ABSTRACT: Government regulation is coming. Here's what is possible in the near-term.
(If this article posted twice I apologize. I didn't see it come through on the platform, so just to be sure I posted again because I think the information is important to distribute.)
We've all figured out at this point that regulation is coming to the US crypto space, but how will that play out? How will it have an effect on prices? And what does it mean for you if you are a US investor? You can read the news, but what does it mean? Hopefully this article will shed some light on what's going on.
Considering that there is a deadlock in Washington, it is unlikely that we will realize any laws that are positive for the virtual currency space, if any at all, at the moment. This pushes the responsibility down to the regulatory level where the SEC (Security and Exchange Commission) and CFTC (Commodity Futures Trading Commission) will begin to figure out how current laws and regulations apply to crypto. In sum, the SEC will be focused on how the consumer or investor is effected and ensuring that consumer protections are in place - while the CFTC will be focused on the formulation of the exchange aspects of the market.
One of the biggest takeaways of the CFTC primer cited below is that:
There is no inconsistency between the SEC’s analysis and the CFTC’s determination that virtual currencies are commodities and that virtual tokens may be commodities or derivatives contracts depending on the particular facts and circumstances.
In short we will likely be seeing more of...
- Rolling blackouts of accounts on online exchanges while those exchanges attempt to fulfill SEC & CFTC requirements.
- Damage done to current market cap levels due to perceptual change in how virtual currencies relate to the world.
- ICOs will, in the shorter-run, be inaccessible to US citizens until expensive guidelines are set to be fulfilled by companies hoping to have an ICO. (Think how expensive it is to have an IPO in the stock market.)
- If virtual currencies are seen as a commodity then it is possible stringent regulations will be put in place that currently have an effect on every other commodity, e.g. limit to sell or buy orders, limits to percentage control of market, and futures contracts formulation.
- A potential Bitcoin ETF is pushed further down the road, thus hurting overall potential market liquidity in short-term. (For further reading: The Potential Future of Crypto Prices, and the Effects of the Hunt for Yield)
CFTC and Margin Trading
BitFinex is closing its doors to US clients, but it can be surmised as being largely predicated on its use of margin trading, which is in the CFTC's wheelhouse. Margin trading is where a loan is made by a broker for a smaller amount of principal capital, this loaned capital is used to trade on their exchange, increasing both gains and loses. Specifically, the CFTC is concerned with markets where margin trading is used. Cash-secured markets like Bittrex remain somewhat out of their orbit, but that could change moving forward. Cash-secured is where trades are made with no margin used.
Conclusions
For the moment, there will be more growing pains in the cryptocurrency space because it remains an organically grown market. One can only hope that regulations do not completely wipe innovation out of the fledgling space. One big thing is that these regulations could dampen technological advancement in the space as more resources are devoted to compliance instead of development. On the other hand, new derivatives markets could be made available as in futures, which could create more stable currencies that would lead to enhancing adoption rates.
And regulation is not necessarily a bad thing, but if it blasts virtual currencies and tokens to smithereens by making them too expensive to deploy there will be a definitive drag effect in the space. Especially with the lack of directly related law-based guidance (legislation) it will be a matter for the determination of the courts further down the line to determine what will happen. Unfortunately, this also has a massive drag effect on the space in terms of resource deployment. If benign neglect gives way to overzealous consumer protections then things could get ever rockier for overall prices.
One thing we can be sure of is the technology is good - even Bernanke says so, but he does not have a vote anymore, which is good because he also spit on Bitcoin.
We're all gonna make it!
Minderbinder
For further reading please see Government, Regulations, and Cryptocurrency Space.
Sources:
CFTC. 2017. Commodity Futures Trading Commission: Primer on Virtual Currencies
[Disclaimer: All the opinions expressed in this article are my own and are in no way meant to be construed as investment advice. Please exercise your own judgement in any investment or money management ideas that you happen to undertake. All images come from either personal files or websites that allow free images and each has an inline citation for reference. Good luck out there!]