Cryptocurrency Forces Government to Rethink
US Commodities and Futures Trading Commission (CFTC) commissioner and government official Rostin Behnam stated that cryptocurrency has forced every government to rethink about the global financial structure and emphasized that cryptocurrency will proliferate to every economy and country in the long-term.
At the UN FBI Summit “Fostering Open, Transparent, Competitive, And Financially Sound Markets” held at United Nations Plaza, New York, Behnam delivered a speech covering various aspects of the US economy and the initiatives CFTC has led throughout 2018.
Behnam discussed about the role of CFTC in governing strictly regulated market such as derivatives and futures, and improving the transparency of the US market to ensure every American is able to benefit from fair markets in just about every day-to-day activity, such as purchasing gasoline, food, home energy, and creating retirement plans and savings.
Cryptocurrency Will Proliferate to Every Economy
The latter section of Behnam’s speech primarily focused on CFTC’s responsibility in understanding and regulating rapidly growing markets such as cryptocurrency and blockchain, and the state of regulatory frameworks in the blockchain sector.
Importantly, Behnam acknowledged that the vast majority of countries have struggled in regulating the cryptocurrency and blockchain markets, possibly due to their lack of knowledge in the technology. Consequently, many countries have opted to impose policies that demonstrate bewilderment and avoidance, and reluctance towards facilitating massive demand for cryptocurrency from investors in the public market.
“The debate on virtual assets is just beginning. None of us know where it will end. But it has forced us to rethink. We have learned that virtual assets respect no borders. Regulation is often behind the curve, unable to keep up with daily developments. At least the developments we know about. As a result, some countries have outlawed virtual currencies. Others have new, strict laws to control them. Many countries simply don’t know what to do. Their policy is bewilderment or avoidance. And, some countries think virtual currencies are only a problem for developed countries like Switzerland, or Germany, or Singapore, or the United States.”
Vietnam is an example of a country that has chosen to avoid the cryptocurrency sector by outright banning cryptocurrency payments and investment. In October 2017, the State Bank of Vietnam announced that the utilization of cryptocurrencies such as bitcoin is officially illegal in the country.
“As from January 1, 2018, the act of issuing, providing and using illegal means of payment (including bitcoin and other similar virtual currency) may be subject to prosecution,” read the central bank’s statement.
However, the ban imposed by Vietnam on cryptocurrency trading and transaction settlement had minimal impact on the global cryptocurrency industry as major economies in the likes of Japan, the US, South Korea, and France have embraced cryptocurrencies and the blockchain. Local analysts stated that the ban on cryptocurrency imposed by the Vietnamese government would only result in the country being isolated from the global cryptocurrency industry, which is growing at an exponential rate.
Currently, the blockchain as a technology and cryptocurrencies as an emerging asset class are still at their infancy. Leading digital assets like Bitcoin and Ethereum are still dealing with major scalability issues, and thousands of developers in the open-source development community are contributing to the codebase of major blockchain projects.
Ethereum, for instance, which remains as the second biggest blockchain protocol behind Bitcoin with a market valuation of $58 billion, has the Ethereum Foundation and developers in its open source development community led by figures such as Ethereum co-founder Vitalik Buterin working on innovative solutions to increase the capacity of the Ethereum blockchain network.
Buterin, who wrote Sharding and Plasma, two scalability solutions that are capable of dividing the blockchain into chunks for nodes and miners to verify information more efficiently, stated that significant improvements have to be made on the first and second layer of the blockchain to improve the scalability of blockchain technology without compromising security and crucially, decentralization.
As the blockchain matures and cryptocurrencies evolve into a major asset class with public trading instruments in the likes of exchange-traded funds (ETFs), futures markets, and integration of digital assets by large-scale financial institutions, Behnam noted that cryptocurrencies will inevitably proliferate to every economy and every part of the planet.
“But virtual currencies may – will – become part of the economic practices of any country, anywhere. Let me repeat that: these currencies are not going away and they will proliferate to every economy and every part of the planet. Some places, small economies, may become dependent on virtual assets for survival. And, these currencies will be outside traditional monetary intermediaries, like government, banks, investors, ministries, or international organizations,” Behnam explained.
Over the past month, several countries that have been affected by the heavy sanctions imposed by the US government including Russia and Iran have proposed the usage of cryptocurrency in processing transaction between allies. As Behnam noted, small economies like Iran that have been isolated from the global financial structure were forced by major economies to rely on cryptocurrency and other decentralized financial networks to send and receive large payments.
On May 21, Russian mainstream media outlet RBC reported that Mohammed Reza Pourebrahimi, Iran’s head of Parliamentary Commission of Economic Affairs (IPCEA), stated the government has already begun to work with Russia by developing various proposals for using cryptocurrency.
“[IPCEA has already] obliged the Central Bank of Iran to start developing proposals for the use of cryptocurrency. Over the past year or two, the use of cryptocurrency has become an important issue. This is one of the good ways to bypass the use of the dollar, as well as the replacement of the SWIFT system. They share our opinion. We said that if we manage to promote this work, then we will be the first countries that use cryptocurrency in the exchange of goods,” Pourebrahimi said.
Future of Cryptocurrency Regulation
In his speech, Behnam admitted that it is difficult to prevent large-scale retail investors and whales from manipulating the cryptocurrency market. While the cryptocurrency market is highly liquid due to its open structure and its ability to have investors in the public market trade digital assets without gaining an accredited investor status, the daily trading volume of cryptocurrencies is still relatively low and as a result, it is possible for large-scale traders to manipulate the market on both the upside and downside.
The CFTC and US Securities and Exchange Commission (SEC) have been working side by side to crackdown on coordinated pump and dumps, specifically the inorganic price movements led by Telegram pump and dump groups, and market manipulators in the futures market as well.
“Regarding blockchain and financial technology more generally, we have been out front on this issue, and outspoken, for the last couple of years. We have been providing oversight in our markets, especially to make blockchain and other technologies more transparent and to ensure that the markets are free from fraud and manipulation. It isn’t easy,”
In February, the CFTC went as far as offering over $100,000 to whistleblowers that can help the agency unravel and investigate into cryptocurrency pump and dump schemes.
“Virtual currency and digital token pump-and-dump schemes continue because they are mostly anonymous. If you have original information that leads to a successful enforcement action that leads to monetary sanctions of $1 million or more, you could be eligible for a monetary award of between 10 percent and 30 percent,”
the official CFTC document read.
Already, the CFTC and SEC have engaged in enforcement actions, cracking down on pump and dump groups and fraudulent initial coin offerings (ICOs) that guarantee unrealistic returns and violate local financial regulations. Behnam emphasized that both agencies will work together to strictly regulate the cryptocurrency market and to ensure it benefits from transparency. Behnam added:
“We have engaged in notable enforcement actions, both in the United States, working with the Securities and Exchange Commission (SEC), the Department of Homeland Security, the Department of Justice and the Department of Treasury, among others. And we are providing public information to educate our citizens, thereby deterring fraud, misinformation, misrepresentation, manipulation, or other criminality.”
The proactive approach of CFTC and SEC in regulating the cryptocurrency market with practical regulations, and the efforts of government officials such as Behnam to better understand the cryptocurrency market with sufficient technical and legal knowledge have prompted the industry to become more optimistic towards the long-term trend of the cryptocurrency market.
In order for the market to evolve into a major sector with publicly tradable assets and instruments, practical policies and adoption by financial institutions are necessary. Investors and analysts in the cryptocurrency industry firmly believe that well-structured regulations will inevitably lead the cryptocurrency market and digital assets to compete with traditional markets and assets such as gold and offshore banking, and eventually achieve a multi-trillion dollar valuation, as billionaire investor Mike Novogratz suggested.