You may have read about a disruptive new technology that replaces cash payments and makes it easier to pay for goods and services, with a growing band of supporters enthusiastic about the possibilities. Unfortunately for these supporters, it will take 25 years for government regulations to catch up, and another decade more until the public starts to widely adopt the technology…
No, it’s not Bitcoin, and this is not present day. The year was 1946, the technology breakthrough was the bank-issued credit card, and it was only available in Brooklyn. By the 1970s, fewer than one in five households had bank credit cards. Then, after more than 30 years of lackluster adoption, credit card adoption spiked. By 1986, half of households had credit cards, and two-thirds by 1996. What happened? Economists point to several factors, but federal regulations adopted in the 1970s gave comfort to both the supply and demand of credit cards.
Today’s breakthrough technology, Bitcoin and the specialized database that propels the digital currency, commonly known as the blockchain, have generated similar excitement. Every day, there seems to be a new prediction about Bitcoin and blockchain. Supporters claim this digital currency will spike in value and increasingly replace government-issued currencies. The naysayers doubt that the world’s governments will ever allow that, and point to both the instability of the prevailing price and the logistical bottlenecks of recording every transaction on a public database. Like the history of bank-issued credit cards, the hype has come with misconceptions, and widespread adoption is unlikely to take place until uniform regulations are implemented.
First, let’s correct a few misconceptions surrounding the regulations of bitcoin. It’s simply not true that bitcoin and other digital currencies are not regulated. To the contrary, state and federal officials in the United States have been applying existing laws and regulations to bitcoin since it was introduced in 2009. Many agencies have issued policy statements clarifying their positions, and in some cases, have brought enforcement actions. In response, many companies, both from the digital currency industry and traditional industries, are affirmatively adopting procedures to ensure that their new business lines comply with these regulations.
The Problem
For companies that are implementing digital currency strategies, the central problem is not the lack of regulations. Rather, it is the inconsistencies in regulations from one jurisdiction to another. Every state has a different regulatory stance on whether a digital currency company is a money transmitter and whether such companies must be licensed. New York adopted a new license in 2015 specifically for digital currency businesses, and other states are considering similar moves. Some state departments of banking and securities, like Texas and Massachusetts, are aggressively enforcing their regulations. Other regulators, like those in Georgia, California, and Illinois, have shown little interest in addressing clear violations.
The regulatory landscape at the federal level is not any more defined. The Internal Revenue Service (IRS) views digital currency as property. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) both have asserted jurisdiction over certain bitcoin-backed financial instruments, classifying digital currencies as securities and commodities, respectively. Financial Crimes Enforcement Network (FinCEN) and the Department of Treasury view digital currency as money. When these positions have been challenged in courts, courts have issued inconsistent opinions. With Congress’s recent stumbles during the Facebook data-breach hearings, the Legislature appears unlikely to take the lead to unify federal regulations.
Internationally, countries are also regulating digital currency differently. Some countries view digital currencies as an asset, as a security, as a currency, and, perhaps the least helpful assessment, as “something other than money.” No widespread agreement has yet emerged.
The Solutions?
Many expect that bitcoin will not be widely adopted until there is some consensus by governments to regulate digital currencies. Several governments are trying to find an appropriate balance between protecting customers and encouraging new businesses. Different jurisdictions are testing their own systems, but we are unlikely to see widespread adoption until digital currency companies feel comfortable with regulatory risk, and consumers feel secure in the fact that digital currency companies can be trusted.
Government regulators are also experimenting with different platforms.
New York has received mixed reviews for its BitLicense. Critics have complained that the license is cumbersome and approvals have been slow (only eight licenses have been issued in three years). However, the licensees have all established themselves as market leaders, and none have been sanctioned or had licenses revoked.
In contrast, Japan issued a new regulatory structure in April 2017 and quickly granted 32 licenses in the first several months. However, within the first year, one exchange was the victim of a $530 million hack and at least eight licenses were suspended or withdrawn. Some smaller jurisdictions, like Malta and Switzerland, have adopted lenient, pro-business regulations in an attempt to establish an environment-friendly to startups.
The Commissioner of Japan’s Financial Services Agency stated in a recent interview, “We have no intention to curb [the digital currency industry] excessively. We would like to see it grow under appropriate regulation.” Still, finding the balance between healthy growth and appropriate regulations is proving difficult.
It should be noted that China is an outlier in this respect, as the Chinese government appears intent on strictly limiting and possibly eliminating digital currency markets, and has imposed severe restrictions on exchanges.
Federal regulations within the United States are incrementally progressing. The SEC has distinguished itself in establishing a functioning, regulatory environment. In reactive enforcement cases, the Commission has shuttered companies that are engaging in fraud or otherwise operating illegally. In proactive administrative procedures, the Commission has issued detailed policy statements, explaining the legal reasoning for permitting or rejecting certain business lines and practices. The Office of the Comptroller of the Currency recently proposed a limited banking license for financial technology companies, perhaps reducing the threshold for companies offering new technology-based financial products to obtain a national banking license.
On the industry side, forward-thinking companies are pursuing multiple paths to establish regulatory compliance and bolster public confidence. One discernable trend being that industry leaders in multiple segments are aggressively moving to adopt fulsome compliance programs. Bitcoin Automatic Teller Machine operators are enforcing daily transaction limits to comply with anti-money laundering laws. Major exchanges are voluntarily delisting publicly-traded tokens that are likely to be viewed by the SEC as unregistered securities. These companies are prioritizing compliance at the expense of revenue growth.
As part of the industry trends to meet existing compliance standards, some digital currency exchanges are acquiring companies that are already registered and licensed. Coinbase, the California-based, online exchange, recently bought companies with a broker-dealer license, an alternative trading system license, and a registered investment advisor license. At least one other major digital currency player is pursuing brokerage licenses directly with the SEC and a federal banking license with the OCC. Several other exchanges are joining forces to establish self-regulatory standards.
Moving Forward
So what is the future of Bitcoin? Consider the first bank-issued credit card introduced in 1946. Congress did not pass any legislation directly addressing credit cards until 1970, and by 1978, only 16 percent of American households had bank credit cards. The widespread adoption that credit cards now enjoy was propelled by a 1978 Supreme Court decision to grant banks increased discretion to set interest rates. Not until 1996 — 50 years after the introduction of bank credit cards — did two-thirds of American families have bank credit cards. Today, 90 percent of families have credit cards.
Like the Bitcoin-related financial markets, the regulations that govern the digital currency market are maturing. Adoption rates are likely to follow, as the companies establish themselves as reliable and trustworthy, and as the public perceives that government regulators will hold these companies accountable. Assessing the progress from the past 12 months, many observers expect Bitcoin will enjoy widespread adoption long before 50 years pass by.
