Challenges and Opportunities in Regulating Cryptocurrency

Sergio Juwa
Associate Editor
Loyola University Chicago School of Law, J.D. 2019

Many nations are increasingly attempting to regulate Bitcoin and other forms of cryptocurrency. Increased regulation could help legitimize the currency, but uncertainties about what regulation lies ahead threatens the value of the currencies. A main driver of the increased value of cryptocurrencies is the potential for increased usage in markets globally and greater integration of them into our economy. Regulation may be essential to successfully enabling such integration, because with instability in trade and valuation of the currency it is hard for consumers to know whether they should be spending the currency, or if it will dramatically change in value over the course of a short time period.

Cryptocurrencies are digital tokens used to transfer money between individuals’ computers, and their peer-to-peer structures enable unanimous transfers. Unanimous transfers are one of the benefits of these currencies, but also problematic as it makes the currencies and their tokens harder to trace when used for illicit purposes. The traceless nature of cryptocurrencies is one of many concerns that governments seek to address through increased regulation.

Some regulation is intended to hinder Bitcoin growth. As a result, China has become increasingly unpopular as a Bitcoin trading country. However, the United States has begun recognizing cryptocurrencies as forms of securities when they meet certain tests. Japan and South Korea seem to have more optimistic outlooks on the future of cryptocurrencies, and as a result have seen increased trade of their currencies for Bitcoin. Japan legalized Bitcoin in April, 2017, and accepted it as a legitimate form of currency. It has since been working on regulating cryptocurrency exchanges, focusing primarily on changes impacting consumers including potential requirements for exchanges to have minimum capital holdings and positive net assets. Their goal is to streamline the exchange process for domestic uses and is not currently targeting international uses of the currency. Although, such regulation is expected to emerge in the future. The regulatory changes and shifts in trading with different currencies evidences the volatility of cryptocurrencies and is strong evidence that such regulation is necessary to protect the market.

It is becoming increasingly vital to regulate cryptocurrencies due to their ever-increasing influence in the economy. Bitcoin, the largest digital currency, recently exceeded an exchange rate of over $5,000, and 11 other forms of cryptocurrency compose more than a $1 billion market. The cryptocurrency capitalization is up to $150 billion, up eight times this year alone. Optimism about wider spread usage of the currency continues to raise the exchange rate; however, a result of the increased prices makes the actual use of cryptocurrencies impractical. Making purchases with the currency becomes risky when there is potential for the currency to appreciate after spending it.

Cryptocurrency has become increasingly entwined with other financial markets. Even large scale financial institutions like Goldman Sachs are considering trading the currency. Concern of a bubble in the market isn’t just an issue for investors, it is a potential economic problem with broad implications. A negative outcome could harm investor sentiment towards other investments, particularly those related to the technology sector. Other forms of cryptocurrency market integration such as bitcoin ETFs will be tricky to regulate as well. No mutual funds or ETFs currently invest in bitcoin in the United States, but some financial institutions are interesting in putting such funds on the market. Regulatory approval of such funds could help legitimize the cryptocurrency, and denial of such funds could reduce investor confidence and reduce its value. Creation of such funds would further link cryptocurrencies to other financial markets and cause price fluctuations and market hazards to impact the United States economy more directly.

Cryptocurrency has already become incredibly widespread and seen more success than many had ever expected. In order for cryptocurrencies to experience continued growth, they will need to aim for greater integration with other financial institutions and more opportunity for investors to use the currency. However, instability in pricing and a potential bubble burst in the market has created a lot of risk that will need to be mitigated for this to occur. Further regulation also tends to lower the value of cryptocurrencies, at least in the short term. The Securities and Exchange Commission will have to successful find a way to create some stability for the currency without causing too much depreciation because as the market cap for cryptocurrencies increases the harm to the entire economy which may result from any potential fallout will increase as well.