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Would regulating cryptocurrencies be a blessing in disguise?

Bill Coffin | July 31, 2017

Nearly 20 years ago, science fiction author Neal Stephenson published a short story in Time called “The Great Simoleon Caper,” in which a mathematician gets caught up in a plot both to manipulate the results of a contest meant to promote a new, nongovernmental, electronic currency…as well as foil the attempts by the government to discredit e-money in general. The result is the kind of tale that does what science fiction does best: predicting the future well before regular folks can even imagine it. When it was written, “The Great Simoleon Caper” was pretty far out there, trading on concepts like untraceable electronic currency and distributed political systems. But now, cryptocurrency isn’t just something we read about in tech journals. It is, at the very least, a robust investment platform if not yet a fully accepted method of currency for everyday purchases.

And yet, the speed at which cryptocurrency continues to evolve makes it a problematic medium for regulators and compliance officers alike. Based on blockchain technology, cryptocurrencies offer a completely decentralized and untraceable manner in which to buy goods and services. Those concerns hit a quantum leap the more cryptocurrency gets used as actual money, because then it also becomes an ideal medium for money laundering. Case in point: a late July indictment by U.S. officials of a Russian operator of a digital currency exchange which he used to launder more than $4 billion in proceeds from various criminal enterprises, ranging from computer hacking to drug trafficking.

Stories like this are problematic for those who seek to establish digital currencies like Bitcoin, Ethereum and their many emerging rivals as legitimate, mainstream forms of payment. High-profile investors such as Mark Cuban and boxing champ Floyd Mayweather have gone public with their enthusiasm for digital currencies as being an investment of the future, and initial coin offerings have raised more than $1 billion since the beginning of the year. But the largely deregulated nature of these things makes it hard for more conservative folks to put their money behind them, and the blistering pace of ICOs has prompted federal regulators to formally define ICO tokens as securities thereby falling under securities law) with the promise that more regulations are sure to follow to help define the finer points of digital currency.

This news wasn’t received with open arms by investors; news of a potential federal crackdown on ICOs in general has already hurt the value of certain nascent digital currencies. But, given how much the value of these fluctuates—and that some insist their value is still only a perceived, agreed-upon thing that has no real value backing it up—the impact of government oversight may not be the big wet blanket some fear it is.

In fact, government regulation would probably be a good thing for digital currencies in general, even if in the short run it’s not so terrific for a few currencies in particular. Some years ago, some innovative souls created the life settlement, a manner in which a person’s life insurance policy could be bought and sold on the open market, wherein one is paid a small fraction of the value of their policy now, in return for immediate cash in hand. Those buying the policy pay the premiums going forward; those who sell their policies can use the money to spend on medical expenses, retirement, whatever. Initially decried by the insurance carriers themselves as a perversion of the intent of life insurance, life settlements fought the industry in court tooth and nail for years until at last, regulators made some official calls on where and how one might sell a life insurance policy. That there were finally rules around these wasn’t a loss for life settlement companies because now they had been legitimized. The Wild West was over for them, sure, but the railroad had come through, which was even better in the long run.

Cryptocurrency is in much the same situation; on the verge of substantial legal and regulatory interpretation. The decentralized notion of digital money makes it a little difficult for standard-bearers to go forth and fight the government on behalf of an amorphous and hazily defined collective, which only makes life easier for regulators to set down solid ground rules for how this new form of currency fits into existing regulatory schema. The more cryptocurrency must play by the rules, the less it must look over its shoulder, the more Main Street can invest in it, too, and the more compliance officers can build a protocol for how it becomes part of their organization’s financial toolbox.