Why U.S Restrictions on ICOs and Exchanges Is Likely

The U.S Senate met on February 6th to discuss "virtual currencies" such as Bitcoin. Many interpreted this meeting as bullish for Bitcoin and other cryptocurrencies, primarily off the back of CFTC Chair Giancarlo's testimony and the idea of a "thoughtful regulatory approach."

While many caught onto the theme that ICOs were not liked by anyone, I think many didn't logically take it to the next step. If all ICOs are securities, aren't many altcoins as well? And if they are, what becomes of exchanges that enable the trading of these altcoins? It was mentioned many times at the hearing that exchanges weren't adequately regulated due to state-specific legislation and the idea that money transmitter licenses weren't designed for such secondary market trading.

There were other red flags as well, such as the idea of escalating Bitcoin to FSOC as a systemic risk or that the principle idea behind Bitcoin is to replace the U.S dollar which is NOT how we want regulators to view Bitcoin as they will see it as a much bigger threat.

Another important detail that many seemed to ignore was that the focus of the meeting seemed to be on how blockchain was valuable, but cryptocurrencies weren't. The only people who seemed to argue against this idea was CFTC Chair Giancarlo and Senator Warren.

Instead, the focus was on how blockchain technology could help regulators do their jobs through increased transparency of data. This usually is a fancy way of saying "more power to government and less privacy." It begins with good intentions, but that's usually what it devolves to.

All in all, there were many details most chose to ignore from the hearing that I wish were discussed more. There were obviously some bullish elements to it as well, but they have been discussed to death in media and hence I've chosen not to cover them. I hope that we do see a "thoughtful regulatory approach," but it appears a bumpy road ahead is likely.

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As an EU resident I've never even watched a hearing for my own country. Let alone a US senate hearing. But now I must have seen it three times already haha I watched it a few days ago and then a bunch of videos like this one to see what other people make of it. And I never thought I'd enjoy checking out a senate hearing, obviously biased here haha.

It's funny a year ago I never thought I'd even be interested in this let alone know what they are talking about now when I read the stocks news just because I learned about crypto.
I always wanted to learn how the whole stock market worked but it was always too daunting but now because of crypto I got a basic understanding and I'm more engaged in the financial sector which I absolutely never expected.

Definitely one of the positive effects of cryptocurrencies is how it has led many people into a whole new world (investing and speculation). I only hope that it has lasting effects for those people in a positive sense even after market crashes like we've had recently.

Nice write-up....Right here in Africa, cryptocurrencies have opened up new frontiers for young people and has brought people with no previous knowledge of the workings of the financial sector into a space of accelerated learning! In Nigeria the first major exposure to cryptocurrencies was the adoption and proliferation of the global ponzi scheme 'MMM'; most persons lost their hard-earned monies, but a core group of crypto-enthusaists emerged and began to explore the possibilities and applications of cryptos beyond ponzi schemes, and this has led to a silent but significant financial revolution for youths-and this is just the beginning

I hope people learned from MMM, as it was obvious it was a Ponzi scheme. Hopefully, we will see individuals building blockchain solutions to improve the social and economic demography. Nigerians seem to see bitcoin a quick money making machine. However, blockchain application to the economy would be beneficial.

All the stuff they wanted to regulate is all positive in my opinion. ICO's and exchanges are nothing but problematic right now. They are by far the biggest sources of lost funds for customers due to hacks, scams, project failuers, etc.

The things I am more concerned about them bringing more heavy regulation on:

  • Being able to use Bitcoin as a means of exchange and as a replacement currency.
  • What businesses can accept Bitcoin and what extra procedures you need to follow to spend Bitcoin as cash.
  • Banks refusing transactions to facilitate fiat transactions to and from cryptocurrency.
  • General crypto trading including unregulated exchanges as well as regulated traditional exchanges through ETF's and futures derivatives.
  • User privacy and tracking how much crypto everyone owns and who they transact with.
  • Taxes
  • Mining

Since I don't participate in ICO's and I already agree that we need heavier regulation on these exchanges the meeting didn't really give me a whole lot to go on. Until they start discussing those topics above I am not really that interested.

I agree that ICOs and centralized exchanges (ones with custody of your funds) require more regulations, but I also know how the market responds to regulation and it generally isn't positive. The meeting did touch on some of your concerns. If Bitcoin is viewed as a replacement for dollar and hence posed as a systemic risk, you can expect much harsher responses from the government if they take it seriously. One of the senators discussed the issues associated with taxing cryptocurrencies, especially if goods are bought with it and salaries are paid in it. And again, an important narrative from the meeting was the idea that blockchain, not Bitcoin, is the important innovation here.

Agree with most of your post. Regulations are not bad as they will legitimize the space. A couple of additional thoughts:

  1. ICO's in the U.S. will fall under security regulations. This is not a true negative as few U.S. citizens can participate as it is. The 2nd order effect is that this is bullish for tokens like Polymath.
  2. Coinbase/Gemini/Poloniex/Kraken/Robinhood and any U.S.-based exchange will issue 1099 forms just like for stocks/bonds
  3. Banks will still allow purchasing of crypto but not using credit or debit cards. This is consistent with buying stocks/bonds where ACH or wire transactions are the norm to fund your account.
  4. ETF's will eventually be allowed. This would be a major catalyst as it will put "true" buying pressure on crypto as happened when the gold ETF (GLD) appeared.

Everything will take time but I see the CFTC/SEC meeting as a huge positive.

Nice post,
I can see crypto like Monero being banned outright...based on its privacy ability.
Taxes...of course Governments all they care about is money they get out of it...(you know for roads)

Mining is a great point i forgot, THAT i see heavily regulated & taxed.
Like having a tax stamp on mining machines etc.

Lets enjoy our freedom here while we can.

Definitely could see Monero getting banned. This would happen if any U.S.-based exchange were forbidden to trade this currency.

Mining is already taxed. It falls under existing mining laws where anything mined is immediately taxable. Small-scale mining will still fly under the radar but slowly large-scale mining will be tracked via checking electricity use.

I don't think mining machines will ever be directly taxed with a "stamp tax." That'd be very British and very un-American.

The thing with banning a privacy coin like Monero is it is the hardest one to ban. You basically have to admit to them that you use it because they have no way of knowing otherwise. They can ban businesses from accepting it, and ban banks from converting it to fiat, but everyone is just going to use BTC for those things anyway.

@noremac13 Those are exactly the points I am waiting for, here in Canada we won’t be directly effected but as everything else we should look to the US as an example of what is to come.

Luckily so far Canada seems to be taking a crypto friendly approach, we also have several talks about mining corporations moving base of operation into Canada. I speculate our legislation is friendlier but I know for certain we have many sources of cheap renewable energy.

Privacy is going to be the biggest issue with a public ledger, I have always feared whom that bitcoin I bought was previously attached to and whether tracking would bring questions upon me!?! Personally I think we won’t see the privacy coins disappear, they may become illegal but that doesn’t effect the criminal use since the other side of the transaction is most likely outlawed goods/services. I know today illegal activity doesn’t make up that much of the overall use of crypto yet we do owe a great debt too said criminals for being early supporters.

I tend to think the same. One of the biggest points of issue for most of the exchanges (in america) is FDIC insurance, which is what clearly makes the few major exchanges that have them Gemini and Coinbase clear front runners now and into the future for as long as that remains a moat. International exchanges you'd like to see the same level of security, but who knows if they have them. Hacking / security / scamming clearly the biggest issue in I think everyone's mind.

They clearly have an interest in dealing with anti-money laundering efforts so user privacy is eventually going to be the real battleground in my eye. Probably not just in the US.

Taxes / mining / paying and being paid in crypto assets will be areas I am most interested in personally. I'm not surprised banks aren't interested in financing with credit cards, but from a financial risk standpoint, it is probably smart that banks are closing this off even though ISN'T THIS AMER'CA!!! (freedom)

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I personally see this hearing as the starting points for a major discourse amongst the policy maker not only in US but all over the world.

In Malaysia, our Central Banks takes a neutral stand and say that the market should decide the fate of cryptocurrency but their full stand on that matter would be not disclosed until the end of this month in their paper work (until now they would not ban it, but also would not consider it as legal tender.. but as of now, ICO is still a no go here.. meaning they have enormous tapes and fences of legal n policy that one must pass.)

http://telegra.ph/BNM-Kertas-Konsep-Mengenai-Mata-Wang-Digital-Akan-Dimuktamadkan-Bulan-Ini-02-12

In Malaysia due to the reason of not having any cryptocurrency exchange based here, (like Bitrrex based in US), we dont have the discussion like what is happening in US..

I do hope more constructive discussion can be made.. I do see a trend nowadays that many ICO n alts coins are doing airdrop, dividend like n thus under SEC definition is categorized under Security.. I am really interested to follow up the on going discussion regarding this, as whatever SEC decide might well be used as a case study and implement in various countries thus having huge ripple accross the globe.

@cryptovestor Do you foresee tokens skipping the ICO phase and launching their tokens without raising capital?
In my perspective, this could be a possibility if regulations become too stringent for ICOs and if everyday people are not able to invest in projects.
If tokens withhold raising capital upfront and provide an efficient product with a use case, then the market will work its magic and boost token prices up over time. In the short run, they operate at a major loss, but in the long run they gain by leveraging a locked up amount of tokens reserved for the team and future investments. In my opinion, I believe the community would be ok with the token team selling their reserve stock of coins to earn some fiat for their hardwork. However, the team selling their tokens may have a slight negative effect on market prices since more tokens are in circulation afterwards.
The only example I can think of right now is the Earnable token where users get paid in ERN token for completing certain tasks which have different dollar amounts to them. Earn currently pays users in BTC to complete tasks but they're launching their own token soon to replace BTC under their service.
You can learn more about them on earn.com by reading their white paper.
Although Earn is taking a very different approach to how their tokens operate, I see skipping the ICO phase as a viable option if regulation comes down too hard.
Furthermore, if cryptocurrencies are truly supposed to be decentralized and for the average Joe, we could see this happen.
Just my thoughts, what do you think?

I think it is funny, how everybody talks about how great blockchain is and that they want their country to be leading in blockchain technology. But on the same note, they think Bitcoin and Altcoins are useless and should be banned.

  1. A blockchain doesnt work without a tangible coin or token, because there would be nothing too lose to attack the blockchain. Therefore there would be no trust or not more than those of a fractinal reserve central bank system.
  2. ICOs and the hype around it provide plenty of easy funding for a lot of ideas. A lot will fail, but some will succeed. And traditional fundings wouldnt given so many projects a chance.

What do I take from it? I believe it is true, that they all want to be leading in blockchain technology. However this works only with decentralized solutions and a tangible asset like a coin or token which can be traded for real money. If they overregulate it in the US, business will move to more friendly environments like Japan, Singapore, Switzland or the EU. And if this happens, they might adjust their approach to regulation.

I do hope for "crypto securities", because I dont think todays security laws could effectively regulate this industry without killing the development in that country. Regarding short term prices, going down the wrong lane, would be certainly not good for prices.

I actually am not sure if point 2 you make is positive. While many more projects have a chance due to this new funding mechanism, the quality of even the better projects is usually worse than the equivalent start-up. Start-ups have to go through a serious grind, and I mean really serious, to even get a dime of funding. They have to make plans, understand their business model, pitch it to investors, etc.

This process refines the product offering and makes it much better than it would be otherwise if they could just directly raise capital with all the benefits of both public offerings and private placements. I tend to think regulations on ICOs, if done appropriately, could formalize the process more and actually lead to a better overall quality of projects entering the space (even if it is far fewer). You will have to be far "hungrier" to get through the process. The question mark is whether or not those regulations go too far.

Thank you for this discussion of the hearing. I always like to listen to your opinion, which I think is unbiased by BTC bull mentality.

Certainly possible but I think these bearish scenarios are pretty unlikely anytime soon, especially given the resource limitations (hiring freezes and budget restraints) that both leaders and many Senators stipulated throughout the hearing.

I see the biggest takeaways as the hyperfocus on fraudsters and Ponzi schemers — which we should be rooting for if we’d like to see more casual investors enter the space.

Second this.

Time-frame for all of these will be a while, especially given the level of coordination they are looking to have before taking action. Just some themes to be mindful of moving forward. Note that even positive regulation is often negative for price initially.

The SEC should spend its time re-evaluating short volatility products like XIV and leave this space alone!

It does seem like the general market was expecting a much more negative reaction, and the release of the statements a day before(on Reddit) colored the narrative. Right now people have some idea on their mind of scam ICOs that will be hit with this and believe that the project that they back will not be because it is 100% legit. The effect will really be felt with once some more specific information is given, or action is taken.

Perception is everything.

HaHa! So true... it is everyone else that is investing in scam ICO's. Mine are 100% legit! Accordingly, regulations are great as long as you keep regulatory hands off my ICO.

This might be the case, but I think it is worth noting that even "good" regulation often has negative implications on price in the short-term (whenever these regulations eventually manifest themselves).