that all boils down to further regulation of the cryptocurrency market. As of May 2020, there are only 25 crypto businesses that have successfully received a BitLicense.
New York is one of the worst places to have a cryptocurrency business because of the hassle of getting a BitLicense, and very few that apply actually qualify and get through the process. The same people who established BitLicense and its guidelines are now in control of the US Department of Treasury, so it may be fair to assume that future regulation of crypto could be as strict as BitLicense’s qualifications. US Senator Elizabeth Warren has been a strong proponent of cryptocurrency regulation and has not been shy to speak out in support of it, calling what’s been happening in crypto an “environmental disaster,” pointing out concerns relating to bringing Bitcoin and other cryptocurrencies into the United States’ monetary system.
Considering the history of regulation of equity markets at the start of the 20th century, regulation of cryptocurrency should be expected. In 1917 regulation was put in place as well as in 1934 with the creation of the SEC. Market manipulation began after the Federal Reserve expanded credit in 1927. Investors now had easy money to put into stock market speculation in an unregulated market. The Federal Reserve couldn’t make proper judgments about lending policies and tried to regulate the flow of money into the stock market by increasing interest rates. Businesses began failing because of this increased cost of money despite the stock market doing well.
With the stock market excelling, investing became more and more popular, with market manipulation from insider trading groups pumping prices and naive investors putting their money into a market they didn’t fully understand. Eventually, this led to the crash of the stock market, spurring Congress to adopt the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the SEC to restore investors’ confidence post-Great Depression.
Crypto regulation makes sense considering that the US has the most to lose from a decentralized global currency because the dollar has been weaponized since the end of WWII. Because the US controls the dollar, they can use imports and exports to/from other countries as leverage and enforce sanctions. This was seen when Steven Mnuchin stated that he would cut billions of dollars from Iran’s regime support. Similar threats were made towards Iraq where crude oil revenue was restricted. In 2018, the US Treasury cut off a Russian aluminum firm’s access to bank wire transfers, limiting their access to clearing houses. The US can get away with all this and still be able to afford foreign countries defaulting on debt because they can just print more money or run up debt due to the modern monetary theory.
Along with foreign countries and those with lower incomes who are able to invest in cryptocurrency, tax attorneys and users of Virtual Asset Service Providers (VASPs) are among the groups of people who will benefit from cryptocurrency regulation.
Right now is a great time to start lobbying against the future over regulation of crypto, but we should expect that it’ll be over regulated anyways, at least in its early stages. To encourage more reasonable regulation, framing overregulation as putting the US at a disadvantage against countries like China and El Salvador that are more advanced in technological areas will likely be the most effective method to encourage this change.
