Can nations agree on cryptoregulation?

For the most part, blue-chip institutions have been forced to wait on the sidelines when it comes to entering crypto markets. There is no global consensus on a regulatory framework or rules of the game that provide the necessary clarity for a large institution to use capital.

Fortunately, we see signs that this seems to be changing.

US Sens. Lummis and Gillibrand have introduced a bill that will provide much of the necessary regulatory clarity that investors have hoped for. The law on responsible financial innovation will define many crypto-related terms such as smart contract, digital asset and virtual currency. The most important thing is that the bill will classify some cryptocurrencies as commodities and others as securities.

Under the current proposal, bitcoin and ether – which account for the majority of crypto’s market value – are likely to be labeled as commodities, while many other coins will be considered securities. Because regulators around the world have differing opinions on the issue of classification, this bill may help settle the debate. Once this framework is established, it will provide a basic basis for regulators, making it easier for other nations to replicate instead of starting with a blank canvas.

Global crypto-regulatory landscape

Looking around the globe, there is no clear agreement on how to regulate crypto. Nations span the spectrum – from making bitcoin a legal tender to trying to ban crypto directly and everything in between.

Central America’s El Salvador declared bitcoin a legal tender in September 2021, while the Central African Republic followed suit less than a year later. By embracing bitcoin, these nations hope to stimulate innovation, increase tourism and strengthen their largely unbanked or underbanked populations.

In the United States, the muddy waters of regulation are gradually becoming clearer. The IRS classified crypto as real estate in 2014, with relatively little regulation coming in since then. Some of these include the Financial Crimes Enforcement Unit, or FINCEN, which imposes new data collection rules for exchanges. Biden’s infrastructure bill also included a provision to classify stock exchanges as brokers, making them subject to anti-money laundering and anti-terrorist financing (AML / CFT) reporting and record keeping.

The state of New York recently introduced a partial ban on proof-of-work mining, while states including Wyoming, Florida and Texas have become milder, with Texas now hosting about 14% of the US total bitcoin hash rate.

And now, with new legislation on the horizon, some much-needed regulatory clarity may be within reach.

Lummis-Gillibrand and the CFTC solution

As mentioned, the Commodity Futures Trading Commission, or CFTC, is likely to gain regulatory authority over the majority of crypto’s market value if the law on responsible financial innovation is passed. For further insight into the implications of this, we spoke with David Mercer, CEO of LMAX Group, the operator of LMAX Digital, the leading institutional cryptocurrency exchange:

“The fact that this is a cross-policy proposal is a positive and important step forward for the entire global crypto community. A well-considered framework from a recognized regulator will support the institutionalization and growth of the crypto market currently hindered by offshore nature of trade and regulation. is a demonstration that decision-makers take crypto seriously. “

When it comes to CFTC vs. SEC debate, LMAX Group is decidedly agnostic:

“Although we do not have a strong view of the particular regulator, it is good news that globally respected ‘non-island’ regulators are considering their approach to regulating this incipient asset class.”

Is crypto a commodity, security or currency?

Legislators behind the Lummis-Gillibrand bill classify bitcoin as a commodity because the supply and network have no central governing body or team behind them. The profit potential of bitcoin is not linked to “other people’s efforts”, which means that it can fail the Howey test, and exclude it as a security. It is much more difficult to make a similar case for other coins.

Classifying bitcoin as a commodity would provide some much-needed regulatory clarity. Nevertheless, some argue that the CFTC does not have the same regulatory regulators as the SEC, making it more difficult for regulators to crack down on fraud and deception.

The vast majority of altcoins are likely to be classified as securities, given that most of them pass the Howey test, which the SEC uses to determine whether something is a security or not. The Howey test has four key figures:

• An investment of money
• In a joint venture
• People buy it with the expectation of profit
• The profit potential comes from the efforts of others

In contrast, Mercer said the LMAX Group views bitcoin differently.

“BTC is a currency, while Ethereum and other Tier 1 blockchains such as Litecoin may well fall under a securities or commodity umbrella; the tokenized or DeFi economy, including staking, appears to be securities, but they are also different in nature, so some may differ in the rights and returns they show. “

What nations need to reach regulatory consensus

If North American and European nations could all reach similar agreements on cryptoregulation, it could be the catalyst for significant amounts of capital to enter space. Other large economies, such as the BRICS nations and others in South America, Asia and Africa, could easily follow suit.

Or, as an alternative, it is possible that a growing number of nations can use bitcoin as a legal tender, and completely circumvent the need for regulation, at least when it comes to the world’s largest cryptocurrency.

David Mercer had the following to say about the case:

“Ultimately, our view is that the CFTC, or other recognized global regulators, will be excellent managers and supervisors of this new asset class and provide greater stability and integrity to the crypto market structure. We do not believe there is a need for a new regulatory body and all products and participants can be broadly accommodated within existing frameworks.

A well-considered initial framework from reputable regulators will give credibility to crypto and only help the institutionalization of the market.

Crypto and DeFi cross a broad cross-section of traditional finance, and it is likely that all regulators, the SEC, CFTC and the Fed will need to create a long-term framework.

This content is sponsored by LMAX.

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