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Why Is the US Not Yet a Leader in Crypto Regulation? — Experts Answer

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Regulatory frameworks for Bitcoin (BTC) and other cryptocurrencies have developed differently around the globe, ranging from outright bans to so-called “crypto-friendly” legislation. Despite being an economic leader, many within the crypto industry argue that the United States in particular has not yet gained a leading position among governments actively working to regulate this new technology. 

We asked the U.S. Chamber of Commerce’s Julie Stitzel, the Commodity Future and Trading Commission’s (CFTC) Heath P. Tarbert, NYU Blockchain’s Timothy Paolini and other industry experts to comment on the current situation with regulation U.S. regulation of crypto and blockchain.

The U.S. — the economic powerhouse home to Wall Street and Silicon Valley — faces some challenges in creating a cohesive regulatory landscape for cryptocurrency. Various U.S. regulatory agencies have different stances toward crypto. Back in 2013, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) classified Bitcoin as “an example of a decentralized virtual currency.” The following year, the Internal Revenue Service (IRS) proposed treating Bitcoin and other digital currencies “as property for U.S. federal tax purposes,” and in 2015, the U.S. Commodity Futures Trading Commission (CFTC) considered digital currencies as commodities. 

Earlier this summer, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) had jointly outlined regulatory compliance issues for cryptocurrency custodians and had not discovered those circumstances in which crypto could comply with the SEC’s Customer Protection Rule. 

Resulting from complex legal and tax requirements imposed by several U.S. regulatory agencies, some of which has been named above, the U.S. still does not have a clear regulatory framework for the crypto industry at the federal level. 

Why has the U.S. not yet become a leader in crypto regulation?

 

“The United States’ history of adopting and amending legal frameworks in the financial sector have resulted in a robust regulatory structure that enables market stability and effectively manages risk. Although the digital assets market is still nascent, there is a risk and concern that the United States may be left behind — missing an opportunity to cultivate innovation, create jobs and grow the economy by leveraging the emerging technology. 

“As the largest economy in the world, the United States must think differently about how we apply existing regulatory and supervisory principles to digital assets—including cryptocurrency. Appropriately classifying digital assets and determining the federal entity with the jurisdiction to regulate and supervise them is one way to provide regulatory clarity for innovators and signal that the United States is a leader in the digital asset space.”

— Julie Stitzel, Vice president, U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness

 

“U.S. markets are the global standard with respect to their breadth, depth, and integrity.  This is the result of a careful balance of innovation, well-calibrated regulation, and a pro-business environment.  While the U.S. regulatory landscape is by no means perfect, there are always tradeoffs with any system. U.S. regulators have been careful not to stifle innovation during the development of this nascent space. 

“As we move forward, applying solid, principles-based regulations that appreciate the transformational potential of new technologies—such as crypto assets and other 21st century commodities—will be key to ensuring America’s free enterprise system remains the envy of the world.” 

— Heath P. Tarbert, Chairman of the U.S. Commodity Futures Trading Commission

 

“Regulatory authority in the U.S. is split among too many diverse agencies, and they all have their missions and their interests to assert. In addition to FInCEN, the SEC, the CFTC, and the IRS all chiming in on how to categorize and treat cryptoassets, you have 50 state governments to think about as well.  In the hurry to assert authority, many of these over regulated, based on what they thought they understood. So we are stuck with thinking about cryptocurrency as if all crypto was the same kind of interest, and could be regulated monolithically by each agency. Congress cannot fix the situation because Congress is too busy being divided along party lines. States cannot fix it because they simply do not agree on how to address the myriad issues that genuinely are posed by cryptoassets.

“Our regulatory scheme is split among too many diverse agencies and authorities, and tends to be too monolithic is its approach and too slow to react to the rapidly developing new technology.”

— Carol Goforth, Professor of Law at the University of Arkansas, Former Arkansas Bar Foundation Professor of Law

 

“Who said that the U.S. isn’t the leader in crypto regulation? On the contrary, from an anti-money laundering (AML) regulatory perspective, the U.S. is certainly the leader. The U.S. provided formal guidance on how crypto exchanges should be regulated as far back as 2013. Last year, I coauthored a study with Tom Robinson of Elliptic where we analyzed Bitcoin transaction data from various Bitcoin conversion services around the world. We found that the proportion of illicit bitcoins going into exchanges coming from darknet markets and mixers was much lower in North America compared to Europe. The likely reason: U.S. Treasury’s FinCEN – the organization that enforces AML regulations—had provided much clearer guidance than you had in Europe. 

“Another example of U.S. leadership in crypto AML regulation is how the Financial Action Task Force, the global body that sets standards for AML and counter-terrorist financing, recently provided guidance for regulating digital assets. This guidance was driven by the U.S. and largely reflects the framework already enforced by FinCEN.”

— Yaya J. Fanusie, Adjunct fellow at the Foundation for Defense of Democracies, Chief Strategist for Cryptocurrency AML Strategies, LLC

 

“One issue in the US is that this asset class falls on the borderlines of multiple regulatory agencies so jurisdiction has caused uncertainty. The SEC has stepped up as the primary regulator and is taking decisive action when it comes to enforcement but a more measured approach when it comes to actual regulation. There are many that feel the existing laws on the books are sufficient. This has caused many in the industry to look to Congress (despite significant hurdles there) for rules. 

“In addition to the above, many in the US feel that we already have robust capital markets and opportunities for innovation and don’t have the same incentives as other jurisdictions that may be using this new industry to spur their economies. We, however, do not think this is the right approach for the US.”

— Georgia Quinn, General counsel of CoinList, Counsel at the Ellenoff, Grossman & Schole

 

“For the most part, U.S. governmental entities are allowing cryptocurrency regulation to evolve incrementally from existing laws, some of which have been in place for eighty or more years, rather than proposing a new regulatory framework.  The advantage of this approach is that the government is allowing guidelines over the development and use of the technology to develop organically rather than establishing premature oversight which could inadvertently stifle a technology that is still in its infancy.

“The disadvantage is that the lack of regulatory oversight makes it difficult for cryptocurrencies and related businesses to operate in the US without bright-line rules. A number of foreign countries (e.g. Switzerland, Gibraltar and Bermuda) have taken the opposite approach in an effort to establish cryptocurrency governance frameworks to lure investment.

“By allowing crypto regulation to evolve organically rather than developing a new framework to accommodate it, the U.S. is deliberately taking a wait and see approach on crypto. While there are undisputed advantages to blockchain technology that are being explored throughout government and the private sector, the advent of cryptocurrencies threatens to disrupt the way the U.S. has traditionally regulated securities and commodities.  As important, some cryptocurrencies allow a simple by-pass of the myriad regulations promulgated under the Bank Secrecy Act and the Investment Advisors Act that are designed to protect consumers and prevent financial crimes such as money laundering. Those complexities, combined with the challenge of addressing issues that fall under the jurisdiction several different regulatory authorities, are key factors preventing the U.S. from becoming a world leader in crypto regulation.”

— John S. Wagster, Co-chair of Frost Brown Todd blockchain and digital currency industry team

 

“Regulatory uncertainty is one of the biggest obstacles to advancing blockchain technology. Specific to the U.S., the sheer number of regulatory bodies and variety of interpretations has made it difficult for U.S. firms to operate. 

“Until the U.S. can articulate a single set of standards to govern the industry we expect to see more innovations coming from other regions, which is why we established Bittrex International—to advance our mission of fostering blockchain innovation on a secure and reliable platform—while continuing our active dialogue with the appropriate U.S. regulators.”

— Bill Shihara, Co-founder and CEO at Bittrex

 

“When new technologies are introduced, regulators are often faced with a similar set of key challenges: how to best protect consumers while fostering innovation, promoting competition, enforcing legacy regulations and resisting the urge to overregulate.  

“With respect to blockchain, policymakers have been hesitant to introduce specific regulations for a variety of hurdles.

“First off, blockchain-enabled digital assets are not a homogeneous asset class—they may feature characteristics of securities, commodities, currency units, or a combination thereof—and affect markets that cross national borders.  In the U.S., we have various agencies exercising overlapping authority; for example, the Commodity Futures Trading Commission, the Financial “Crimes Enforcement Network, the Federal Trade Commission, the Internal Revenue Service and the Securities and Exchange Commission may have concurrent or overlapping jurisdiction over a particular blockchain-related matter. 

“Secondly, while the standard policy cycle often takes several years, emerging companies often develop disruptive technologies with global reach in just a few months. And history has taught us that regulations that are too fast can be just as bad as regulations that are too slow.

“Despite these challenges, U.S. policymakers are calling for action and are showing a strong effort to engage with participants in the blockchain space – a crucial step on the path toward meaningful regulation and guidance.”

— Dario de Martino, Partner in the Corporate Department of Morrison & Foerster, Co-chair of MoFo’s Blockchain + Smart Contracts Group

 

“The U.S. Financial Crimes Enforcement Network issued its first guidance addressing cryptocurrency companies in 2013, and since then regulatory action for digital assets has been slow to develop but has picked up in the past few years as an increasing number of federal and state agencies see the unique opportunities and risks associated with the sector. 

“Crafting sensible regulations to provide a stable regulatory framework for digital assets without choking their innovativeness is a difficult task and not one a federal or state agency should undertake without a solid foundation of experience with digital assets.  

“There is a growing buzz complaining that the lack of regulations has impeded progress for digital assets, but it would quickly become a loud scream if regulations were issued in a way that missed the mark altogether.  

“The slow, deliberative nature of the regulatory process in the U.S. can be frustrating to be sure, but it reduces the type of big swings and misses risked by reactionary and under-informed regulations.” 

— Michael Nonaka, Partner and a co-chair of the Financial Services Group at Covington & Burling LLP, Member of the American Bar Association and Banking Law Committee

 

“In my 8+ years of dealing with the government, I can tell you that there is significantly more red tape, formalities, and bureaucracy than you can imagine to deal with prior to getting anything done in DC. Even bringing up issues for discussion takes immense effort as there is always a never ending barrage of topics competing for attention. 

“Also, probably the biggest contributing factor is the huge educational gap that currently exists in DC. Many of the regulators are only now trying to wrap their heads around crypto and blockchain. Thankfully we have people like Kristin Smith and her team at the Blockchain Association to help educate DC and speed up the process towards much needed regulatory clarity.

“Washington is also notoriously reactive. We saw this in the case with Facebook’s Libra initiative, which caught regulators completely off guard and led to a scramble of fact-finding hearings. That all being said, I do have confidence that the US government will eventually figure it out and do so smartly so as to not stifle innovation and to [hopefully] position the US as the standard setter for crypto regulation.”

— Timothy Paolini, Board Member, NYU Blockchain

The answers are authors’ own and do not necessarily constitute the official position of the affiliated organizations.

These quotes have been edited and condensed.





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Crypto Custodian BitGo Expands Japanese Presence, Builds Team

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Digital asset trust and security company BitGo is reportedly expanding into the Japanese market, The Block reported on Aug. 9.

A source familiar with the matter told The Block that BitGo is expanding its presence in Japan. According to the report, BitGo is planning to grow its Japan-based team, including hiring a sales director for the company’s sales team in Tokyo.

Per a dedicated job post published by BitGo last week, the sales director will specifically be responsible for the company’s “digital wallet and offline vault solutions across your agreed territory.”

In May, BitGo appointed a veteran Wall Street trader Nick Carmi as its head of financial services. The hire was ostensibly spurred by an intent to forge a stronger connection between technologically innovative digital assets and the traditional financial sphere.

In late July, BitGo and decentralized identity startup Civic announced plans to launch a new wallet using BitGo’s multisig technology in Q4 2019.

Using BitGo’s multisig security technology, the wallet will require users to undergo identity authentication using a blockchain system for secure verification. The underlying data is not shared between multiple parties and aims to grant users more control over their personal information.

As reported in June, about 30 Japan-based crypto-related businesses and 50 individuals had not declared their revenues from cryptocurrency trading as of March, allegedly due to a high tax on this type of income.





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Weapon in US Trade War or Attempt to Manipulate Bitcoin?

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After a short stay in the red zone, Bitcoin (BTC) has recovered toward $12,000, with traders turning bullish as ever. Experts call the United States-China trade war a key reason for the main cryptocurrency’s price fluctuations. Fuel to the fire has been added by the recent announcement by the People’s Bank of China (PBoC) of plans to get ahead of the U.S. and Facebook’s Libra by issuing a national cryptocurrency.

Chinese government is set to digitize yuan, challenge U.S. and Libra

As Cointelegraph reported, the PBoC plans to focus on developing its own legal digital currency. On Aug. 2, during a video conference devoted to discussing financial tasks for the second half of 2019, heads of financial and economic institutes in China touched upon the topic of cryptocurrencies. The country’s central bank announced its intention to accelerate the development of its own digital currency and also confirmed its plans to allocate more resources to the implementation of this task.

It is notable that the decision of the Chinese bank to intensify the creation of a national cryptocurrency was preceded by the hotly debated development of the Libra coin. Initiated by Facebook in 2019, the project is now actively being lobbied for in the U.S. government, but without any results so far. 

Related: US Congress on Libra Overview: Trust, Privacy and Genocide Accusations

In July, Wang Xin, director of the PBoC Research Bureau, said that, with the development of the Libra cryptocurrency project, the People’s Bank of China should accelerate the growth of its own digital currency, which it has been working on over the past few years. Wang believes that the risks Libra bears for the traditional financial system will force regulators to devote many more resources and forces to develop its digital currency. Wang asked:

“If [Libra] is widely used for payments — cross-border payments in particular — would it be able to function like money and accordingly have a large influence on monetary policy, financial stability, and the international monetary system?”

In particular, China is concerned about which currencies Libra will be tied to and what role the U.S. dollar will play in this project. Wang said:

“If the digital currency is closely associated with the US dollar, it could create a scenario under which sovereign currencies would coexist with US dollar-centric digital currencies. But there would be in essence one boss, that is the US dollar and the United States. If so, it would bring a series of economic, financial and even international political consequences.”

Former PBoC Chairman Zhou Xiaochuan also believes that the concept of a global digital currency introduced by Facebook that can be exchanged into fiat money threatens existing cross-border payment systems and could weaken the position of national currencies, which he spoke about at a conference in Beijing, as reported by the South China Morning Post.

According to Zhou, Chinese authorities need to strengthen the national currency and consider the Hong Kong model to create a digital renminbi, which involves issuing money through commercial enterprises under the supervision of the central bank. Some analysts have already expressed the belief that technology giants Alibaba and Tencent may be assigned such a task. Large corporations in the country appear to be supportive of the ideas coming from government ​​members, as Huawei CEO Ren Zhengfei commented:

“China can just issue our own version of Libra. Why should we wait for others to do it? The power of a country is always stronger than that of an Internet company.”

Stablecoin to support the local economy

A future national cryptocurrency may be issued in the form of a stablecoin tied to the yuan (also called the renminbi). Researchers at the PBoC published a review of recent initiatives in this area back in October last year. Most of the coins discussed in the material are pegged to the U.S. dollar, such as Gemini Dollar (GUSD) and Paxos Standard (PAX). The researchers are convinced that the development of cryptocurrencies tied to USD strengthens the role of the dollar in the global monetary system, while also having a negative impact on other fiat currencies. According to the researchers:

“If the stablecoins tied to the U.S. dollar end up being widely recognized by the market and prove their applicability in the real economy, we will have to redouble our research efforts in this direction, as well as in studying the relevant experience. This is necessary to support local institutions and issue stablecoins tied to the renminbi.” 

At the same time, the authors note that stablecoins still have a long way to go before the financial system begins to feel any significant influence from new assets. Star Xu, the founder of cryptocurrency exchange OKCoin, expressed a similar point of view in his post on Weibo, writing: “The dollar-pegged #stablecoin regulated by the US government will strengthen the penetration of the US dollar 100 fold.”

Bitcoin is growing due to the yuan’s rate falling

Analysts have drawn parallels between the declining rate of the yuan and Bitcoin’s growth. The price of the preeminent digital currency rose sharply the very moment when the Chinese currency fell by 7% to an 11-year low. On Aug. 5, Bitcoin’s price surged to $11,786, with the daily increase amounting to an 11% gain.

Evolution of PBoC's relations with cryptocurrencies

U.S. President Donald Trump alleged on Twitter that the Chinese government is manipulating the price of the renminbi:

“China dropped the price of their currency to an almost a historic low. It’s called ‘currency manipulation.’ Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”

As financial analysts suggest, the renminbi declined due to investors’ concerns about a new round of escalation in the trade war between China and the U.S. This happened a few days after Trump introduced additional tariffs on goods imported from China. Now that U.S. products could become more expensive for Chinese consumers, a lower exchange rate might adversely affect U.S. exporters. The prices of U.S. stock futures have already declined, while the cryptocurrency market has demonstrated the opposite tendency.

Some analysts have postulated that the reason for this dynamic could be because Chinese investors use Bitcoin as a means of saving money. Simon Peters, an analyst at trading platform eToro, suggested that Chinese investors could want to diversify as the yuan fell. According to Peters:

“Given that Chinese investors make up a large proportion of crypto investors, there’s a strong possibility some are backing bitcoin’s chances against the yuan.”

However, Peter Schiff, an economist and CEO of brokerage company Euro Pacific Capital, rejected this explanation, claiming it was more about speculation rather than about real need:

“CNBC is trying its best to dupe its audience into buying Bitcoin. Despite gold being a much larger market, CNBC devotes far more airtime to Bitcoin. The Chinese aren’t buying Bitcoin as a safe haven. Speculators are buying, betting that the Chinese will buy it as a safe haven!”

The internet says…

An ambiguous statement made by the PBoC regarding the creation of a national cryptocurrency has sparked intense discussion around the world. Several points of view, primarily negative, have appeared on the internet in response. Some users suggested that both the U.S. and China need cryptocurrency to strengthen control over their citizens. Crypto enthusiast Richard Heart opined:

“Nations want more control over their cirizens. Nothing new…or good.”

And some even suggested that the confrontation between China and the U.S. in the cryptocurrency field could lead to a world war.

Place your bets

How soon Chinese residents will be able to see — and most importantly use — the local digital cryptocurrency is still unknown, as it may take years to implement such an idea. The full process may require the development of a regulatory framework, instruments of taxation and regulation, as well as creating special entities and hiring specialists who will work with cryptocurrency.

Previously, attempts to create a national cryptocurrency have already been undertaken by countries such as Iran, Turkey, Saudi Arabia, Russia, Estonia and Venezuela. The South American country allegedly raised $1 billion during the presale of the supposedly oil-backed cryptocurrency Petro, and Venezuelan banks began to display the citizens’ account balance in the new currency. This year, Venezuela intends to make Petro OPEC’s main digital currency, according to Oil Minister Manuel Quevedo.

Related: Venezuelan Petro Against US Sanctions: History and Use of the Crypto

In regard to China, such an initiative has been discussed since January of 2016, when representatives of the PBoC announced the plans outlining their desire to create the country’s own digital currency as soon as possible. At the same time, the Chinese central bank also clearly articulated the advantages of cryptocurrencies over traditional money:

“Digital currencies are much cheaper in circulation than traditional fiat money, promote trade, increase transaction transparency and reduce the risks of money laundering and tax evasion. The use of digital currency will help build a new financial infrastructure, strengthen the payment system in China, increase the efficiency of mutual settlements and accelerate the modernization of the economy.”

Notably, the PBoC has been following the development of the digital currency market for a long time, with an appropriate research group created back in 2014. And since 2015, the Chinese government has been actively studying the regulatory experience of other countries in order to prepare an appropriate regulatory framework.

Correlation between yuan’s fall and Bitcoin’s surge

It is noteworthy that in a report published on the PBoC’s official website, the word “Bitcoin” is not mentioned even once, although China is one of the top players in the crypto industry. The principles and technologies on the basis of which it is planned to create a state digital currency are also not explained. 

At the same time, blockchain technology is mentioned only once as one of the iconic phenomena in the information technology development. However, the general context of the statements suggests that the future digital currency will have much in common with Bitcoin — at least, from a technical point of view. 

Wang noted that the PBoC was one of the first central banks to start exploring the possibility of creating its own digital currency, but research experience alone is not enough. Wang said, “We had an early start […] but lots of work is needed to consolidate our lead.” He also confirmed that the central bank has already received approval from Chinese authorities to create its own digital currency, though it is not yet known at which stage its development is currently at. Huang Yiping, a Beijing University professor and the chairman of the research initiative, said that China is ahead of the U.S. in promoting digital finance. He continued:

“It remains unclear if Libra will succeed […] but the concept won’t disappear. But it has sent a warning to China that its lead [in digital finance] is not a sure thing.”

However, in an interview with Cointelegraph, one of the senior PBoC representatives — who wished to remain anonymous — said that the implementation of such a fundamental project may not do without risks, continuing:

“Digital currency is a sphere very important to look at in the future. The turbulence caused by the Chinese-American trade war and the negative implications of it will last for a long time. Under these circumstances, we will have to monitor the development of digital assets since it brings both risks and opportunities. I believe that China will create its digital currency one day.”





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Disgruntled Bitcoin Investor Brings $22.5M Class Action Suit to Israeli Bank

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An unnamed investor has filed a lawsuit against the Israeli Bank Hapoalim in the amount of approximately $22.5 million, on account of the bank allegedly refusing to accept deposits of profits earned via Bitcoin (BTC). 

Industry media outlet BlockTV discussed the lawsuit in a report on Aug. 9. According to the report, the complaint is being filed as a class action suit, and the investor ultimately plans to sue other Israeli banks on the same grounds. 

According to the report, Israeli banks are largely anti-crypto because they wish to avoid being scrutinized in connection with crypto-related firms and individuals. However, the disgruntled investor’s lawyer, Lior Lahav, has said that this is not sufficient grounds for banks to refuse services to cryptocurrency investors. Lahav stated:

“The banks have an obligation under the law to accept money from the clients […] They can check on their clients, do their due diligence, and find out where the money is coming from. The problem with the banks is that they are doing nothing. They are not asking their clients: ‘Provide me documentation of the origin of the money.’”

Lahav further illustrated the scale of the issue, arguing that there are tens of thousands of Israeli investors who are similarly being punished for no apparent wrongdoing:

“There are more than 70,000 bitcoin investors in Israel who are facing the same problem from their banks […] 99 percent of them are ordinary people that invested in a thing that’s completely legal.”

Ross Gross

Lahav pointedly noted that his client is not Ross Gross. Gross is a Bitcoin investor who claimed that the bank Hapoalim refused to accept his deposit, purportedly because it came from crypto trading profits.

As previously reported by Cointelegraph, Gross began investing in Bitcoin back in 2011, and has reported his earnings to the Israeli tax authority. However, as of 2017, Bank Hapoalim stopped accepting his deposits of funds earned from Bitcoin trading. 

As a result, Gross has not been able to pay his capital gains taxes and the tax authority has put a lien on his bank account, home and scooters. Gross said, “the tax authority is aware of the problem, but they say the ball isn’t in their court.”





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