Keeping Up With Kryptocurrency: How Governments and Regulators Are Catching Up With The Cryptocurrency Industry14 April 2023
When Kim Kardashian’s face splashed across our screens earlier this year (not itself an unusual occurrence, but this time next to the logos for the cryptocurrency altcoin EthereumMax and the US Securities and Exchange Commission (SEC)), one could be forgiven for thinking the law had finally caught up with the tumultuous and celebrity-fuelled world of cryptocurrency. The charging of Kardashian for violation of anti-touting rules under the US Securities Act 1933, arising from an alleged failure to disclose a $250,000 payment to promote EthereumMax on Instagram leading to a $1.26 million settlement, was a sign of increasing intervention in the cryptocurrency industry by governments and regulators around the world.
‘Cryptocurrency’ is an umbrella term used to refer to a diverse range of digital assets representing tokens for value and operating through blockchain technology. It is an industry that has grown at an unprecedented rate, although growth has been volatile: the value of the crypto asset industry reached almost $3 trillion in November 2021 before falling to less than $1 trillion in 2022. This volatility presents a significant risk to financial stability, as demonstrated by the aftershocks from the collapse of stablecoin TerraUSD and the cryptocurrency exchange FTX last year. There are also significant risks to consumers, who are targeted by ‘get-rich-quick’ advertising or social media endorsements and may not understand the underlying technology or market.
Governments and regulators are still in the very nascent stages of cryptocurrency regulation but have begun to take more forceful steps, such as the charging of Kardashian in the US and the proposed Markets in Crypto Assets (MiCA) Regulation in the EU.
Aside from a few outlier jurisdictions and ongoing debate about whether regulation provides a ‘rubber stamp’ for the industry, there appears to be an emerging consensus that the cryptocurrency industry requires greater supervision and regulation. In this regard, there are three key challenges ahead. The first is determining whether existing legal frameworks can be adapted to fit the cryptocurrency industry or must be replaced with new industry-specific laws and structures. The second is to strike a balance between protecting consumers while minimising the stifling of technological development. The third is to keep up with the rapid change of pace in this industry.
The European Parliament will soon vote on the proposed MiCA Regulation, which proposes a raft of old and new rules for the cryptocurrency industry. The draft borrows heavily from existing law on other regulated activities, such as the prohibition on media endorsements for crypto assets without proper disclosure of conflicts of interest. The draft also addresses some specific concerns about the cryptocurrency industry, for example by requiring certain industry participants to declare information about environmental and climate impact. The Regulation seems to be a positive development for consumers and other industry participants seeking regulatory approval, although would not come into effect before 2024.
In the US, legislators are grappling with how to differentiate between the responsibilities of different national regulators. The SEC has jurisdiction to deal with cryptocurrency transactions that are considered a security for the purpose of federal securities law, but does not have the power to regulate decentralised cryptocurrencies such as Bitcoin and Ethereum, being the two largest cryptocurrencies by market capitalisation. Meanwhile, the Commodity Futures Trading Commission (CFTC) has jurisdiction over cryptocurrency transactions involving a commodity for the purpose of the US Commodity Exchange Act, but there is no clear divide between them. This challenge has been identified in a recent report by the Financial Stability Oversight Council, and the raft of draft cryptocurrency bills introduced into US Congress this year included the frontrunner draft Digital Commodities Consumer Protection Act bill which proposed to give the CFTC primary oversight over the industry. This is an encouraging start, and we can look forward to seeing how legislators and administrators in the US will resolve these issues and begin implementing more comprehensive reforms.
Outside of the US and the EU, other jurisdictions are also adapting legal frameworks to address new challenges presented by the industry. The England and Wales Law Reform Commission have provisionally recommended that cryptocurrency be included in a new third category of personal property, although have not indicated whether they will follow the EU’s lead on reform. In Australia, the financial regulator is still considering whether to classify more cryptocurrencies as financial products, which would bring them within existing consumer protection and financial laws. Just like the rise of the computer index fund in the 1970s, it is understandable that regulators need time to understand new technological developments and ensure any legislative intervention strikes the right balance between protecting consumers and stifling innovation. In April 2023, it will have only been 3 years since Elon Musk first tweeted about Dogecoin. All things considered, governments and regulators have moved quickly. But this is a high-speed industry of ‘pump and dump’ price rollercoasters, million-dollar tweets, and anonymous transactions. If governments and regulators are to navigate the challenges ahead, policy-making will need to occur at a speed that can match an industry moving at an unprecedented pace. The early signs are promising. Now let’s see if they can keep up.