China has triggered a massive Bitcoin and altcoin crash last week by re-iterating its trading ban and issuing a new country-wide mining ban.
In a recent article Prof. Patrick Schüffel and I have pointed out that such measures were not just probable but imminent, and would have a significant effect onto the crypto-market - we have all now witnessed.
But what is next at the crypto-regulation horizon after China has fired its ban-gun and made crystal clear where it stands with regards to the private cryptocurrency market? States around the world have recently taken a high dynamic of measures to regain control over the crypto world, sometimes even in a panic-like manner. From announcements and warnings, over formative or restrictive regulations, to outright bans, it's all there.
The illustration below depicts some of the most recent measures taken by selective states and whether they can be seen as rather invasive with respect to the economy and citizen's rights or rather moderate.
The NEXT BIG HIT to the crypto-market will be triggered by US regulation, once the U.S. government and its various federal agencies have made their stance. Such regulation(s) is not likely to include bans as seen from China, though, they will trigger a similar market-reaction as last week...
Only after that, like after a clearing thunderstorm, will the crypto market be able to recover gradually and sustainably due to regulatory clarity, and also curbing speculation and market volatility. Yet, we will have to go through another such storm ...
Why to expect the next big hit coming from the U.S. Regulation?
Regulatory efforts in context of cryptocurrencies and crypto-assets are under way globally. India as a big crypto-market has recently announced a DLT (digital ledger technology) related legislation. The EU region has already drafted out its Markets in Crypto-Assets (MiCA) regulation to be enacted through the next years, and Switzerland has even enacted a dedicated DLT framework legislation in February 2021. Amongst the EU member states, e.g. Germany is pushing forward and has enacted in April genuine crypto-friendly law: The biggest EU economy is permitting over 4'000 institutional investment funds to gain exposure to cryptocurrencies and, thereby, hopes for a massive cryptocurrency adoption. All these states and jurisdictions are equally taking advantage of the early hour to position their home markets in the area of DLT. They put forward binding rules in form of a regulatory frameworks, which balance the needs for adequately containing the crypto risks whilst in the same time leaving sufficient room for innovation, sand-boxing and investing.
Hence, the named regulations are moderate, non-interventionist and already today quite clear. There are not too much of (negative) regulation-surprises to be expected from Europe, and even with one or the other surprise, this might not trigger crypto-market dips of scales like last week.
In contrast, the U.S. is clearly behind the curve to set a regulatory framework for the crypto-market. Currently there is a huge gap and voices from the industry are getting louder to come out with something rather sooner than later. Yet, the dominant question to solve is not even, which direction regulation will take but rather who will take the regulatory lead amongst the various federal agencies, hence driving the agenda. The situation that the U.S. as the financial center of the world has not yet made its stance towards cryptocurrencies, leaves the global crypto-market in great uncertainty and lead to situations that mere warnings about crypto risks from higher officials like Janet Yellen cause temporary market fluctuations of 15%. What should we expect when warnings and announcements are followed by actions then?
What mix of regulatory measures to expect from the U.S.?
The U.S. Like the EU or Switzerland are liberal states, and in general striving for appropriate and balanced regulation than harsh and restrictive ones, let alone bans. Bans, on the other side, are interventionistic, prohibitive and to a certain extent also fanciless, but ultimately ineffective measures to mitigate risks. They are usually also rather applied by protectionist economies and autocratic regimes - see chart. The U.S. probably still is the most economically liberal and competitive, i.e. innovative economy globally. Regulatory measures hence will be moderate, in general. They will most likely also abstain from fundamentally new legislation or even paradigm shifts as building upon existing law like the EU or Switzerland which have followed kind of a gap-filling exercise for the crypto-world.
As for the regulation, federal and state's legislation need to be differentiated. The U.S. is a country which leaves their states greater autonomy as other democratic and federalist state systems, similar like Switzerland with their (e.g. tax) legislation even on 3 levels (the federal government, the canton and the municipality).
At the federal level there are different authorities which will have a relevant say regarding the crypto-regulation, and amongst others particularly the SEC (U.S. Securities and Exchange Commission), the OCC (Office of the Comptroller of the Currency) and the CFTC (Commodity Futures Trading Commission). Further, and as the government has recognized the urge to come out with a coordinated crypto-legislation or framework, there is a task force put in place to drive progress (more here). At the federal level there is currently the biggest gap and as mentioned before, first there needs to be a clear cut governance in place before, regulation will be shaped out (more here).
In contrast, at the U.S. state's level, some quite concrete legislation momentum can be observed, mainly driven by competitive motivation to tap DLT-market potential early and position the local economy for the future. In general, this regulation is economy friendly, hence formative rather than restrictive. As an example, Illinois is about to pass a legislation to adopt cryptocurrencies and blockchain technology after Nebraska and Wyoming which have already done so (more here).
In sum, one can hence expect regulation rather than bans at both, the federal and the state's level and a trend to economy-friendly formative legislation at the state's levels. At the federal level, though, regulation will be economy friendly as described above but also of restrictive character, where crypto-risks are in the foreground. To be named as the most prominent purposes for regulation are clearly protection from money laundering and terrorist financing, consumer investment protection, newly also ecological purposes like carbon-reduction (e.g. through mining) and of course taxation. All these purposes are protected already today in the traditional financial system via by nature restrictive regulation. They are in principle legitimate, and thus will eventually be rolled out to the crypto-world. The IRS (Internal Reserve Service) does so already today and not only within the borders of the U.S.: On the hunt for tax cheats, 'Uncle Sam' is forcing cryptocurrency exchanges like Kraken to reveal their customers (more here). It would go beyond the scope of this article to dig deeper into the different fields of the U.S. federal legislation. Instead, I like to refer to a very good overview on the current and pending crypto-legislation.
When will the U.S. fire off their crypto-regulation?
It remains the key question particularly to the investor's world, when U.S. regulation will hit the ground. More important yet, will be, if there will be an (orchestrated) big bang or a staggered approach with one regulatory body after the other making their stance(s). In the latter case, markets could face sequences of dips and recover subsequently, whereas with a big bang, one can expect a massive dip of dimensions as seen last week.
As outlined in this article, the U.S. will regulate in a rather moderate way to protect its own economy and also consumers and (crypto) investors. There is no obvious interest hence, to hit the market hard, on the contrary: The loud warning voices from government officials from crypto-risks at an increasing high frequency since start of 2021 can be interpreted as an indication, that formative and restrictive regulation can soon be expected.