Like the White Walkers heading south into the heart of Westeros, Federal and State regulators are slowly marching to increase their regulation of cryptocurrency like Bitcoin, Ether, and Litecoin.
The cryptocurrency industry is accustomed to working on the outside, and unstructured — with no single company or organization behind it. Some institutional investors think this makes it safer from traditional regulation. However, when the clamor for regulation comes, there may not be anyone organized to stand up and fight to protect the industry.
Just this past March, the Securities and Exchange Commission (S.E.C.) met with crypto coin investors to discuss the possibility of regulating the currency as a security, which could cause a substantial drop in value.
Consider the example of Japan, which recently announced stricter regulations of cryptocurrency exchanges to prevent another Coincheck exchange hack — in January, attackers made off with $530 million worth of NEM tokens. Now, exchanges in Japan will have to keep customer assets separate from exchange assets. They will also have to monitor customer account balances serval times per day, and work harder to prevent money laundering by verifying customer identification for major transfers.
The Congressional Blockchain Caucus has “decided on a hands-off regulatory approach, believing that this technology will best evolve the same way the internet did; on its own.” However, consider the recent federal action to limit net neutrality, and the fact that various states have instituted taxes on Internet commerce. It is a sure bet that the “hands-off” approach will not last forever. Unchecked, state and federal regulations could significantly impede the growth of the cryptocurrency industry.
Over $6 billion of initial coin offerings has taken place over the past year. Most of these trades have happened on unregulated virtual currency exchanges. Free from the prying eyes of the Internal Revenue Services or other government agencies. It is only a matter of time before state regulators and the federal government will feel forced to take action, and likely pass complex regulation on the industry and the digital asset management community.
In fact, according to a report in the New York Times, Jay Clayton, the chairman of the S.E.C., has said that he believes almost every token issued through an initial coin offering should be registered as a security — almost none are, today.
As traditional investment houses like Goldman Sachs—which recently announced its plan to open cryptocurrency trading unit—look to invest large amounts of capital into cryptocurrency, the pressure to regulate the industry will only increase.
A group of investors calling itself the “Venture Capital Working Group” is trying to advocate for the industry. Led by Andreessen Horowitz, the group has been meeting with the S.E.C. and trying to push back against potential challenges to the industry. But this group might not be enough.
Consider that during the recent Federal Communications Commission comment period for the net neutrality fight, over 21 million public comments were submitted. And about five million comments we submitted to the Federal government about the TransCanada Keystone pipeline. This is how it’s done; harnessing vocal, well-organized public displays of support is how trade groups within mature industries fight to protect their financial interests.
Cryptocurrency is still a fledgling industry, and the industry needs to learn from other businesses about how to mobilize against damaging regulations that could depress prices.
Winter is coming to the cryptocurrency industry. Will anyone be ready for the storm?
Frank Rizzo is a Partner with Five Corners Strategies a public affairs firm that specializes in corporate and trade association advocacy.