What Is Cryptocurrency? The U.S. Senate Is Weighing In

Cryptocurrency has mostly been operating in a Wild West environment since Bitcoin was created in 2009, with almost no regulation of its offerings and activities. That could be changing soon.

Influential senators are pitching legislation that would characterize Bitcoin and Ether as commodities and therefore hand regulation over to the U.S. Commodity Futures Trading Commission. This would change the world of cryptocurrency in two ways: going from no regulation to some regulation, and ending the discussion over whether these assets should be regulated as securities, instead of as commodities.

The most immediate effect for cryptocurrency firms would be additional costs and risks. Regulation would lead to increased costs due to hiring and other efforts related to compliance, explains Ken Joseph, managing director of financial services compliance and regulation at the consulting firm Kroll, and a former associate director at the U.S Securities and Exchange Commission. On the risk side, “You increase the risk of non-compliance, enforcement actions, investigations, and examinations…you run the risk that if you violate those rules, there are going to be consequences,” Joseph says. He added, however, that the benefits would still outweigh the cost. “The industry has been clamoring for some level of certainty, of more predictability with regards to what rules or regulations apply.”

The cryptocurrency industry would likely benefit from regulation because of what it would do for investors, as regulation “actually provides some investing confidence, some market participant confidence,” Joseph says. “It also provides some transparency and I think serves to overall increase and provide a level of assurance, if you will, that there are operators in the space that are compliant with something.”

The transition could present less of a challenge for larger crypto companies, according to Jennifer Connors, financial regulation and enforcement partner at Baker McKenzie. “Smaller players in the crypto ecosystem may have some culture shock in connection with assuming regulated status, but the larger firms are probably prepared and ready to manage, as soon as they understand what the rules are,” Connors says.

The classification of these cryptocurrencies as commodities, and putting them under the CFTC, is a move the cryptocurrency industry has been lobbying for, preferring that route to regulation over the possibility of cryptocurrency being declared a security, which would subject it to regulation from the SEC.

“Firms such as Coinbase, FTX and Ripple have spent millions of dollars over the past year lobbying Congress to create a new category for digital commodities and empower the CFTC to regulate it,” the Wall Street Journal reported, emphasizing that “The agency has roughly one-sixth the head count of the SEC, and its rules are seen by the industry as easier to comply with than securities laws.”

However, Joseph asserted that regulation under either agency would likely be equally strict: “As a former regulator myself, I would guess that if you were to ask a CFTC enforcement or examination person as to whether they’re any less tough than the SEC, I don’t think you will hear that.”

Meanwhile, Connors thinks the regulatory oversight is likely to be shared: “I would doubt that the CFTC ends up as the sole regulator; instead, I would expect an outcome more similar to swaps, where the SEC and CFTC share jurisdiction.”