The listing of a bitcoin exchange-traded fund and the legalisation of bitcoin in El Salvador have marked watershed moments in an asset class that US regulators are still unsure how to regulate.
On Tuesday, 19 October 2021, the New York Stock Exchange began trading the first bitcoin-linked exchange traded fund (ETF). It was a watershed moment for the cryptocurrency industry, coming eight years after the first application for a cryptocurrency ETF was filed. Rather than directly investing in bitcoin, the ProShares ETF provides investors with exposure to bitcoin futures contracts.
While the start of trading in BITO is undoubtedly a watershed moment, the events surrounding its application and approval also provide a snapshot of the current and frequently contradictory perspectives at play in the US, as national authorities in the world's largest economy seek to shift towards a more coherent and cohesive policy regarding cryptocurrency and blockchain activity.
The Upheaval Surrounding El Salvador's Historic First
Not in Washington DC, New York, or Silicon Valley – but in a Central American country with a population of less than 7 million – is a stark illustration of the difficult dynamics that US officials are currently grappling with. On 7 September 2021, El Salvador became the first country in the world to adopt bitcoin as legal tender. While it was a historic day, it was not without controversy.
After midnight, President Nayib Bukele criticised Apple and Huawei for not making Chivo – the official app Salvadorans can use to conduct crypto transactions available. Following this, the app was forced to go offline for a period of time due to the strain of user registrations. Bitcoin's price also plummeted during the day, falling from US$52,000 to just under US$43,000 at one point.
Without a doubt, there is another side to this Salvadoran pioneering. Although Chivo's launch was undoubtedly bumpy, it eventually gained widespread adoption, eventually rising to the top of Apple's App Store finance category.
Salvadorans have since used it to purchase Big Macs at McDonald's and Starbucks coffees. President Bukele stated that the use of the world's first cryptocurrency will save Salvadorans US$400 million annually in remittance commissions. El Salvador now has the added advantage of being the 'first mover' in legalising bitcoin transactions, which will help it attract foreign crypto investors and businesses.
While the long-term impact of El Salvador's embrace of the BTC crypto is unknown – and there are undoubtedly a number of distinctions between El Salvador's government's actions and any future moves by the US government – the turbulent start to El Salvador's first official day with the crypto saw a loss of confidence among market traders.
This resulted in increased trading volumes, and – as a result of the perception that large stakes would be sold off – several prominent cryptocurrency exchanges (including Coinbase, Gemini, and Kraken) experienced trading delays and outages. This is most emphatically not the type of incident that the US government wishes to see replicated as a result of their own actions.
BITO launches at a time when all three branches of the US government are engaged in crypto-related activity. At the moment, the US regulates the sector relatively lightly. Crypto exchanges adhere to the Bank Secrecy Act (BSA) and other regulations aimed at combating money laundering and other illegal activities. However, there are now significant efforts underway to increase the obligations of those involved in the cryptocurrency sector.
A number of new crypto-related provisions, including new tax reporting requirements, were tucked away in the $1 trillion Infrastructure Investment and Jobs Act, which was sent to Congress as a critical component of the Biden administration's agenda.
At the time of press, the bill is making its way through the House after passing the Senate – and thus many variables remain in play between now and when it becomes law – but the movement thus far demonstrates a clear signal of intent from US lawmakers in their desire for increased control over cryptocurrency.
The Prospective Executive Order of the White House
The White House is currently considering an executive order on cryptos across from the Capitol on Pennsylvania Avenue. This is being considered with a particular emphasis on the threat posed by ransomware, as well as other criminal activity in the sector.
The Legal Issues Involved
Ripples Labs Inc. was sued by the Securities and Exchange Commission last year. The Commission asserted that Ripple violated the law by conducting an unregistered securities offering valued at US$1.3 billion. While the case is still pending, there is hope that its outcome will establish a significant precedent that will influence future cryptocurrency-related activity.
Along with the aforementioned US agencies, the Treasury's Financial Crimes Enforcement Network, the Commodity Futures Trading Commission, the Office of the Comptroller of the Currency, and the Office of Foreign Assets Control have all made crypto-related moves. Additionally, other US-based organisations are active in this field.
The US Government's Undercurrents of Cryptocurrency Activity
This current flurry of activity across the US government is motivated by a number of key themes. To begin, there is a fundamental acknowledgement of the imperative of modernisation. While those who take a conservative approach to law reform in this area may well believe that 'if it ain't broke, don't fix it,' any minimalist approach to law reform is likely to face significant pressure tests given cryptos' potential to deliver profound systemic change.
Efforts to strengthen consumer protection and reduce criminal activity throughout the sector are also critical. Increased regulation, policymakers believe, will help boost investor confidence while also providing a new avenue for combating scam activity. In turn, the fact that officials from the United States and Europe engaged in a large-scale bust of suspected drug traffickers on the dark web in late October – resulting in the seizure of more than US$31 million in crypto and cash – is certain to pique authorities' appetite for new tools to investigate and prosecute crypto-related criminal activity.
Stablecoins' current status and projected growth are also a source of concern for US policymakers. Stablecoins, which are digital tokens with their value pegged to the US dollar – or another currency or asset, as the case may be – enable traders to transact without constantly converting into dollars. They are currently largely unregulated, and US officials are concerned that they will undermine the authority and operation of central banks as technology and eCommerce companies continue to develop and incorporate them into their ecosystems.
In turn, while a stablecoin should theoretically be backed by reserves – allowing for the crypto to be exchanged for the original asset at any time – the current lack of guarantees surrounding reserves raises doubts about whether theory and practise differ. As a result, numerous stablecoins have come under fire for making misleading statements about their holdings, essentially claiming to have a dollar-to-stablecoin reserve when this was not the case.
Another significant point of contention in this arena is the definition of terms. Gary Gensler, Chairman of the Securities and Exchange Commission, has stated that the majority of crypto assets fall under the definition of securities and thus should be regulated by his organisation. Nonetheless, Brian Quintenz, a commissioner with the US Commodity Futures Trading Commission, has stated that cryptos are commodities and thus fall under the authority of his agency.
According to Vanessa Savino, Deputy General Counsel at tZERO – "a technology company dedicated to democratising access to private capital markets" – bringing clarity to the crypto sector's definitions will benefit both consumers and businesses.
"I believe that clear guidelines are necessary for this industry, for consumers to understand the products they are purchasing, and for innovators to understand the regulatory environment in which they operate and must comply. And establishing clear guidelines is the first step towards regulatory reform and progress," Ms Savino stated.
"I believe that if innovators have firsthand knowledge of the products they wish to bring to market and the regulatory framework in which they operate, it will expedite the process and benefit consumers."
Washington and Beijing's Rivalry for Strategic Influence
BITO's launch comes just days after China's government declared all cryptocurrency transactions illegal in the country. Although Beijing's late September announcement is the latest in a long line of attempts to rein in the crypto sector, this most recent move is the strongest yet, and notable for the clarity of its implications.
While efforts to circumvent the ban have continued despite it – as is customary for crypto enthusiasts in China and around the world – the reality is that the Chinese government's past and present stances have dealt a savage blow to the sector and its domestic prospects.
Between May and July of this year, according to data released by the Cambridge Centre for Alternative Finance in mid-October, the global hash rate (the computational power required to create bitcoins) fell from 44% to zero in China. A precipitous decline from September 2019, when China's share reached as high as 75%. While other nations' shares of the global hash rate have increased as a result of China's decline in activity, the real winner is the United States, which now controls 35% of the global hash rate as of August and is thus the world leader in bitcoin mining.
There are numerous areas in which the US and China are already engaged in significant and growing strategic competition. In turn, Beijing has almost certainly determined that it can afford – or even requires – ceding ground to the US in this area. Finally, the crypto sector's decentralised nature means that it should not be lumped in with other fields in which Washington and Beijing compete and where both can easily exert more centralised control.
Nonetheless, as recent events demonstrate, the American and Chinese governments' approaches to cryptos will continue to be markedly different in the future, Washington is undoubtedly cognisant of the opportunity to profit from the crypto sector's decline as a result of Beijing's domestic actions.
In turn, while the US government's precise approach is still being developed, the SEC has made a clear distinction between how the Chinese government has approached cryptocurrency and how the US government will approach it in the future. Chairman Gensler stated in early October that the US will not pursue a crypto ban in the same manner as the Chinese government, following comments made in late September by Federal Reserve Chairman Jerome Powell, who stated that he had "no intention" of doing so.
By establishing a coherent and consistent policy regarding cryptos, the US government will instil confidence in the industry, both domestically and globally. Apart from addressing current issues in the crypto space, key US authorities have been engaged in a continuous – and frequently contradictory discussion regarding the development of a central bank digital currency (CBDC).
While a CBDC is not a cryptocurrency – the centralised nature of the former versus the decentralised nature of the latter exemplifies this point – the US government's potential development of one in the future is a live issue, and thus informs the current calculus surrounding crypto regulation more broadly.
Underpinning all of this is the need for payment system modernisation, and – while some in the US government may have reservations about the crypto sector in general, there can be no doubt that the way many contemporary crypto apps provide an extremely user-friendly platform for investing in and transacting in crypto is something that all interested stakeholders in this arena can learn from.
For Australians who are already interested in crypto – and those who are growing in their interest – significant and well-received reform in the United States would refocus attention on offerings within its markets. Additionally, it would bolster confidence in Australia's ability to implement sound policy, laying the groundwork for the crypto sector's next chapter of growth in the country.
