Bitcoin Prices Should Not Distract From The Need For Better Regulation

March 9, 2024

4 minutes read

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With bitcoin briefly touching all time levels in March 2024, bitcoin and crypto investors have had plenty to celebrate so far this year. Following the approval of bitcoin spot ETFs, and after weathering the price declines and public doubters that followed, the price of bitcoin and many other cryptoassets have been on a rapid increase. In addition, regulatory bodies outside of the SEC have seemingly come around to the fact that crypto is to hear to stay. Specifically, the head of the CFTC recently commented that if given the necessary framework and authorization the CFTC could construct effective regulatory guidelines within a 12-month period. This is certainly an about face from previous comments and public statements, which focused on inter-agency turf wars and a lack of cooperation.

Despite these positive trends, however, bitcoin and other crypto investors should not lose track of a fundamental reality that remains unchanged; the regulatory and operating environment for crypto entrepreneurs and innovators remains a difficult one. For all of the success that spot ETFs have created, including the wealth that crypto investors have accumulated during the recent bull market, there remain significant obstacles toward continued growth and development in the sector. Papered over by the wealth effect of rising asset prices, these regulatory issues and obstacles continue to present issues that need to be addressed.

Let’s take a look at some of the items crypto advocates need to keep in mind, even as prices are on the upswing.

The SEC Contiues To Stymie Compliance

Even after the SEC approved the issuance of 11 bitcoin spot ETFs, the SEC remains an obstacle toward greater token registration, and the tokenization of broader financial markets. Statements by Gary Gensler reinforce the mindset and approach that crypto firms are simply choosing not to register. Despite statements from the chair that registration is a simple form, and that firms that are not registered are doing so willingly, this glib attitude disguises a deeper issue that requires addressing.

Assuming that the registration process is as simple and straight-forward as advertised, firms that followed that advice to register tokes would encounter a dead-end. Registered tokens, which would reaffirm the chairperson’s position that all tokens are equity securities, can only be traded on registered exchanges via registered broken dealers. While FINRA has approved a handful of institutions to deal with crypto tokens, the SEC has not allowed any currently registered exchange or broker-dealer to list, custody or trade crypto tokens.

In essence, regulatory compliance via the SEC remains a virtually impossible task.

The OCC Is Crimiping Banking Innovation

According to the Banking Disruption Index nearly 60% of Americans surveyed are dissatisfied with the levels of products and services currently provide by U.S. banking institutions. Given that banking is a lucrative global business, and that the financial benefits of tokenized payments have been recognized via adoption of blockchains by major TradFi institutions, crypto investors might be surprised to hear about the continued regulatory obstacles toward greater banking innovation.

The OCC continues to stymie efforts for the banking-as-a-service sector seeking to grow and offer a bevy of more efficient and cost-efficient services for customers. Specifically, the OCC has been publicly cautious regarding BaaS due to concerns about how these firms handle customer data, monitoring tools for bank secrecy purposes, and how new entrants to the banking field deal with the multitude of existing rules. In essence, this hesitation has created an environment in which TradFi institutions serve as gatekeepers, since new entrants to the space seeking to make/receive dollar payments must work with licensed financial institutions.

Combined with the fact that the OCC seem adverse to developing specific regulations or new rules for banking disruptors has created an environment that severely curtails opportunities for banking innovation and competitiveness.

State Innovation Should Be Encouraged

Given the reality that the federal agencies in charge of financial markets and the banking system seem unwilling or unable to embrace new ways of thinking and treating financial assets or instruments an interim path forward would be to embrace state-driven innovation. While New York has taken criticism for the composition and enforcement of the BitLicense regulation, the fact remains that it is a regulatory framework, albeit one that has proven difficult for firms to comply with. Another example is the state of Wyoming that has passed over 12 laws to integrate blockchain into the business environment, created and codified special purpose depository institutions for handling crypto transactions, and is currently working on developing a state-based stable token.

These efforts, however encouraging and innovative, are not a substitute for federal regulatory changes and ideally the U.S. Congress. A patchwork of state-based regulations should be celebrated and encouraged, but if not reinforced with federal follow-up actions will not be enough to create a sustainable and stable environment for continued crypto growth and innovation.

Bull markets are always for celebration among investors, but should not overshadow the need for a better regulatory environment.

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I am a professor at the City University of New York – Lehman College. I serve on the Advisory Board of the Wall Street Blockchain Alliance, where I chair the Accounting Work Group. I am also the chairperson of the NJCPA’s Emerging Technologies Interest Group (#NJCPATech). I sit on the Advisory Board of Gilded, a TechStars ’19 company and AICPA-CPA.com startup accelerator participant. I was a Visiting Research Fellow at the American Institute for Economic Research during 2019.