The brave new world of Bitcoin
Given the convenience of established currency and payment systems, what is driving the ever-growing interest in Bitcoin and other virtual currencies?
Interest comes from a confluence of several factors. The recent increase in the price of bitcoin showcased the status of this virtual currency as an asset class for investment. There has been a significant increase in hedge funds investing in virtual currencies and retail investors are also investing in and trading the asset. Further, trading markets are emerging – for example, the CBOE Futures Exchange (CFE) and the Chicago Mercantile Exchange (CME) have begun offering Bitcoin futures. Although it has not been widely adopted in US consumer and retail transactions, virtual currency may become increasingly attractive to consumers because of data security concerns and the possibility of lower transaction fees. At the international level, China, India and Japan have seen a growth in virtual currencies – partly as an alternative to the US dollar. A unit of the People’s Bank of China has even actively promoted the application of blockchain technology, and large institutions in Japan are beginning to accept digital currency as a transactional entity. Bitcoin and some other virtual currencies are decentralised, which means that they operate independently of a third-party institution. This is a revolutionary innovation that has piqued the interest of many participants and observers. The essence of bitcoin and other technologies running on the blockchain is that there is no centralised authority for transactions and record keeping – instead, there are multiple inputs (ie, computers) verifying and approving transactions by majority. As such, Bitcoin and other cryptocurrencies represent a way to transfer value without reliance on established institutions. This means that virtual currency transfers on the blockchain tend to be faster and more reliable as they are not subject to human error, confined by local regulations or vulnerable to tampering.
Has your jurisdiction taken steps to regulate virtual currencies? What is their current status?
In the United States, regulation is emerging from several sources. Regulatory challenges include the regulators’ inability to trace virtual currency transactions, territorial limitations in the scope of US regulators’ jurisdiction and the absence of any central regulatory authority.
The Securities and Exchange Commission (SEC) is concerned that the offering and sale of virtual currency (or ‘tokens’) is a sale of a security under the Securities Act of 1933 and that there be compliance with offering regulations, including providing appropriate disclosure to investors in order to prevent fraud. The chairman of the SEC has released statements on the rise of cryptocurrencies (see www.sec.gov/news/testimony/testimony-virtual-currencies-oversight-role-us-securities-and-exchange-commission and www.sec.gov/news/public-statement/statement-clayton-2017-12-11) and the SEC has published an investor bulletin on the topic. The SEC will also use its investigatory and enforcement powers to prevent fraud; in a recent example, it charged a former Bitcoin-denominated platform and its operator with fraud (see www.sec.gov/news/press-release/2018-23). The SEC has also brought enforcement actions resulting in the receivership of currency issuers.
In addition, the Commodity Futures Trading Commission views cryptocurrencies and derivative contracts based thereon as commodities in certain circumstances (see www.cftc.gov/sites/default/files/idc/groups/public/documents/file/labcftc_primercurrencies100417.pdf).
The US Treasury Department’s inspector is involved in reviewing the Financial Crimes Enforcement Network’s (FinCEN’s) cryptocurrency practices as they relate to money laundering and terrorism financing risks. FinCEN’s Guidance FIN-2013-G001 can be viewed here.
State regulatory authorities are also taking a role in regulating virtual currencies. For example, the Conference of State Bank Supervisors (CSBS) has formed the CSBS Emerging Payments Task Force to examine the intersection between state supervision, state law and payments developments and to identify areas for consistent regulatory approaches among the states. In addition, the National Conference of Commissioners on Uniform State Laws has developed a Uniform Regulation of Virtual-Currency Businesses Act to provide a statutory framework for the regulation of companies engaging in “virtual-currency business activity”.