Risk Insights
November 23, 2021

Is It Time to Regulate Crytocurrencies?

The world currently seems deeply divided over whether to regulate cryptocurrencies. 

U.S. President Joe Biden wants to regulate cryptocurrencies, but many in Congress do not. This as El Salvador became the first country to adopt Bitcoin, the world’s largest cryptocurrency, as legal tender. And as the government in India seeks to ban almost all private cryptocurrencies, including Bitcoin.  

U.S. regulators recently asked lawmakers to speed up regulations for Stablecoins, a fast-growing type of cryptocurrency intended to be stable in price. By one estimate, more than $130 billion worth of stablecoins is in circulation. 

Whether cryptocurrencies are tied to a stable currency such as the U.S. dollar, or are decentralized, as is  Bitcoin, red flags are being raised about their potential for fraud, their volatile nature, and the possibility that they may pose a major risk to the global financial system. So what’s to be done?

That question was the focus of a recent episode of Crypto Corner, RANE’s podcast exclusively focused on cryptocurrencies. 

RANE Founder and Chief Collaboration Officer, David Lawrence, discussed the idea of regulation with Joe Hanvey from FalconX and Tim Murphy of Consortium Networks.  

The conversation focused closely on how best to institute regulations, not to stifle innovation, but to protect consumers against fraud, and ensure that, as people invest their capital, they have a full understanding of where they're putting their money.

As the global economy moves from a tightly controlled financial system with a lot of regulatory activity to money on the internet, Tim Murphy, said that people are struggling with how to understand what’s going on. Murphy leads Consortium Networks’ strategic direction, operations, cybersecurity solution development, and client services.  

“I think from my work in this space, Americans would welcome the safeguards around this, because I think they'll give confidence in retail investors as well as institutional investors that we're seeing to actually invest in it, whether it's for safekeeping, whether it's for interest-bearing, whether it's for transactional activity as we kind of develop those different areas around cryptocurrency.”

“But I would say that having worked in government for many years and working now in the private sector, in the AML, (anti-money laundering) and CTF, (counter-terror finance) space, is that we have to get this right because the older regulatory frameworks just may not work.” 

But, Murphy added, the U.S. on its own has a long way to go to develop a clear regulatory framework. Regulators don’t even use a common definition. The Security and Exchange Commission (SEC) typically classifies cryptocurrency as a security. The Commodity Futures Trading Commission (CFTC) calls Bitcoin a commodity. The Department of the Treasury calls it a currency, and the Internal Revenue Service (IRS) ​​classifies it as property for federal income tax purposes.

Joe Hanvey, who is the Chief Compliance Officer at Falcon-X, a digital asset trading platform, approaches the lack of confluence from the perspective of risk management.

“And okay, it needs to have a governance framework. It needs to have a management committee. It needs to have your risk assessment. I convene with my colleagues, my peers in the industry, and we meet on a monthly basis and we just talk through, ‘Okay, what are you doing for OFAC sanctions? What are you doing for due diligence? What is law enforcement doing? What kind of red flags is law enforcement seeing?’”

But are most governments lagging too far behind technological innovation to effectively regulate cryptocurrencies? 

“To the government, whether it's the congressional action, whether it's executive orders, whether it's the government making decisions - and not just the United States but around the world - technology always leads,” said Murphy.

“So, as quick as the technology's moving, we're very slow even to keep up with just regulating Bitcoin. And the next thing I'm hearing about is the social finance aspect that's supposed to be the next boom. You had the cryptocurrencies, you've got DeFi, you've got NFTs which people are trying to wrap their heads around, and now you've got social finance. So, what I will tell you is yes, small progress, but we really need to wrap our arms around this with these groups in government. And I don't think people understand it. This is a big movement driven by technology, driven by engineers, driven by people that understand this world, and yet we don't have enough people in our government or organizations” to keep up.

It’s possible the U.S. and other governments will have to break precedent and act more like start-ups in this space to make any changes that are needed, faster than they have ever moved on regulations. Of course, that brings its own challenges.

You can listen to the entire conversation for specific takeaways and predictions, here, or subscribe wherever you get your podcasts.

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