As the price of Bitcoin, which is currently valued at over $10,000 per coin, continues to see exponential rise, economic connotations about the mass-scale adoption of cryptocurrency have emerged in in the public’s imagination over the last two or three years, as many industry thought-leaders and business titans have been publicly supporting the effort to develop key pieces of technology on the blockchain distributed ledger network. Using these new virtual ecosystems to securely manage transactions without relying on central third-party institutions, the tech community is attempting to change the way finance works for merchants, consumers, and for individuals in developing countries (Bernard, 2017). These efforts are aimed at empowering the world with long-overdue advancements in global monetary systems. This is the first time since the 17th century that new economic systems have been developed as an alternative to representative and fiat currency.
However, the digital world we live in requires that we use our advanced technological knowledge to improve every aspect of our lives. The way in which we store value and conduct transactions should certainly be no exception. Resulting from recent calls for monetary reform and the public’s growing mistrust towards central authority, financial institutions are beginning to fundamentally reassess the ways in which they will continue to conduct business and serve customers in the future. Indeed, the race to regulate Bitcoin and other cryptocurrencies, especially within the Initial Coin Offering (ICO) market has been more of a marathon than a sprint, with many hurdles along the way.
In recent months, over 30 global regulators announced their various approaches to token sales and coin offerings (Wintermeyer, 2017). This emerging space is full of promise, as well as potential pitfalls during its infancy, as government regulations are sure to come down and stir the pot. There is Japan for example, which has 11 Bitcoin exchanges under tight regulation (Bernard, 2017). These exchanges effectively control over 60% of the global Bitcoin market (Wintermeyer, 2017).
The Chinese government, however, has banned the sale of crypto currencies and tokens all together. There are other countries making moves in alternative directions as well. To name a few: Abu Dhabi has offered guidance on regulating cryptocurrencies and ICOs on an individual case basis; the United States’ Securities and Exchange Commission (SEC) has declared that ICO tokens are subject to federal security laws (Wintermeyer, 2017). The Commodity Futures Trading Commission (CFTC) has announced that crypto assets may also be commodities; and, Switzerland and Singapore are leading the ICO market as popular destinations for startups seeking to raise funds using tokens (Wintermeyer, 2017).
While these crypto currencies have certainly introduced some fascinating concepts, accountability concerns continue to linger regarding the exchange of illegal drugs, arms, and other kinds of black market activity. Some influential parties have argued that Bitcoin and other cryptocurrency transactions on the blockchain ecosystem can stay under the radar of the authorities. Indeed, that is a potential downside, but there is a growing number of individuals who offer a contrarian view on the subject. Many public figures have spoken out in favor of Bitcoin and its alternatives, claiming that these digital coins have a great deal of potential to become a new fiat currency one day (Bernard, 2017). However, the most obvious concern is that people will begin using Blockchain currencies to buy big-ticket items in an effort to avoid taxation.
So, the argument really cuts both ways here. I believe the most important question will be if these kinds of cryptocurrencies are successful, what is the temptation of governments to step in with regulations, to what extent would these measures affect its’ progress? It's certainly been very interesting to watch the migration of regulatory interest across the space. First, back in 2013 we had law enforcement begin to take a public interest in regulatory measures with the rise of Silk Road and the online dark web due to its use of Bitcoin (Bernard & Eha, 2017).
The astronomical growth of the crypto market over the past few months has made headlines across the globe, with Bitcoin alone reaching $190 Billion, and global market charts capping out at over $350 Billion, securities regulators have been paying close attention to the up-swing in prices (coinmarketcap.com). In fact, White House press secretary Sarah Huckabee Sanders made this revelation during a press conference last Thursday. “I know this is something that is being monitored by our team here,” (Huckabee, 2017). This statement was made in response to a Buzzfeed reporter’s question about whether President Donald Trump believes bitcoin should receive increased regulatory attention from the government. However, tax authorities are next in line to start getting involved. Mick Mulvaney, White House budget director and acting director of the Consumer Financial Protection Bureau, co-founded the bipartisan Congressional Blockchain Caucus, a bloc of lawmakers who seek to promote cryptocurrency usage at the federal legislative level (Wilmoth, 2017).
As Crypto Coin News reported, the Blockchain Caucus recently introduced the Cryptocurrency Tax Fairness Act of 2017. If passed, this bill would eliminate reporting requirements for cryptocurrency transactions worth less than $600 (Wilmoth, 2017). With regards to the law enforcement question, it’s really a double-edged sword for authorities. On the one hand, these currencies do enable privacy on dark web transactions and large sums of money can be anonymously exchanged across borders.
On the other hand, when law enforcement catches a criminal who's been using Bitcoin, and they get ahold of their software wallet, the District Attorney’s office effectively gets a full catalog of the perpetrator’s books. As a result, they may have a good chance of recovering some, if not all the funds. That's certainly not something they get with a cash criminal, where there isn't record-keeping. Therefore, law enforcement can use the blockchain to prosecute cases, and that potential has led some jurisdictions to steadily become more open to seeing crimes committed using blockchain technology (Eha, 2017).
It does, in fact, give parties involved in the effort to stop cyber-crime a discernible advantage over cash crime because it's a very transparent technology. In my opinion, that is an extremely compelling point in favor of the crypto community. Just because transactions are encrypted doesn’t mean there is no specific tag to identify and track transactions to and from each user’s wallet.
As pressures continue to grow, the speculation also grows as to what kind of threat that is to Bitcoin, and whether it can find a way to evolve with this kind of supervision & regulation from the outside. This has certainly attributed to increased volatility in the crypto markets as of late. However, it would probably be fair to assume that the people who started this whole thing don't like the state, they don't like authority, and they really want to be on their own. As we will inevitably see an encroachment on these innovative new currency approaches, alternative financial mechanisms will hopefully emerge to counteract any restrictions on progress.
The regulation of exchanges began in the spring of 2013, and initially it was a disaster. This was mostly attributed to legislators’ limited knowledge about how the Blockchain works, and what intrinsic benefits this technology could provide to all of humanity. A few influential parties have publicly stated that we would have been much further along without these regulations, claiming that this is the main way the government can control the use of Bitcoin. In my opinion, the government is not actually controlling Bitcoin.
What they're doing is controlling the traffic between national monies, in terms of what crypto assets are coming and going, and the United States has some of the worst regulations in the world on these exchanges. Tax regulators want to see these exchanges’ books, they want to see names, and they want to see transactions. Last week, U.S. Magistrate Judge Jacqueline Scott Corley in San Francisco ruled that the tax agency’s demand for information isn’t overly intrusive (Rosenblatt, 2017). The reality is that these crypto markets are global and new technology needs new legislation to match it.
The government may need to stop trying to put digital technology into an analog old-world style regulatory framework. It is obvious that whatever is being done about the regulatory roadmap is not working towards any definitive outcome. All these efforts are really doing is driving the innovation out of this country and to other places. In fact, people can buy Bitcoin much easier in a place like Israel then anyone can in the United States or in Brazil (Rosenblatt, 2017).
There are exchanges all over the world. Most of them are very free and easy to use, and there's a lot of entrepreneurship and innovation sprouting from more open policies. Instead of focusing on policies that effectuate command and control, American regulators should consider taking their efforts in a different direction because they're just going to continue driving the capital outside of our borders (Eha, 2017). What is important to remember here is that Blockchain is a decentralized global technology, and it doesn’t care about the nation-state.
Bitcoin and all other crypto assets are already being recognized as a major threat to the all mighty dollar (Eha, 2017). This is obviously something the U.S. doesn't want to have happen. However, the days of U.S. dollar hegemony are very limited, as more bills are printed every year, and the value of our currency continues to degrade along with continued inflation. Before the United States became the reserve currency back in 1913, when they created the Federal Reserve, the British Sterling was the reserve currency of the world for over 300 years (Wintermeyer, 2017).
Some would even argue that the United States responsible for the petrol-dollar, and going off the gold standard during the Nixon era. There is a compelling amount of evidence to suggest that this has caused market distortion as a result. In fact, one might even go so far as to say that central bank policies over the past 10 years have been a great deal more destructive than constructive. Personally, I don't see that we've created growth for the trillions of dollars in debt that we've created.
As we saw in the last administration in Washington, big government is in right now. Indeed, our government is enormous, and they naturally want to overreach everything, and every part of people's lives in America. However, the only way to do that is to get an iron fist on the banking system, and make people keep all their money into a bank. This is a very dangerous thing, and that's why people are migrating to other platforms.
We're at a point in history that could be very pivotal in terms of how we move forward with financial reform. The biggest problem that people have with the government’s efforts to get a foothold on cryptocurrency is that it chooses not to regulate companies like Amazon, which dips its fingers into every different business, or companies like Facebook & Google which have become oligarchies, basically controlling the content that everybody sees and hears. This is where the regulatory agencies should be looking rather than seeking to control people's currency movements, or what they choose to invest some of their wealth into. Regulators should also look at controlling the news entities, because as the primary source of information in this country, news syndicators have morphed into more opinion and political advocacy groups than seekers of truth.
Without getting to deep into politics, I will just end with this. 160 companies used to control the media, and now it's down to 6 (Wintermeyer, 2017). One of the things I find appealing about Bitcoin is that it seems to promote ethical consensus in entrepreneurial development, which I think is a very good thing. While it certainly appeals to people that want to get out of the system and away from regulation, is it fair to say that this these cryptocurrencies would be good for innovation overall.
I don't think anyone doubts that Blockchain technology has many potential benefits for mankind, and truthfully, people can argue about how bad the regulation is, but in certain markets there's been a very pro cryptocurrency attitude because of the fundamentally innovative aspects of its’ underlying technology. People are taking a much lighter touch in Switzerland, the UK, and elsewhere because of the amount of investment that's coming in to make faster, cheaper, and more tangible ways that we can make use of Blockchain technology (Wintermeyer, 2017). It’s not just about the technology itself either, but also the new funding channels that are now opening. The Initial Coin Offering (ICO) phenomenon on the aspiring new financial market for Decentralized Autonomous Organizations (DAO) has taken off this year thanks to smart-contracts and proof-of-stake consensus ecosystems provided on the Ethereum network.
Ethereum's vertical iteration of the blockchain architecture was initially launched on July 30th, 2015. The concepts it introduced, such as self-executing contracts and the position to achieve transactional consensus for the exchange of cryptocurrency, were the brainchild of Russian programmer Vitalik Buterin, who developed the idea when he was only 19 years old. While Ethereum investors have enjoyed over a 5,000% increase over the past 12 months, the altcoin market that it has garnered remains highly volatile, mostly as the result of a few clearly fraudulent projects. At the same time, the business applications of Ethereum are not limited to any fixed complexion or size.
ICOs are opening access to early-stage technology by maximizing crowdsourcing opportunities at the seed stage of development. Thanks to Ether’s platform and others like it, the stakes are open to anyone around the world with an internet connection. Funding ideas used to be something you had to be a rich venture capitalist to be able to do. Now, if you have a computer and some cryptocurrency, you can invest in early-stage technology that may come with a high level of systemic risk in the short run, but that risk is balanced out by exceptional profit opportunities in the long run (Eha, 2017).
Personally, I would urge anyone with investment incentives to pay close attention as this extremely disruptive space is likely to continue stirring the financial pot in unexpected ways. Despite the potential of these Initial Coin Offerings, they have been smeared by the mainstream media and financial press lately. It may be true that there are some rackets, but the fact remains that ICOs are an amazing innovation that allow people to rate any business, raise money from anyone in the crypto-community without using financial intermediaries, and test markets before launching a fully developed concept or project (Eha, 2017). The amount of innovation and capital that is going to be unleashed on the planet as a result, is beyond comprehension.
It's inconceivable what blockchain technology could do to transform the nature of capital markets themselves over the next 10 years. The issue is that the crypto market, by which I mean the entire blockchain community, is still very much in its development stages, and because of this, some might compare it to the virtual wild west, just like the internet was in its early days. Market valuations are marked by steep exponential rises and sharp pullbacks. Because of this, Bitcoin has been labelled a speculative bubble by many, including former Fed Chairman Alan Greenspan and economist John Quiggin (Eha, 2017).
Yale economics professor Robert Shiller, who won the Nobel prize for his work on bubbles has weighed in on this issue as well (Detrixhe, 2017). He wrote a seminal book on speculative manias, Irrational Exuberance, a deep analysis of the dramas over the centuries when otherwise sane people drove prices for tulips, stocks, and houses to inexplicable heights (Detrixhe, 2017). As Shiller sees it, “big things happen if someone invents the right story and promulgates it,” (Shiller, 2017). Also, major financial players such as J.P. Morgan and Goldman Sachs, who are being infringed upon, and are unable to collect their fees when these offerings come out, have been spreading propaganda to incite uncertainty and mania into the market (Rosenblatt, 2017).
What happens is someone makes a public example out of one ICO that fails, and the media blows it up into epic proportions. The next thing you know people are pouring onto exchanges trying to dump all their crypto assets at once, and the server inevitably crashes. The volatility and socially-officiated mania surrounding the market is contrived from people’s lack of knowledge about this new virtual space, as well as their obvious desire not to get ripped off. So, the banks push for regulation under the incentives of self-preservation.
They justify it with any example they can come across, telling people that the money they invest through something should be vetted by them first. The reality is that no matter what any authority or regulator tries to do, a growing number of people, especially Millennials, are opting to take managing their wealth into their own hands. When a new global technology emerges that aims to address such a fundamental aspect of our lives, there will always be winners and losers. People simply need to keep things in a clear, practical perspective in terms of risk and reward.
In other words, don't go out and mortgage your house and put everything into Bitcoin, or an Ethereum ICO, but look at this as a portion of your diversified portfolio. Many experts such as cyber security pioneer John McAfee and billionaire media mogul Mark Cuban have recommended investments of no more than around 10% of your savings into Bitcoin. When you get into a high-risk investment like an ICO, it is important to always do your own homework and don't ever invest in anything you don't fully understand. If you don't fully understand it, and you invest in it, then you deserve to lose what you lose.
As for the question of what Bitcoin and other similar currencies must do to create confidence in people who just see it as too risky, perhaps one or two steps they need to install would be patience and education (Eha, 2017). The diffusion cycle of mass-scale adoption most definitely applies here, and we can use the early 90s as an example of our collective adoption curve for profound technologies. The blockchain market is certainly in the infrastructure building phase. As for cryptocurrency and crypto commodities, just last week there were three major exchanges that experienced significant problems when users tried to sign on and exchange currencies; Coinbase, which coincidentally gained over 100,000 new accounts within a 24-hour period, & Gemini exchange, which is run out of New York by investment magnates, the Winkelvoss twins. Considering these two exchanges will be relied upon by the CME Group for their futures market, that simply can't continue to happen (Rosenblatt & Eha, 2017).
For this to be taken seriously by institutions, and for Bitcoin to be trusted by a broader class of individual, more capital market infrastructure, and the right balance of regulation is needed. I agree with the comments about only putting what you can afford to lose into this, because it is still very new, and consequently, very high risk. However, if the past year is any example of where Bitcoin and Blockchain is headed, we’re certainly in for an interesting ride.
References:
Wintermeyer, Lawrence. The Race to Ban or Regulate Bitcoin and ICOs. The Little Black Book of Billionaire Secrets. Forbes. October 15, 2017. https://www.forbes.com/sites/lawrencewintermeyer/2017/10/31/the-race-to-ban-or-regulate-bitcoin-and-icos/#48c29f9a100d
Wilmoth, Josiah. The White House is Monitoring Bitcoin: Press Secretary Sanders. Cryptocoinnews. December 2, 2017. https://www.cryptocoinsnews.com/white-house-monitoring-bitcoin-press-secretary-sanders/
Rosenblatt, Joel. Bitcoin: Coinbase cryptocurrency broker loses bid to stop US tax probe. Independent. November 30, 2017. http://www.independent.co.uk/news/business/news/bitcoin-coinbase-cryptocurrency-broker-us-tax-probe-irs-jacqueline-scott-corley-san-francisco-a8085156.html
Bernard, Zoë. Everything you need to know about Bitcoin, its mysterious origins, and the many alleged identities of its creator. Business Insider. Tech Insider. Dec. 2, 2017. http://www.businessinsider.com/bitcoin-history-cryptocurrency-satoshi-nakamoto-2017-12
Eha, Brian Patrick. Can Bitcoin's First Felon Help Make Cryptocurrency a Trillion-Dollar Market? Fortune. June 26, 2017. http://fortune.com/2017/06/26/bitcoin-blockchain-cryptocurrency-market/
Global Coin Market Data. https://coinmarketcap.com/charts/