Seven years ago, the FinCEN released its first guidelines on digital currency. Following that, a year later, the IRS issued Notice 2014-21. These two documents provided the first United States government stance on the cryptocurrency exchange market.
The purpose of the FinCEN guidelines was to apply existing laws to some cryptocurrency service providers such as ‘money transmitters’ or ‘exchangers.’ As a result, the existing financial laws were applied to those operating in the cryptocurrency industry. Also, this indirectly defined some cryptocurrency as money by linking its value to a centrally issued currency, for example, the U.S. Dollar.
What is more interesting, the IRS document labeled Bitcoin as an asset class like property. It clearly defined Bitcoin as not being a currency and stated that Bitcoin could be taxed similarly to purchases of land or gold. So, the document prompted more questions than answers.
By 2017, cryptocurrency continued gaining prominence. Blockchain technology continued developing rapidly and Initial Coin Offerings (ICO’s) began enjoying enormous popularity. During that time, bankers and financial regulators continued to rubbish cryptocurrency as a bubble and a criminal enterprise, often for a good reason. However, neither the SEC nor the CFTC provided any meaningful framework for cryptocurrency regulation. This is despite calls from the Chicago Board Options Exchange (CBOE) for the SEC to allow U.S. markets to offer cryptocurrency derivatives exposure. To add to that, attempts at creating financial products like that were routinely rejected. Towards the end of 2017, the SEC gave approval to CBOE for the first Bitcoin futures market in the U.S.
As you can see, the American regulatory framework for cryptocurrency has been quite controversial, causing uncertainty within the community and the government itself. Essentially, this has implied that it’s high time to introduce new well-thought-out policies.
The ‘Crypto-Currency Act of 2020’
First, it is important to note that at this stage the ‘Crypto-Currency Act of 2020’ (the Act) is a draft proposal. This means that a finalized bill ready for introduction to the House of Representatives could be months from now.
Also, it is likely there could be many amendments and revisions even prior to being passed up to the Senate. For that reason, final conclusions are hard to reach. However, the document sheds light on how the U.S. intends to regulate the emerging cryptocurrency market.
The Act details the three main government bodies that will ensure regulation and enforcement in the U.S. cryptocurrency markets. The Act also defines cryptocurrencies into three distinct categories. In addition to that, the Act assigns each of those categories to one of the three government agencies.
The three agencies put forward in the Act are the SEC, FinCEN and the CFTC. The three distinct categories of cryptocurrency in the Act are ‘crypto-security’, ‘crypto-currency’ and ‘crypto-commodity’. Crypto-securities will be regulated by the SEC; cryptocurrency laws and regulations will be enforced by FinCEN, and crypto-commodities will be regulated by the CFTC.
Role of the Federal Reserve in cryptocurrency regulation
The three government bodies mentioned above appear to be at the spear tip of the U.S. cryptocurrency regulation. Clearly, those governmental organizations will continue to regulate sanctioned market trading activity and the enforcement of financial laws within the U.S.
However, the role of the Federal Reserve in cryptocurrency is entirely different. Much focus has been put on whether the Federal Reserve will issue its own Central Bank-Backed Digital Currency (CBDC). That is a power that none of either the SEC, the CFTC or FinCEN do not have.
Lael Brainard, a member of Federal Reserve Board, gave a speech at Stanford University. In that speech Brainard highlighted the importance of the U.S. Dollar and the Federal Reserve’s mandate in maintaining its stability.
In this regard, it was stated that there seemed to be no real demand for a Federal Reserve CBDC. However, what was most interesting, Brainard made comments concerning Facebook’s planned release of its own cryptocurrency. She said it forced an urgency to address the issue of a Federal Reserve CBDC.
In full agreement with Brainard, Federal Reserve Chair Jerome Powell’s statements showed the central bank had no incentive to issue a CBDC. That was his reply when asked at the House of Representatives Financial Services Committee less than a week after Brainard’s speech at Stanford University on Feb 6, 2020.
In terms of the bank’s strategy regarding a CBDC, he noted that within the U.S. context it would be difficult to have a transparent blockchain for each individual transaction. Compared to China’s pursuit of a CBDC, Powell concluded that a similar approach would not be a good solution.
What’s more important is Chairman Powell’s reaction to Libra. In light of Facebook having a global reach to one-third of the world’s population, he said that the announcement of Libra set a fire for policy-makers at the Federal Reserve.
The evolving regulation of cryptocurrency
This article covered recent events in the U.S. cryptocurrency regulation. A key finding has been the importance of Facebook’s own cryptocurrency, Libra. By looking at the Federal Reserve’s reaction to the announcement, it is hard to overstate the importance of the Federal Chair’s comments about Libra. They signal a very serious consideration of Libra and its potential influence on global money markets.