How Regulators are Tackling the 'Wild West' of Cryptocurrency

2021 was a major year for cryptocurrency. We witnessed all-time-highs and steep plummets, but one clear trend amongst the volatility is that public discussion on the topic reached hitherto unseen levels. This was fueled by such diverse factors as bitcoin upgrades, NFT artwork, China’s September ban, and Elon Musk’s SNL antics.

The spotlight has carried on into 2022, and not always for favorable reasons. The market had been predicted to grow at an annual rate of nearly 13% until 2030, meaning that regulators were paying extra attention to an industry that has regularly been labeled ‘ungovernable’. The dramatic crash of January 2022 brought further attention; with approximately $1.4 trillion wiped from the combined crypto market, more eyes were on crypto than ever before.

Issues with Crypto

The clamor to take control of crypto is an inconvenient necessity for regulators, given its reputation for being so difficult for them to deal with. 

Current SEC Chairman Gary Gensler likened the cryptocurrency market to the “Wild West”, labeling it an asset class “rife with fraud, scams, and abuse”, and claiming that investors don’t have enough regulatory protection. He explained, “There’s a great deal of hype and spin about how crypto assets work. In many cases, investors aren’t able to get rigorous, balanced, and complete information.”

There are, of course, always perspectives to consider. Crypto’s decentralized nature challenges the fiat currency system, and weakens a government’s control over the economy. A central bank is no longer required because peer-to-peer transfers can be made between parties, and so intermediaries become redundant. The crypto setup therefore does away with these intermediaries (banks, financial institutions) and, by extension, the elements of a government’s system through which it can exert influence. It would be fair to say that a rebellious streak naturally courses through cryptocurrency; it challenges long-established systems, and government authority. 

The market has often been charged with claims of insufferable volatility. This has seen it likened to the Gamestop trading saga, where social media influencers used aliases and carefully cultivated Reddit boards to manipulate the market in a seismic way. While this particular scenario occurred in the regular stock market, the comparison certainly does crypto no favors, given the anger it elicited from traditional institutions that were incensed by the outcome.

Taxation is another complication, although not just for the underhand reasons that one might expect. As Scott Duke Kominers, Associate Professor of Business Administration at Harvard Business School explains “Another basic challenge is around taxation of crypto income. This isn’t just about tax avoidance concerns — a lot of people would like to pay taxes on their crypto but have absolutely no idea how to do so.”

Due to its inherent characteristics of decentralization and anonymity, criminals have naturally flocked to crypto as a ‘clean’ currency to be used for illegal activity. There is also the significant environmental impact of crypto mining to take into account -  cryptocurrencies require staggering levels of energy to process the data associated with mining. Approximately 30 kilotons of electronic waste are annually produced as a byproduct of Bitcoin mining.

While there are certainly ethical issues to be considered, there is also a narrative unfolding which is difficult for a capitalist society built on The American Dream to derail; that of the little guy sidestepping the well-trodden path in pursuit of individual prosperity. However, governments are certainly prepared to use whatever tools are at their disposal to reassert control over the economy.

A Global Crackdown 

In recent months, we have seen crypto-focused measures taken in many nations across the globe, with varying levels of urgency and severity.

China occupies the more decisive end of the scale. In September 2021, the Chinese Central Bank decreed that any cryptocurrency transactions conducted within their borders were now illegal. 

In January 2022, UK Chancellor Rishi Sunak shared the UK Treasury’s plans to tighten regulatory standards around the industry.  The Treasury said it would bring crypto ads under the scope of existing legislation that covered financial promotions, adding the Financial Conduct Authority (FCA) to its list of regulators. The Treasury was keen to stress that its aim was to increase consumer protection from ‘misleading’ promotions, but not at the expense of innovation.

Gary Gensler became chair of the SEC on April 17th, 2021, and the organization has magnified its focus on the cryptocurrency market under his tenure. He has asked Congress to pass legislation giving the SEC the authority to monitor crypto exchanges, and just one month after his appointment, the SEC sued five individuals who helped raise over $2 billion from investors, in one of the agency’s then-largest digital asset cases. Similar enforcement actions continued as the year progressed, but the market crash at the start of 2022 elevated the regulations and sanctions to another level entirely.

White House Executive Order

Following January’s crash, it was reported that the White House had begun preparing a cryptocurrency executive order that we can reportedly expect to see imminently. To shape this, President Biden has requested for various federal agencies to assess the risks and opportunities posed by digital currencies, and delve into the details of a central bank digital currency. 

The intention is to look at the impact of digital assets on financial stability, and to review standardizing crypto regulations with other countries. What those regulations will entail is not yet certain, but based on the UK admitting the FCA into the fray, there is a good chance that US crypto standards will fall more in line with their FCA equivalents, the SEC and FINRA, and their rules governing financial services institutions. 

Jaret Seiberg, a financial services analyst at Cowen Washington Research Group, claimed that the administration’s involvement is, “symbolically significant, as the White House is acknowledging that crypto is becoming economically important. The White House would not issue such an order if it wasn’t convinced that crypto will continue to grow and spread throughout the economy,”

This assertion is supported by the work being done to address the environmental issues afflicting cryptocurrency. New methods for validating crypto transactions are being developed and implemented to reduce its tremendous energy requirements. These include proof of stake, proof of history, proof of elapsed time, proof of burn, and proof of capacity. None of  these alternatives rely on extensive computing power, reducing the ethical liability over the energy-sapping process known as proof of work, and suggesting that crypto is anticipated to be here in the long term.

Tightening the Leash

In its short lifetime, cryptocurrency has managed to operate outside the authority of the strictest watchdogs for a variety of reasons. These include its fragmented, decentralized nature, its uncertain status as a legitimate currency, and resistance from within the relatively rebellious and tech-savvy crypto community.

The spotlight is now shining more brightly as crypto has infiltrated the zeitgeist, rendering it impossible for those invested in a traditional economic system (i.e. governments) to ignore it without sacrificing a fragment of control.

While cryptocurrency has many detractors, it is a polarizing market, and its number of supporters is growing. January’s crash has again demonstrated its unpredictability, and matters appear to have escalated to a point of imminent regulatory overhaul. The White House Cryptocurrency Executive Order is bound to be quite a read.