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Law and Order: Regulating Cryptocurrencies

 5 min read / 

The crypto evangelists who stand at the very roots of the blockchain technology, associate it with freedom: freedom from banks, the state, intermediaries — from everyone. The legendary Satoshi Nakamoto, who created bitcoin in 2008, wrote:

“Yes, [we will not find a solution to political problems in cryptography,] but we can win a major battle in the arms race and gain a new territory of freedom for several years.”

Now, almost 10 years later, the world witnesses a radically different situation: cryptocurrencies are surrounded by state financial and banking institutions trying to impose strict regulations.

David vs. Goliath

A lot has changed since 2008. Following bitcoin, other coins appeared. Cryptocurrencies are no longer just a hobby of some hackers who used to mine them at home. The digital, cyber future has become a reality today.

As of March 2018, the total market capitalization of cryptocurrencies exceeded $300bn (back in the day it surpassed the $400bn mark). Every day dozens of projects mushroom on the market, attracting money through the ICO mechanism and issuing their own coins. According to Coinspeaker 382 token sales were successfully completed in 2017, in total collecting more than $3.7bn. In January 2018, 82 startups launched ICOs.

Today payments in cryptocurrency are supported by many influential companies and industry giants, including Microsoft, Expedia and KFC Canada.

No doubt that the skyrocketing of digital money and its ubiquitous expansion could not slip under the radar of governments. Banks and financial regulators saw that bitcoin and other cryptocurrencies would not disappear, either now or in a couple of years.

The traditional banking sector sees a clear threat from the digital currencies. These coins and the blockchain technology going to disrupt the conventional patterns with their anonymity and decentralization. Evidently, central banks are aware of the enormous potential that the distributed technologies have and thus are actively engaged in studies and implementation. But while they are spending money and time to achieve milestones, nothing prevents them from regulating the use of cryptocurrency.

Wild Wild West

The main issue governments have with cryptos is that there are too many blank spots in this field. Till now no one can give a straightforward definition of cryptocurrency: whether it is an asset, how should it be taxed and how to monitor and identify confidential transactions. Moreover, there is no clear interpretation of the ICO instrument.

The cryptocurrency market resembles a chaos — and chaos carries a threat. It jeopardizes the order.

The anonymity of transactions opens up almost endless opportunities for money laundering and fraud — and criminals have already been grasping them. Crypto exchanges also remain in a grey zone for regulators — especially in relation to speculation and cash-out operations that involve the conversion of cryptocurrency to fiat money. Also, governments have serious concerns about security and safety of depositors’ funds. So, after numerous cases of fraud, the authorities of South Korea tightened the requirements for exchanges, closing down some of them and promising more serious measures in the future.

ICOs have been a headache for financial institutions for a long time. It is one of the fundraising methods used by a company, when issues its own tokens (digital assets) and sells them to the community in exchange for other, more established cryptocurrencies. Quite often projects promise investors not only the product’s continuing development but also a highly speculative possible income. However, in reality, some companies that have collected funds turn out to be scammers not in a hurry to fulfil their obligations. What is more, they can even run away with the money right after the ICO ends.

How can the state protect the aggrieved investors? They can warn, or even better, prohibit. For example, in Singapore and Switzerland, central banks issued guidelines for conducting an ICO and described cases when tokens are to be defined as securities and thus must fall within the scope of the law. The Chinese government went much further and completely forbade anyone from holding token sales or participating in them.

A Caged Lion

The United States Securities and Exchange Commission (SEC) has already become a nightmare for all companies that have launched or plan to launch an ICO.

The regulator’s attitude is tough. As SEC chairman Jay Clayton declared during a US Senate hearing, “every ICO I’ve seen is a security”, and therefore it must fall under the law. According to the Securities Act of 1933, a defrauded investor who bought unregistered securities can sue the company to recover their investments.

The most notorious case is the trial of Tezos, a company that collected an astronomical sum of $230m. A group of investors filed a class-action lawsuit against the startup in the Supreme Court of San Francisco, accusing the troublesome Tezos of fraud and trade of unregistered securities, i.e. tokens.

In early March it was revealed that the SEC had sent subpoenas to the companies involved in ICOs, their lawyers, and advisors. Likely, new trials are to come.

According to former SEC commissioner Dan Gallagher,

“This was the tip of the iceberg and that there would be a ton of enforcement activity.”

An End or a Beginning?

People vary in opinion as to whether the crypto world should be regulated or not. Some crypto evangelists shudder arguing that control contradicts the philosophy of digital currencies and their main value — freedom.

Meanwhile, the others say that regulation is a sign that cryptocurrencies, albeit unofficially, have already been accepted by the authorities as an integral part of the new cyber reality. They believe that laws will not kill bitcoin and ICOs, but on the contrary, will help them to progress.

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