International | Oct 28 2021
The listing of a bitcoin ETF, and bitcoin becoming legal tender in El Salvador, have marked milestone moments in an asset class US regulators are still unsure how to control.
-US government is moving towards greater regulation of the cryptocurrency sector
-Precisely what this new framework looks like remains far from clear
-A great challenge for the country surrounds ‘getting all its ducks in a row’ in regards to the competing perspectives and activities of various stakeholders across the US government
By Ed Kennedy
Tuesday 19 October 2021 saw the first bitcoin-linked exchange traded-fund (ETF) begin trading on the New York Stock Exchange. In what was a landmark moment for the crypto industry, it came eight years after the first filing of an application for a cryptocurrency ETF. As distinct from providing exposure to bitcoin directly, the ProShares ETF (NYSE: BITO) offers investors exposure to bitcoin futures contracts.
But while the commencement of BITO’s trading is undoubtedly a milestone moment, the events that surround its journey from application to approval also provides a snapshot of the current – often contradictory – perspectives at play in the US, as national authorities in the world’s largest economy seek to shift towards a more coherent and cohesive policy when it comes to cryptocurrency and blockchain activity.
The Turbulence Amidst El Salvador’s Historic First
A clear-cut illustration of the difficult dynamics US officials are currently wrestling with can be found not in Washington DC, New York, or Silicon Valley – but instead in a Central American country with a population of under 7 million. A historic day for the crypto world occurred on 7 September 2021 when El Salvador became the first nation in the world to adopt bitcoin as legal tender. While it was indeed a historic day, it was not one without issues.
After midnight President Nayib Bukele critiqued the fact that Chivo – the official app Salvadorans can use when they wish to transact with crypto – was not made available by the likes of Apple and Huawei. Following this, the app had to be offline for a time as it was buckling under the strain of user registrations. Bitcoin’s price also crashed from US$52,000 to a low beneath US$43,000 at a point in time during the day.
Undoubtedly there’s another side to the coin in this Salvadoran pioneering. Although it was unquestionably a bumpy start for Chivo, it eventually saw a widespread uptake, ultimately making its way to the top of Apple’s App Store finance category.
Salvadorans have since bought Big Macs at MacDonald’s and coffees at Starbucks using it. President Bukele has said the use of the world’s first crypto will save Salvadorans US$400 million a year on commissions for remittances. El Salvador now also has the advantage of ‘first mover’ status in making bitcoin transactions legal tender, when it comes to attracting crypto investors and businesses from abroad.
Yet while the long-term outcome of El Salvador’s embrace of the BTC crypto is not yet known – and there are certainly an array of distinctions between the movements made by El Salvador’s government and any the US government may make in time ahead – the turbulent start of El Salvador’s first official day with the crypto saw a loss of confidence among traders on the market.
This then resulted in higher trading volumes, and – amidst the perception large stakes would be sold off – some leading crypto exchanges (Coinbase, Gemini, and Kraken among them) saw trading delays and outages. This is certainly not the sort of episode the US government would wish to see replicated as a result of their own movements.
Pursuing New Laws of the Land
BITO launches at a time where all three branches of the US government have been busy with activity surrounding crypto. At present the US has comparatively light regulation of the sector. Crypto exchanges operate in line with the Bank Secrecy Act (BSA), and with requirements that seek to combat money laundering and other surreptitious practices. But there are now substantial efforts seeking to increase the obligations of those who’re active in the crypto sector.
The Big Bill Before Congress
Tucked into the $1trn Infrastructure Investment and Jobs Act that has been sent to Congress as a key part of the Biden administration’s agenda was a number of new provisions surrounding cryptos, including new tax reporting requirements.
At time of writing the bill is presently making its way through the House after being passed in the Senate – and thus many variables remain in play between now and it coming in law – but the movements so far show a clear signal of intent from US lawmakers in their appetite for more control over crypto.
The Potential White House Executive Order
It’s known across from the Capitol on Pennsylvania Avenue that the White House is currently considering an executive order concerning cryptos. It’s understood this is being entertained with a particular emphasis on the desire to combat the dangers of ransomware, in addition to other criminal activity in the sector.
The Case Before the Courts
Last year the Securities Exchange Commission commenced a suit against Ripples Labs Inc. The Commission did so contending Ripple was in breach of the law for conducting a US$1.3 billion unregistered securities offering The case is currently ongoing, but there’s the expectation its outcome could set a significant precedent which informs future activity surrounding the crypto sector.
The Busy Bureaucracy
Alongside the aforementioned US bodies, the Treasury’s Financial Crimes Enforcement Network, the Commodity Futures Trading Commission, the Office of the Comptroller of the Currency, and the Office of the Foreign Assets Control have all been making moves around cryptos. And there are other US organisations currently at work in this space too.
The Undercurrents to US Government Activity Around Cryptos
A number of key themes inform this present flurry of activity across the US government. First, there is a basic recognition of the need to consider modernisation. While those with a conservative approach to reform of the law in this area may well take the view ‘if it ain’t broke, don’t fix it’, that cryptos pose the potential to deliver profound systemic change means any minimalist approach to law reform is likely to face substantial pressure tests.
Efforts to enhance consumer protection and diminish criminal activity across the sector also loom large. Policymakers see greater regulation as an avenue to increase investor confidence, while also offering a new route to drive down scam activity. In turn, the fact late October saw officials from the US and Europe engage in a major bust of suspected drug traffickers on the dark web – which resulted in the seizure of more than US$31 million in cryptos and cash – is sure to further enhance the appetite of authorities for new tools to investigate and address any crypto-involved criminal activity.
The current status and anticipated growth of stablecoins is also a source of anxiety among U.S. leadership. As digital tokens with their value pegged to the USD – or another currency or asset as applicable – stablecoins make it easy for traders to transact without needing to continually convert into dollars over and over. Right now they’re essentially unregulated, and the concern held by US officials is that they pose a threat to the authority and operation of central banks as tech and eCommerce companies look to develop and utilise them as part of their ecosystems going forward.
In turn, while a stablecoin should in theory be backed by reserves – which accordingly should allow for a swap back trade of the crypto for the original asset at any time – the present lack of guarantees surrounding reserves means doubts are held regarding whether the theory differs from the practice. In turn numerous stablecoins have been heavily criticised for misleading statements surrounding their holdings, essentially claiming they held a one-to-one reserve of dollars for stablecoins when it wasn’t the case.
Another key tussle in this arena surrounds definitions. Securities and Exchange Commission Chairman Gary Gensler has held most crypto assets fall under the definition of securities, and thus should be within his organisation’s purview to regulate. Yet Brian Quintenz, a commissioner with the US Commodity Futures Trading Commission, has said cryptos are commodities, and thus fall under his agency’s authority.
For Vanessa Savino, the Deputy General Counsel of tZERO – “a technology firm with the goal of democratizing access to private capital markets” – US authorities bringing clarity to definitions surrounding the crypto sector will offer real benefits to consumers and business alike.
“I think for this industry, and for consumers to understand the products they’re buying, and for innovators to understand what regulatory landscape they fall under and need to comply with, we need clear guideposts. And clear guideposts are the first step in regulatory reform and moving forward”, said Ms Savino.
“I think if innovators know first-hand the products they want to bring to market, and the regulatory regime they fall under, it’ll help products be brought to market, and it’ll be beneficial for consumers.”
The Strategic Competition Between Washington and Beijing
The launch of BITO comes shortly after the Chinese government declared all crypto transactions in the country illegal. Although this declaration by Beijing in late September is the latest in a long line seeking to constrain the crypto sector, this recent move is the strongest yet, and notable for the clear-cut nature of its consequences.
While – typical for crypto enthusiasts in China and around the world – efforts to get around the ban have continued despite it, the reality is that the Chinese government's stance both past and present have delivered savage blows to the sector and its future prospects domestically.
Data from the Cambridge Centre for Alternative Finance released in mid-October showed the global hash rate (the computational power that is a requirement for the creation of bitcoins) fell from 44% to zero in China between May and July of this year. A colossal drop from September 2019 when it is held China’s share was as high as 75%. While other nations have seen their share of the global hash rate rise due to the decline in activity in China, the real winner is the US, which now commands a 35% share as of August, and accordingly is now the world leader in the mining of bitcoin.
There are an abundance of areas where the strategic competition between the US and China is already substantial, and indeed growing. In turn, Beijing has doubtless calculated it can afford to – or simply needs to for its own domestic priorities – cede ground to the US here. And ultimately, the decentralised nature of the crypto sector means it should not simply be placed in the same basket along with other fields in which Washington and Beijing are engaged in competition, and where a more centralised control can be easily exerted by both accordingly.
Nonetheless, just as recent events appear to evidence the future will see clear and enduring differences in the approach to cryptos by the American and Chinese governments, Washington is doubtless mindful of the opportunity to capitalise on the decline of the crypto sector due to Beijing’s actions on the domestic front.
In turn, even though the precise approach by the US government is still being formulated, a clear distinction has been drawn by the SEC between how the Chinese government has approached crypto, and how the US will in future. Chairman Gensler said in early October that the US will not be pursuing a ban on cryptos as the Chinese government had done, and this followed on from comments in late September by Federal Reserve Chairman Jerome Powell who said he had “no intention” of banning cryptocurrencies.
The US government forming a coherent and cohesive policy to cryptos will inject confidence into the industry, within the US and around the world. Beyond consideration of existing issues in the crypto space today, key US authorities have also had a rolling – and again, often contradictory – conversation among themselves regarding the development of a central bank digital currency (CBDC).
While a CBDC is not a crypto – with the centralised nature of the former versus the decentralised form of the latter serving as an clear-cut illustration of this – the potential development of one in future by the US government is a live issue, and thus one that informs the current calculus surrounding crypto regulation more widely.
The undercurrent to this all is the need for modernisation of payment systems, and – while some in the US government may take a dim view towards the crypto sector generally – there can be no doubting the way in which many contemporary crypto apps offer a very user-friendly platform to invest and transact with crypto is something all interested stakeholders in this arena can learn lessons from.
For Australians who are already keen on crypto – and those with an increasing interest in it – major and well-received reform in the US would draw new attention to offerings within its markets. Additionally, it would enhance optimism surrounding the capacity of Australian authorities to implement quality policy that could serve as the foundation for the next chapter of the crypto sector’s growth Down Under.
Writer’s Note: There has indeed also been momentous events occurring in the crypto space in Australia recently, with a full analysis to follow of recent developments surrounding the Australian Senate in a sequel piece.
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