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August 16, 2021

It’s time to regulate cryptocurrency – Here’s what’s brewing

Is cryptocurrency really the financing of the future?  When will federal oversight of the new market come?

Congress, investors in the digital currency space and the public all want to know.

The legal experts who participated on an American Bar Association panel discussion say it’s well past time for answers for what has become a virtually unregulated $2 trillion market.

“Everybody wants to work toward regulation, but we just aren’t getting there quickly enough,” said Katherine Dowling, general counsel and chief compliance officer at Bitwise Asset Management in San Francisco, the world’s largest crypto index funds manager.

“We have this incredibly new asset that deserves original thought,” Dowling said. “But we’re trying to fit it into frameworks that are old and crusty — and they don’t necessarily work.”

Dowling and other financial experts who shared the stage on Aug. 5 at the ABA Hybrid Annual Meeting in Chicago say the United States has been flailing in establishing oversight.

“I think the U.S. regulatory strategy up to now has been denial, hoping that this will go away,” said Professor David Yermack, chair of the finance department at New York University’s Stern School of Business.

Beyond calls from some in Congress for cohesive federal strategy on regulation, it is unclear what is on the horizon. For now, Securities and Exchange Commission Chairman Gary Gensler has indicated that the SEC will become more active in regulating cryptocurrency trading and lending using its existing authority.

We’re trying to use “old case law” that has no relevance to the underlying questions we’re dealing with today, Yermack said of the various regulatory frameworks being proposed. “The temptation to try to take laws off the shelf and not meet the technology on its own terms has been a serious problem in the U.S.”

“Regulators are doing the best that they can with the tools that they have right now,” said Michelle Bond, CEO for the nonprofit Association for Digital Assets Markets. She would like to see the SEC offer “less guidance and more proposals in the space, to the extent that a regulator has jurisdiction.”

Yermack called for Congress to develop new federal regulations altogether — as soon as possible — saying that the United States has even “fallen behind countries like Switzerland and Singapore” in its response.

The nation indeed lags sorely behind its peers, panelists agreed, noting that the United States does not even have an Exchange Traded Fund or a clear definition of what a security is.

“There is an ETF in Ontario for bitcoin that is gathering in a lot of assets that otherwise could be in the United States. And there are ETFs in the over-the-counter markets from Grayscale Investments (in New York) — they’re just not called ETF,” Yermack said, adding that “people are not going to wait around for the regulators to figure this out.”

As a result of inaction, Dowling said the U.S. is losing “amazing, innovative” companies to other countries that offer ETFs and have clearer regulations. “We should be looking at those countries to see how they’re regulating and how we can get there.”

Beyond efforts abroad, local U.S. regulatory initiatives may help blueprint the federal response.

Much of the innovating in American virtual cryptocurrency space is happening at the state level, Yermack said. “Wyoming is the state everyone points to, but the others are Wisconsin, Vermont and Arizona.” He would like to see the best of these state laws “make their way into the federal statutes.”

On the federal stage, Yermack says Congress needs to act to clarify the confusion over jurisdiction, and predicts that self-regulation is going to be “much more important” than other areas because enforcement is difficult.

Still, Yermack thinks cryptocurrency offers a lot of opportunity for the public sector. “It will make government do its job better and in a more citizen-friendly way, fairer and more efficient financial markets. But it’s going to take some time to get there,” he said.

Cryptocurrency Law: The Wild West or the Financing of the Future?” was moderated by Michael Leotta, a partner at WilmerHale and national chair of the ABA’s White Collar Crime Committee and co-chair of its Financial Institution Fraud/Money Laundering and Patriot Act Subcommittee. The program was sponsored by the ABA Criminal Justice Section.