With the rise of cryptocurrency across the global landscape, regulators across the world are trying to figure out ways to control cryptocurrency exchanges. Originating as a currency exchange in the dark side of the Internet, marked by secret drug trades and illegal activities, cryptocurrency quickly became a backbone of mainstream digital currency exchange.
However, this is where the problem lies; cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) were designed to make it difficult to track transactions.Additionally, cryptocurrencies aren’t governed by any central authority, and thus lack regulations over transactions and exchanges involving virtual currency.
Although cryptocurrency is anonymous to an extent, this also means that it will be difficult for investors to trace and recover their virtual currencies should they be hacked. Since 2015, estimates show that hackers have managed to steal over $400M in cryptocurrencies from investors.
Recently, the U.S. government has made attempts to enforce this market through regulations from the Securities and Exchange Commission (SEC). The core reason for this comes from the idea that cryptocurrencies are more of an asset than a currency. And until now, the SEC hasn’t devoted much attention to virtual currencies, since the government has not deemed it worthwhile to allocate many resources to an asset that was thought to be short-lasting.
At one point, the entire market for cryptocurrencies was worth a mere $50B, and was only seen as a small fish that wasn’t worth regulating. In addition, people simply didn’t think cryptocurrency was worth understanding; the idea was so new to the public that even today, people are still struggling to understand it. Now, the government has recognized that many of the initial coin offerings (ICOs) that are occurring – that too at a very rapid pace – resemble initial public offerings (IPOs), which involves the issuance of regulated securities. Since ICOs entail the issuance of unregulated securities, the U.S. government is now scrambling to intervene.
One of the illicit strategies by cryptocurrency founders was to raise money through the offering of their coin, and vanish with the proceeds after finishing funding. Since cryptocurrency maintains a varying degree of anonymity, many people were able to disappear completely with the funding.
So what is the government doing to regulate this space? The Securities and Exchange Commission has made several subpoenas to various trading platforms and exchanges, and are working to draw a line between legitimate and illegitimate securities by determining whether certain cryptocurrencies should be recognized as securities; which, if recognized as a security, would bring in much more regulatory scrutiny and oversight by the SEC.
One way for cryptocurrency exchanges to bypass this is to register as formal exchanges. However, this would almost certainly eliminate their revenue stream; registered exchanges are only permitted to issue securities to accredited investors and investment brokers, eliminating the possibility for anyone else to purchase a coin. One can quickly see where this becomes a problem, since most people who purchase cryptocurrencies are not accredited investors or investment advisors.
So can you just become an accredited investor? Yes, but with the title come several regulations. You must either be an individual who has an earned income of over $200,000 (or $300,000 with a spouse) in each of the last two years while reasonably expecting the same income in the current year, or you must have a net worth exceeding $1M (either alone or with a spouse), exceeding the value of your primary residence. Institutions can gain accreditation as well; trusts with assets in excess of $5M that are not formed solely for purchasing securities, “whose purchase is directed by a sophisticated person,” or organizations where all equity owners are accredited investors, are entitled to receive accreditation.
In the time being, however, it might be difficult for the SEC and other government entities to enforce regulation over these decentralized exchanges, since bills concerning cryptocurrencies will take time to pass into law. Excessive regulation can potentially destroy the entire mechanism behind legitimate virtual currencies, reducing it to the sole purpose of underground trade. The SEC must approach this with delicacy, ideally scaring exchanges into compliance without affecting its exchange operations.