Why Increased Regulation May Not Be a Concern for Crypto
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The Wild West of cryptocurrencies may soon be tamed by regulators in Washington. New taxes may also be coming in the infrastructure bill working through Congress.
But the crypto markets appear to be taking it all in stride. Bitcoin traded around $39,0000 on Thursday, down from recent peaks around $41,000, but hardly crashing. Ethereum, the second largest cryptocurrency, rose 5% to around $2,800, partly in response to a technology upgrade that could expand the tokens appeal.
One way to read the markets reaction: More regulation isnt coming as a surprise, and it may not be a bad thing.
As the crypto bulls see it, regulation will open the door to mainstream financial advisors and asset managershelping them to gain access to crypto markets through products like exchange-traded funds, mutual funds, and other investment vehicles. Banks and other fintechs may also benefit from more regulatory clarity in order to offer more crypto services, including payments, custody, lending, and settlement.
Nonetheless, the devil is in the details: new securities rules, tax proposals, and guidelines under discussion in both Congress and regulatory agencies like the Securities and Exchange Commission.
One pressing concern is the infrastructure bill. The initial draft included a provision that could have raised $28 billion in tax revenue by imposing additional reporting requirements on crypto transactions and expanding the definition of a broker to include miners, software providers, and others.
But a fierce industry backlash appears to have prevailed, at least partially. A bipartisan amendment introduced Wednesday by three senators would specifically exclude intermediaries like miners, network validators, and others that provide crypto services from falling under the broker definition.
Our amendment makes clear that reporting does not apply to individuals developing blockchain technology and wallets, Sen. Ron Wyden (D-Oregon), a co-sponsor of the measure, said in a statement.
The next battle may be over a candidate to head the Office of the Comptroller of the Currency, or OCC, a major federal bank regulator. The Biden administration is now vetting Saule Omarova, a Cornell law professor, according to a report in the New York Times.
Judging by her writing, she may be no friend of crypto or the broader fintech industry.
According to a 2019 article she wrote in the Yale Journal on Regulation, fintechs and cryptos appear poised to amplify longstanding systemically destabilizing trends in financial markets.
Crypto backers are synthesizing assets that are untethered from the real economy in potentially infinitely scalable virtual markets, she wrote. Frictionless transactions in crypto have the potential to fuel financial speculation on an unprecedented scale. And fintechs, more broadly, pose macro risks by exacerbating the systems dysfunctional tendency toward unsustainably self-referential growth.
According to her writing, Omarova also views fintechs and crypto as an existential threat to the New Deal system of finance that has been in place since the 1930s: a public-private partnership in which capital is generated and allocated privately, while credit and banking are regulated as a public responsibility.
The nearly century-old arrangementappears increasingly ill-suitedfor ensuring systemic stability in the emergent world of frictionlesscrypto-speculation, she wrote.
Omarovas views wont necessarily translate to heavy-handed regulation (assuming she is formally nominated and confirmed by Congress). SEC Chairman Gary Gensler, for one, has indicated that he is open to expanding crypto investment products like ETFs, though is also warning the industry that its Wild West days are likely coming to an end.
This asset class is rife with fraud, scams, and abuse in certain applications, he said this week at the Aspen Security Forum. Theres a great deal of hype and spin about how crypto assets workIf we dont address these issues, I worry a lot of people will be hurt.
Gensler also made clear that he views all digital tokenscryptos like Bitcoin, stablecoins, or other variationsas securities that are subject regulation.
It doesnt matter whether its a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities, he said. These products are subject to the securities laws and must work within our securities regime.
Fintechs that offer digital tokens on lending platforms also fall under the SECs jurisdiction, he said.
For now, the market doesnt appear concerned about the Washington regulatory posse. While more rules, taxes, and legal frictions wouldnt be welcome in the libertarian leaning crypto world, it may be inevitable. And it may be what the industry needs to make another leap from the financial shadows further into the mainstream.
Write to Daren Fonda at daren.fonda@barrons.com
