John Beccia is general counsel and CCO for Circle, a consumer finance company that uses bitcoin technology to make money transfers and payments instant, secure, global and free.
In this article, he shares his wish list for regulators focused on digital currency.
It’s the time of year when everyone is filled with holiday cheer and ambitious goals.
As we turn the calendar page, it’s a moment for optimism and hope that not only will digital currency businesses grow in 2015, but there will also be sensible regulations for their activities.
The road to creating a regulatory framework for digital currency has taken several twists and turns over the past year. Despite some progress, questions and challenges remain.
Early holiday gifts have come from the Conference of State Bank Supervisors (CSBS), which issued proposed ‘principles’ for state regulation of digital currency, and Superintendent Lawsky who laid out revisions to New York’s BitLicense proposal.
Along with finalizing those proposals, coming attractions for 2015 include completion of the Fourth Money Laundering Directive in the European Union (EU), a potential ban of bitcoin in Russia and a key case pending on the value-added tax (VAT) treatment of digital currency in the EU.
Regulators, such as the Securities and Exchange Commission, Commodities Futures Trading Commission, Consumer Financial Protection Bureau and the Financial Conduct Authority, have indicated that additional regulation may be needed to protect consumers and the financial system. On top of this, law enforcement will undoubtedly continue to target illicit activity relating to digital currency.
In light of this, here is a ‘wish list’ for those poised to regulate digital currency in 2015.
1. A balanced view
Regulators should not lose sight of the intrinsic value of digital currency, which is its decentralized nature, lack of intermediaries and cryptographic proofs that make the system inherently trustworthy.
Regulators should not only focus on the risks, but should also take time to understand the benefits of digital currency and the practical impact of regulation. As this technology evolves, regulation should be measured and risk-based.
It should offer flexible, principles-based guidelines versus overly prescriptive rules that would place burdens on firms and eliminate the benefits of the technology. Regulations should be established in a manner that maintains a level playing field with other payment service providers. Regulators should resist the temptation to offer duplicative or unnecessary requirements.
Recent comments by Superintendent Lawsky regarding providing “flexible” regulations and creating transitional licenses for small business are steps in the right direction.
2. Regulation of biggest risks only
There are many business models in the digital currency ecosystem. Each lends itself to different degrees of risk and should be regulated accordingly.
FinCEN’s regulation of the on and off ramps between the exchange of fiat currency to bitcoin is an appropriate level of regulation based on risk.
Firms operating as exchanges in the EU should similarly be regulated under relevant directives and should be covered by applicable money laundering regulations, such as the proposed directive.
3. A framework of creative thinking
Regulation doesn’t tend to be innovative or proactive. However, with the advent of blockchain technology, this is a good time for government officials to take a wider view of regulation and how they can leverage technology to support their mission.
In particular, it would be helpful to develop open standards for digital identity that would protect user privacy while limiting bad actor access to digital currency platforms and the existing consumer finance ecosystem.
In areas where current rules do not fit with new technology, regulators should be receptive to industry ideas on ways to comply with the spirit versus the letter of the law. Many emergent risk management protocols are significantly more effective than legacy solutions.
Regulators should be receptive to industry best practices that address risks in an efficient manner.
4. Clarity for banking relationships
There are still significant barriers for digital currency firms looking to bring these services to mainstream users, including the lack of banking and audit firm relationships for digital currency businesses.
Regulatory clarity is needed to bolster these partnerships and enhance consumer adoption of digital currency.
If lawmakers determine that digital currencies do not need oversight, some clarification should be provided regarding ongoing obligations and/or the ability of traditional financial services providers to interface with digital currency firms.
5. Coordination and collaboration
In the US, a standard licensing and oversight approach is needed at the state level. Key states, such as New York and California, should be working closely with the CSBS as they finalize regulatory principles to ensure the approach is reasonable and consistent.
A diverse regulatory regime in multiple states would create unnecessary complications and barriers to entry for smaller firms. Due to the decentralized nature of digital currency, it makes sense for regulations to be developed on a global basis to the extent possible.
Regulators have been successful in the past by taking a coordinated approach on anti-money laundering regulations, such as through Financial Action Task Force recommendations.
6. Additional tax guidance
Further clarification is needed regarding the tax treatment of digital currency in the US and EU. The IRS guidelines are not appropriate for digital currency transactions and are too onerous for consumers from a reporting standpoint.
Similarly, it is important to have clear and consistent guidance across the EU as a VAT regime could significantly hamper digital currency adoption. These transactions should be exempt from VAT.
Hopefully, the EU Court of Justice will reach a similar conclusion in the pending case on this matter.