At $6,096, Bitcoin hit its highest price of the year on May 9. All this despite a $40 million hack earlier that week, a call from a Nobel laureate to ban all cryptocurrencies, and continuing signals from the Securities Exchange Commission that regulatory guidelines on digital assets were imminent.
Yet the market apparently sloughed off the bad news after Fidelity Investments announced that it would launch Bitcoin trading on behalf of clients in coming weeks, serving notice to central bankers and old school economists that cryptocurrencies like Bitcoin, Ether, Litecoin and XRP are not going away.
That’s why the sooner agencies like the SEC start treating cryptocurrencies like the tools of exchange they are, and not a variant of stocks and bonds, the better for investors and the digital economy as a whole. More so when we consider the risks that siloed regulation of the cryptocurrency application will have on blockchain, the underlying technology infrastructure that supports it. Undercutting blockchain innovation would be disastrous not only for the future of finance but technology as a whole.
Bitcoin is not a security
Cryptocurrency is digital cash. While it has value, it neither represents an ownership share, as stock does, or a redeemable debt, as bonds do. While cryptocurrency is traded on the open market where its price can fluctuate, that does not make it a security. In fact, purchase and sale of Bitcoin is more like foreign currency exchange, which the SEC does not regulate.
Yet that has not stopped SEC Chairman Jay Clayton from hinting at classifying many cryptocurrencies as securities and placing them under rules that govern conventional securities trading, rules that won’t mesh with the healthy function of the cryptocurrency market and will likely hurt investors and damage cryptocurrency growth and utility.
Clayton justifies SEC mission creep in the name of protecting investors from market manipulation. While the Bitcoin market has been volatile, analysts have argued that data does not support claims of manipulation.
Consequences for blockchain
While the policy debate centers on cryptocurrency, hasty regulation will, by extension, adversely affect the development of blockchain, the network technology that makes cybercurrency work. In cryptocurrency applications, blockchain creates a virtual permanent ledger of transactions, distributed across the Internet. That distribution makes it difficult to impossible to tamper with the validity of Bitcoin or debauch or counterfeit the currency.
Beyond that, blockchain can do much to safeguard privacy and security of personal data on the Internet without decreasing the value of networked applications. For example, one of the toughest problems in health care is protecting the privacy of electronic health care records but allowing physicians to access those records in an emergency. Blockchain provides secure solutions in these situations.
Right now, the U.S. is a global leader in blockchain technology, thanks to much that has been learned from cryptocurrencies. But the Chinese are actively working to develop blockchain technology and corner the cryptocurrency market – particularly in mining Bitcoin. China has been a forceful opponent of transparency and privacy since the invention of the Internet, which has rapidly grown to combine artificial intelligence and ubiquitous wireless service. China is using these latest techniques to monitor and track citizens in unprecedented ways. The Chinese carrier Huawei already has more than 1,000 patents–37%–on Fifth Generation (5G) wireless, the core of the so-called Internet of Things. The U.S. is not alone in their concern about Huawei’s aggressive push to standardize 5G around its patents and exactly how Huawei, which has a history of ethical problems, will process the data it will collect from millions of interconnected sensors, cameras and devices. As the U.S. and China compete to develop next generation technologies blockchain stands to be a critical counterweight against abuse and is crucial that the U.S. remain the leader in blockchain innovation. That will require a U.S. regulatory framework that nurtures innovation, not hampers it.
Pointedly, China prohibits the use of cryptocurrency by citizens, but it tolerates massive server farms that now account for 74% of Bitcoin mining. While the Chinese government recently called for a ban on cryptocurrency mining, it has yet to give the decree the force of law. Even if it did, bureaucratic loopholes would prevent enforcement. This will only further centralize control over cryptocurrencies mined by the Chinese.
Preserving the U.S. position as a global leader in technological innovations is critical to maintaining our economic advantage with things we ourselves develop. That’s why the SEC’s attempt to place cryptocurrencies under decades old regulatory regimes is concerning. Such moves could have unintentional consequences beyond investment markets. The bullish market shows digital currency is becoming an accepted financial tool. Siloed approaches no longer work. Regulation needs to be thoughtfully crafted with the knowledge that in today’s digital economy pulling on one thread affects so many others.