Agree: Fears of new crypto regulations being overly complex, costly and burdensome are overblown

Regulation. That very word seems to be striking fear in anyone involved in crypto. 

But there’s a difference between regulation – which can create clarity and confidence – versus overregulation. Yes, overregulation is a negative thing and would certainly have an adverse effect on the future of Bitcoin and the crypto sector. But don’t panic.

It is an accepted fact that governments and their central banks do not like Bitcoin and cryptos. The fear of losing monetary control and their ability to enact social policies have alarmed central bankers. But they are baffled on what to do. 

Governments realize they are behind the curve in recognizing the growth and acceptance globally of Bitcoin, and their biggest weapon to exert some control is tighter regulation. But government regulation will be difficult only because the globalization and decentralization of Bitcoin make local rules hard to enforce.

Let’s look at some potential new rules that may be considered and actually enacted. With the appointment of Gary Gensler as SEC Chairman, rules for crypto trading and investing are surely close at hand. Remember, Mr. Gensler was formally Chairman of the Commodity Trading Futures Commission (CFTC) so it makes sense that any crypto regulation would include rules already in effect in the futures markets. 

That would be a major plus. Let’s consider the implications:

  • Bitcoin will be considered a “standalone digital asset.” The CFTC once defined Bitcoin as a currency and Mr. Gensler has commented publicly that Bitcoin may indeed be a store of value. It’s just a digital asset. So, if Bitcoin trades on an exchange with proper regulatory oversight would that be so bad? There would be no need to further define Bitcoin as a security, a currency or even a commodity. Oversight for KYC/AML would be in place via accredited exchanges.
  • Other cryptocurrencies may be restricted to what individuals and institutions can invest in just as stocks are. Cryptos and digital assets trading under $5.00 would be restricted (just as stocks are) thus “protecting” investors. These other digital assets may be restricted to an OTC (Over the Counter) type market with necessary KYC/AML protocols in place. Again, not so terrible. 
  • Exchanges such as Coinbase, Kraken, etc. would be responsible for setting their own margin (risk parameters) just as futures exchanges do now. Look for more self-regulation like the National Futures Association (NFA) and expect the licensing of brokers who sell Bitcoin and other crypto assets. Perhaps the SEC and FINRA will require licensing just like equities. But again, not so bad, and certainly tolerable.

While global regulatory bodies, including the SEC, may talk about strict regulation and oversight, they may realize they lack the ability to actually enforce their own rules. Because of the decentralization and fungibility of crypto, any overtly strict regulations will just move trading to other parts of the world. 

For example, if US regulators create too complex and burdensome an environment for crypto, another jurisdiction (take your pick – Ireland? Singapore?) would certainly be more than eager to step in. American regulators need to tread lightly, which I am sure they realize.

So, do not panic about our regulators either overregulating Bitcoin or other crypto assets. Their tough talk really is just old fashioned “jaw boning” to create a pathway to accept some new regulation – A reasonable level of fresh clarity and rules will make investors more comfortable with crypto, and that should be the outcome wealth managers can expect.

Bill Taylor is Chief Investment Officer of Entoro Wealth, an asset manager specializing in digital asset-driven strategies

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