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Bitcoin Breakdown: CFTC, NY Move to Regulate Virtual Currency

  • By Andrew Deichler
  • Published: 2014-03-12

As Bitcoin and other virtual currencies continue to gain more attention, AFP will provide updates on the latest news surrounding these new forms of payment.

The Commodity Futures Trading Commission (CFTC) indicated Tuesday that it is considering regulating Bitcoin. Separately, New York’s financial services regulator also took steps toward state regulation of virtual currencies.

Mark Wetjen, acting chairman of the CFTC, said that his agency is “looking into” regulating virtual currencies. “It’s been initiated, there’s been an internal discussion at the staff level,” he said.

Federal regulators had generally taken a “wait-and-see” approach to Bitcoin, as indicated in a series of hearings on the subject late last year. However, a string of recent incidents—including the collapse of Bitcoin exchange Mt. Gox after more than a half a billion dollars in the cryptocurrency was stolen—has prompted regulators to consider taking action.

Though Federal Reserve Chair Janet Yellen recently said that the Fed has no jurisdiction to regulate Bitcoin, the CFTC might be a different story. Wetjen said the regulator has broad authority to counter manipulation of commodity markets and is looking into whether Bitcoin falls under those rules, Reuters reported. “I think people (in the agency) believe there’s a pretty good argument that it would fit that definition,” Wetjen said.

Wetjen added that there is a separate question of “whether or not there is some derivative contract based on, or denominated in, a virtual currency and whether that’s listed on an exchange. There’s some looking into that question too.”

New York regulators meanwhile continue to be a bit more aggressive overall. Benjamin Lawsky, superintendent of the New York State Department of Financial Services (NYDFS) has issued a public order that his department is considering formal proposals and applications for virtual currency exchanges operating in New York.

Firms can submit formal proposals and applications immediately. This application process would be a precursor to regulations the NYDFS plans to propose by the second quarter 2014.

“The recent problems at Mt. Gox and other firms further demonstrate the urgent need for stronger oversight of virtual currency exchanges, including robust standards for consumer protection, cybersecurity and anti-money laundering compliance,” Lawsky said in his statement.

Lawsky held virtual currency hearings in January, in which he advocated for “Bitlicenses” for virtual currency firms.

Lawsky added that virtual currencies are unlikely to disappear and will continue to exist in one form or another. “As such, turning a blind eye and failing to put in place guardrails for virtual currency firms while consumers use that product is simply not a tenable strategy for regulators,” he said. “Our overarching goal is to balance creating appropriate regulatory protections without stifling beneficial innovation in the development of new payments platforms.”

Weeding out the bad seeds

With all of the bad press Bitcoin has gotten so far in 2014, it is no surprise that the U.S. and Japan are considering regulating it and China has virtually “banned” it, noted Gilles Ubaghs, senior analyst, financial services technology for research firm Ovum. “It would on the surface look like a lot of the magic dust behind Bitcoin is quickly evaporating,” he said.

However, Ubaghs pointed out that the price of Bitcoin is still several hundred percentage points higher than it was a year ago, and appears to be rallying again. Many investors and businesses still see Bitcoin as a future growth opportunity, and for good reason. “One of the big misunderstandings about Bitcoin is that it’s a completely non-real commodity with no value or inherent worth,” he said. “But this ignores the very real function that Bitcoin serves in being able to be traded instantly and rapidly online through the Bitcoin cryptographic protocols. Users can make and receive payments, and store value, instantly and globally with minimum fuss.

Ubagh noted that one make the case that Bitcoin serves more of a function than gold does. “Gold doesn’t really have any intrinsic value in and of itself other than what others are willing to pay for it, and Bitcoin's ultimate value stems from what the market says it’s willing to pay for it,” he said.

While recent developments like the Mt. Gox collapse do not bode well for Bitcoin, it is important to remember Bitcoin itself is not the problem, Ubagh emphasized. “It’s the emerging institutions around bitcoin which have proven problematic,” he said. “Storing Bitcoin and trusting Bitcoin exchanges are, I think, more the greater concern for the market at this point. Confidence in some of the institutions around Bitcoin will have wobbled, but not in the actual currency itself.”

What has suffered is the very rapidly development of legitimate Bitcoin businesses and the many exchanges out there that are trying to “tame” Bitcoin and make it easier to use, Udagh said. “Regulatory approval of bitcoin is still very nascent with divergent views and policies on it, and I think it will take a long time for any sort of coherence to emerge,” he said. “It’s unclear still what the U.S. might do, but with markets like Singapore seeming fairly relaxed about it, we could easily end up in environment of largely ‘offshore’ Bitcoin exchanges.”

Furthermore, the non-centralized nature of Bitcoin creates more problems for regulators. “While you can regulate the exchanges of bitcoin, you can’t really regulate the currency itself, only the points where it interacts with the real economy,” Ubagh said. “That’s a major pinch point, but dedicated users will always be able to find a way around that, likely without much hassle.”

Given time, Ubagh sees more reputable Bitcoin sites and services with better infrastructure and security emerging. “A lot of the initial players in Bitcoin have developed from some slightly weird places—Mt. Gox started as a Magic the Gathering card game exchange,” he said. “I think it will take awhile to shake out the tree as it were, so I wouldn’t be surprised if there was more scandal and intrigue in the Bitcoin market in the coming months.”

Copyright © 2015 Association for Financial Professionals, Inc.
All rights reserved.

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