The rapid ascent of bitcoin into mainstream consciousness has left financial regulators worldwide scrambling to respond -- or decide to leave it be.
A rules framework for cryptocurrencies in line with more established foreign exchange (FX) markets is years away, if it ever develops. But that big picture is of only academic interest to active traders, whose pressing day-to-day need is to stay on top of the regulatory information flow for its immediate impact on crypto valuations.
Bitcoin fell below $10,000 on Jan. 23, from $19,500 five weeks earlier, after South Korea said it would ban anonymous bank accounts from trading cryptocurrency. That followed reports about China cracking down on cryptocurrency mining. Fewer crypto market participants would diminish liquidity, so most any report presaging oversight is seen as bearish news.
“There are flashpoints of potential regulation coming from different points in the world, and it’s sending the universe of cryptocurrencies into fits and starts” said Ed Oliver, Vice President, Finance Sales at Dataminr.
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Regulatory interest in cryptocurrency is partly an offshoot of recent market development, which included bitcoin futures launched by exchange operators CME Group and Cboe Global Markets, plus media reports that Goldman Sachs would start a crypto trading desk.
“There was a flurry of activity around making it a proper investment tool, and now all of a sudden, there are regulatory considerations,” Oliver said. “If cryptocurrencies are going to be seen as legitimate in the institutional world, there has to be some regulation driving that.”
Market practitioners and observers note that in cryptocurrency’s purest form as a decentralized digital asset that functions as a medium of exchange, regulation is not warranted. Rules come into play when crypto crosses paths with established FX markets and institutions.
“Exchanges that trade bitcoin for traditional currency are regulatable,” said Simon Dixon, CEO of fintech platform BnkToTheFuture. “Regulation only seems to impact the interface between traditional money and crypto.”
In the global market that is cryptocurrency, regulatory news breaks from all corners. That extends from the U.S., where the CFTC and SEC recently confirmed they were looking at crypto, to Europe, where ESMA said it may ban the cryptocurrency derivative product called contracts for difference (CFDs), to Zimbabwe, where the central bank chief said bitcoin is not legal.
Adding to the swirl of information is the uncertainty of how exactly cryptocurrencies should be categorized. “As a new asset class it could be a commodity with the CFTC regulating. And it could be a security that the SEC says we are going to regulate because we are here to protect U.S. citizens,” said David Drake, chairman of private-equity firm LDJ Capital. “It could be a gaming token, it could be a utility token, it could be a currency. There’s a lot of confusion.”
For cryptocurrencies, the regulatory road promises to be a long one in terms of changes ahead, largely because current regulatory infrastructure is de minimis. As high volatility continues, any incremental news on potential rules stands to move markets. “It’s about the news cycle and staying ahead of these tweaks,” Oliver said.
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On Jan. 29, the crypto news du jour was the $530 million hacking heist in Japan, the knee-jerk reaction to which were calls for more regulation. That will play out in dribs and drabs of information over the coming weeks and months, anytime in the day or night and from anywhere on the globe.
Bitcoin retreated to $7,300 on Feb. 6, as the SEC and CFTC heads discussed cryptocurrency with the Senate Banking Committee. The day’s meeting was meant to find facts and assess oversight roles rather than put forth specific rules, but traders will be closely watching the follow-through.
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The velocity of news flow on cryptocurrencies is “explosive,” Drake said.
“The beauty of crypto is that it is digitally dispersed,” he said. “You can raise capital from people anywhere in the world with a wallet. So a woman in Vietnam, an entrepreneur in Stockholm, or a prince in Dubai can send ethereum in five seconds. There's no going to the bank, there’s no asking for wire instructions and verification.”
Added Drake: “It's instantaneous. And the news travels as quickly as the capital does.”