NEW YORK — The relationship between bitcoin and US regulators is kind of like modern dating. It’s complicated.
Sometimes, there are multiple classifications and statues depending upon whom you ask. How do we classify virtual currencies under the law? Are they commodities, or are they assets? With more than 1,600 cryptocurrencies currently listed by CoinMarketCap, how we treat bitcoin under applicable US property law is a question needing consideration. And the answer is still in flux, demanding further clarification.
A recent panel discussion between Lona Nallengara, a partner at Shearman & Sterling and former Chief of Staff to Securities and Exchange Commission (SEC) Chair Mary Jo White, and Alan Cohn, Of Counsel at Steptoe & Johnson, attempted to provide some of that clarification.
The panel, Examining Banking Modernization and Global Regulation of Virtual Currencies, was part of the Legal Executive Institute’s Regulation of Financial Services 2018 conference held at the always-impressive Harvard Club, and it explored just how much confusion surrounds the classification of cryptocurrencies such as bitcoin. The panel was moderated by Joe Raczynski, legal technologist and futurist at Thomson Reuters Legal.
A Rapidly Evolving Regulatory Landscape
Gone are the days when bitcoin and other virtual currencies were primarily used to place an illicit order on the Dark Web. Today, bitcoin and other currencies like ethereum and monero are becoming more a part of mainstream commerce. And with the attention of the mainstream, comes the attention of government regulators. Investors are unsure what to do. Financial institutions and exchanges are still wary of anything crypto.
On the panel, Cohen explained that currently, the bitcoin asset itself can be simultaneously classified four separate ways:
- “Currency” or “Convertible Portable Currency” as classified by guidance issued by the Financial Crimes Enforcement Network (FinCen) for the purposes of their regulatory structure and the Bank Secrecy Act (BSA);
- “Security” by guidance from the SEC;
- “Commodity” by the US Commodity Futures Trading Commission (CFTC) and;
- “Property” by the Internal Revenue Service (IRS).
Cohn said he believes that US regulators need to reach an integrated viewpoint about virtual currencies as other counties such as Singapore and Switzerland already have done.
Yet, having assets with multiple classifications isn’t anything new, Nallengara reminded the audience. We have seen this with security-based swaps, for instance. “This is not a new environment, but it adds to the confusion,” he said. “While we are seeing more coordination, that chapter hasn’t been written yet.”
Clarity is at an Enormous Premium
“We have a new asset class now and a new opportunity to come to some integration,” Cohn said. In addition to the above-mentioned classifications, let us not forget that other entities are considering how to view cryptocurrencies, including the Office of the Comptroller and the Federal Deposit Insurance Commission (FDIC); and what specific laws apply, such as state money transmission-specific laws, state cryptocurrency-specific laws and even state governments’ taxation laws.
“It’s all over the place,” Cohn said. “But at the end of day, the interest of consumer protection and market integrity are the things most important to the regulators. Therefore, clarity is at an enormous premium.”
The market will continue to grapple with how to categorize virtual currencies for the foreseeable future, the panelists agreed. While this space fluctuates, with some countries outright banning cryptocurrencies, the US is still coming to terms with it. However, conflicting regulatory standards have been a part of the history of the currency supply in our country, and lack of clarity is all a part of learning something new.
“There should be messiness in this space,” Nallengara noted. “My concern is that regulators won’t appreciate that.”