Here’s What You Need To Know
With companies as varied as Eastman Kodak, Long Island Iced Tea, and KFC trying to capitalize on bitcoin, the internet’s best-known cryptocurrency, it appears that bitcoin-mania is reaching new heights. Bitcoin’s journey has been nothing if not volatile, introducing new words into the lexicon like blockchain and raising new policy questions for regulators.
Needless to say, it is worth considering this craze through a regulatory lens, because with every craze comes a crash, followed by the inevitable regulatory crackdown. Here’s our primer on making sense of today’s bitcoin frenzy:
- Blockchain And Bitcoin 101: Blockchain is a technology that allows for the existence of digital mediums of exchange. Like a ledger, blockchain keeps a record of digital, peer-to-peer transactions. It was invented in 2008 to make the launch of bitcoin possible the following year, and has since been used for transactions as varied as legal contracts, “rave” party bookings, and even sexual consent. Although there are over 1,400 different “coins,” bitcoin remains the most popular cryptocurrency, which is a decentralized, virtual form of money that can be used to make purchases without a middleman like a bank or government. Some vendors accepting payments include Overstock.com, Dish Network, Microsoft, and Mark Cuban’s Dallas Mavericks, who will be accepting cryptocurrency next basketball season.
- Where Do Traditional Financial Institutions Stand? Last year, the Commodity Futures Trading Commission approved bitcoin futures and exchanges quickly went live. JP Morgan Chase CEO Jamie Dimon regrets calling bitcoin and other cryptocurrencies a fraud, and has continued to express his belief in the power of blockchain technology, which can be used to transfer non-crypto currencies and disrupt how banking is done. In addition, Goldman Sachs is setting up a cryptocurrency trading desk and making a bet that it can be a portfolio asset comparable to gold. But with a former Wells Fargo CEO calling bitcoin a “pyramid scheme” and Capital One Bank announcing it will block its credit card holders from cryptocurrency purchases, there is no clear message coming from the industry most impacted by this technology.
- Is A Worldwide Crypto Crackdown Coming? It appears the crackdown has already started. The price of bitcoin has plummeted in part due to greater scrutiny of cryptocurrencies like China’s escalated crackdown on online platforms and mobile apps that offer exchange services, and South Korea’s suggestion it may ban cryptocurrency trading. A director at Germany’s central bank called for regulating cryptocurrencies on a global scale, due to the inherent difficulties of enforcing a virtual, borderless community. While this may be plausible in Europe, where continental-scale approaches to regulation have been implemented, a more global agreement may take years to coalesce, if ever. Still, with the Russian government developing a cryptocurrency in the hope of evading international sanctions and scrutiny, and fears that they could assist the North Koreans in doing the same, further national and multinational regulatory barriers are sure to follow.
- What Could Regulation Look Like In The U.S.? The U.S. government has examinedand implemented rules to stem the use of cryptocurrencies for money laundering and other nefarious purposes. And, the Security and Exchange Commission warned investors to “exercise caution” when it comes to cryptocurrencies because state and federal regulators are still working to get ahead of the issue, meaning that any money lost due to illegal actors in the meantime may not be recovered. Comprehensive regulation would be led by the Federal Reserve, which is responsible for monetary policy, and whose chair said bitcoin plays a “very small role in the payment system,” requiring no regulation at this time. Should cryptocurrencies threaten the Fed’s control of monetary policy in the future, that could quickly change.
Bitcoin’s early success was in part due to its potential for circumvention and lack of oversight, which made it also an ideal tool for criminals. While the above demonstrates the growth beyond that early success, the evidence suggests that further regulatory scrutiny may bring increased volatility. Should this come to pass, it may garner public attention in a way which focuses on the significance of the blockchain revolution more broadly, rather than simply a component of making cryptocurrencies work.
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