Next Up Libra: Regulating Cryptocurrency


By: David Molinari

Reluctance to accept cryptocurrency as a medium of exchange continues to focus, in substantial part, on the inability to regulate a virtual form of currency.
Cryptocurrencies were originally meant to be stateless entities, not beholden to legal frameworks of any state or country.  Such intent was/is short-sighted if the goal is to function as an alternative currency.  Regulation is the doorway through which cryptocurrency must pass to be considered a viable system of currency for everyday transactions.  The word “regulation” has taken on a negative meaning.  “Regulation is bad for (fill in the blank)” is a familiar refrain.  However, regulation, at least concerning currency markets and exchanges, establishes rules and order.  When the currency alternatives are defined by the term “virtual,” proponents of cryptocurrency will face skepticism.  In the absence of federal directives on the cryptocurrencies, some states have tried to take matters into their own hands.  The result is a patchwork approach trying to meld old currency regulations to control the new frontier of cryptocurrencies.  Perhaps as a nod to the inevitable choice of government regulation or irrevocable stamp of “outlaw,” Facebook’s executive, David Marcus, in recent statements before the Senate Banking Committee noted that Libra will get “appropriate approvals” from regulatory agencies and be subject to regulatory oversight and review.
But what does regulatory oversight look like in a virtual currency world? How can any state or the Federal Government regulate a system where any major corporation with international reach can create their own form of cryptocurrency.  Cryptocurrencies raise concerns of national security because virtual currencies have the potential for illicit activities such as money laundering or facilitating other unlawful behavior.  The virtual currency market was created so digital asset service providers can operate in the shadows of no regulation.  Also, cryptocurrencies are highly volatile because exactly what backs the currency?  What is the value of any cryptocurrency at any time?  How can the system be protected from fraud?
There are three aspects that should be covered when attempting to establish a system of regulation for virtual currency: The use of cryptocurrencies as legal tender in business transactions, imposing authority on operation of cryptocurrency exchanges as money transmitters; and the status of smart contracts and Ethereum Tokens.
The first two factors seem amendable to the type of regulatory framework of establishing a commissioner or government arm that is responsible to evaluate whether the crypto/digital currency has capital enough to ensure safety and soundness of the currency for consumer protection.  A minimum amount of capital should be maintained by the cryptocurrency provider measured by total assets, total liabilities, the expected value of the virtual business activity, the amount of leverage employed and liquidity.
A difficult factor is determining a definition of “digital unit” to be used as a form of stored value.  Further, should there be carve-outs for online gaming platforms, digital units used exclusively as part of a consumer affinity or rewards program; or, digital units redeemable for goods, services or purchases exclusively with the issuer or designated merchant.
Libra is the latest threat to an old guard established financial system.  Where Facebook’s Libra allegedly differs is it is not intended to compete with the US or other countries’ sovereign currency; and therefore, won’t interfere with central banks on monetary policy. Yet by the very nature of being an alternative currency, Libra like other cryptocurrencies are competitors and disruptors of established currency markets.  A competitor is seen as a threat in most environments; when the environment is a financial system, competitors are a threat that raise serious concerns.  Libra, like other cryptocurrencies were designed to be independent of legal frameworks.  Regulation is the opposite to cryptocurrency’s design.  While such opposites in another environment or market would cripple any new product or service, cryptocurrency as a technology, is an idea whose development isn’t tied to or halted by government oversight.  While it is quaint to conclude cryptocurrency will be forced to adjust to government’s brand of regulation, that may not be accurate in this situation.  Cryptocurrencies are operating and will go on and continue to be unregulated. It is the regulating bodies that are playing catch-up.
If you have questions or would like more information, please contact David Molinari at [email protected].