In January 2018, the justice minister of South Korea announced that the country would consider banning cryptocurrency exchanges amid concerns regarding rampant speculation driving the prices of several virtual currencies, including bitcoin, sky high. ((The Crypto Sun Sets in the East, Economist (Jan. 20, 2018), https://www.economist.com/news/finance-and-economics/21735055-china-has-taken-harsh-line-south-korea-contemplates-banning-bitcoin.)) The news led to an extreme worldwide drop in the price of bitcoin, as investors tried to gauge the uncertainty of the effects of increased regulatory scrutiny with respect to trading cryptocurrency. ((See Steven Russolillo & Kenan Machado, Bitcoin Is Falling Fast, Losing More Than Half Its Value in Six Weeks, Wall St. J. (Feb. 2, 2018), https://www.wsj.com/articles/bitcoin-is-falling-fast-losing-more-than-half-its-value-in-six-weeks-1517556514?mod=searchresults&page=1&pos=2.)) Such a move would see South Korea—one of the most important countries for bitcoin trading and responsible for nearly 10% of the global volume of bitcoin exchange—follow in the footsteps of China, which has “all but banished them,” ((Economist, supra note 1.)) and could serve as an ominous sign for traders throughout the world as more countries possibly follow suit in the coming years.
Indeed, just a couple of weeks after the South Korean announcement, the Chairman of the Commodity Futures Trading Commission (“CFTC”), J. Christopher Giancarlo, announced that the agency would be reviewing its approval process for new financial products, which some in the financial industry believe to be too lax, particularly with respect to cryptocurrencies. ((Gabriel T. Rubin, Rise of Bitcoin Futures Prompts Regulator to Revisit Hands-Off Approach, Wall St. J. (Jan, 31, 2018), https://www.wsj.com/articles/rise-of-bitcoin-futures-prompts-regulator-to-revisit-hands-off-approach-1517394600.)) It remains to be seen how far the new regulations will extend; the Chairman has already announced a “heightened review” for new virtual currency offerings, but also indicated that he did not believe wholesale change would be necessary ((Id.)) As such, the way in which the United States regulates cryptocurrencies is certainly going to change.
There appear to be three overarching problems that cause issues in valuation and inspiration of trust: “The volatility of bitcoin [and other cryptocurrencies], coupled with worries about the lack of transparency and cyber vulnerability of bitcoin exchanges.” ((Id.)) Regulators have good reason to worry; volatility and lack of transparency have been the root causes of countless financial bubbles, panics, and market failures for as long as such markets have existed, and fear of these issues creates the strict regulation of modern equity markets (and what allows the premier markets to function so well). Cybervulnerability is a serious concern across all industries in the 21st century and particularly rampant in cryptocurrency— from the Mt. Gox collapse several years ago (in which over $400 million worth of Bitcoin was stolen from the exchange) to last the recent announcement that over $500 million worth of NEM, another cryptocurrency, was stolen from a Japanese exchange. ((Kenny Au, Tracing Back Stolen Cryptocurrency (XEM) from Japan’s Coincheck, Forbes (Jan.29, 2018), https://www.forbes.com/sites/outofasia/2018/01/29/tracing-back-stolen-cryptocurrency-xem-from-japans-coincheck/#328d886a277e.)) In the words of the CFTC Commissioner, “[O]ur task, as market regulators, is to set and enforce rules that foster innovation while promoting market integrity and confidence.” ((Jay Clayton & J. Christopher Giancarlo, Regulators Are Looking at Cryptocurrency, Wall St. J. (Jan. 24, 2018), https://www.wsj.com/articles/regulators-are-looking-at-cryptocurrency-1516836363?mod=searchresults&page=2&pos=18.)) This vision cannot be fully realized so long as there are substantial questions around any of the aforementioned concerns.
What could stabilize crypto markets? Issues of volatility and liquidity are particularly exacerbated in crypto markets, as a small group of investors controls the lion’s share of the market. Indeed, nearly 40% of the outstanding bitcoin in the world is owned by roughly 1,000 investors. ((Olga Kharif, The Bitcoin Whales: 1,000 People Who Own 40 Percent of the Market, Bloomberg (Dec. 8, 2017), https://www.bloomberg.com/news/articles/2017-12-08/the-bitcoin-whales-1-000-people-who-own-40-percent-of-the-market.)) The problem looks like a catch-22: if ownership were more dispersed (which could only meaningfully be accomplished by convincing large financial institutions to enter the market), prices would most likely stabilize, and if respected names in the financial industry were willing to invest money in cryptocurrency, this could have a ripple effect. But with prices as unstable as they are, and with comparatively little known about the cryptocurrency industry, institutions like banks are unwilling to enter the market, or even to recommend doing so to their clients. ((Matt Levine, Crypto Finance Meets Regular Finance, Bloomberg (Jan. 24, 2018), https://www.bloomberg.com/view/articles/2018-01-24/crypto-finance-meets-regular-finance.)) All of this could change in the near future, however: Intercontinental Exchange (“ICE”), the owner of the New York Stock Exchange, announced that it will be partnering with a startup to create the most up-to-date, comprehensive cryptocurrency exchange that would aggregate prices from as many as fifteen different exchanges worldwide and provide such data to financial institutions. ((Alexander Osipovich, What’s Bitcoin Worth? A New Plan to Bring Discipline to Crypto Prices, Wall St. J. (Jan. 19, 2018), https://www.wsj.com/articles/bitcoin-draws-another-wall-street-giant-nyse-owner-1516271400?mod=searchresults&page=1&pos=15.)) The hope is that this platform will “draw more financial heavyweights into the risky, rapidly evolving world of bitcoin,” by enabling them to be able to price cryptocurrencies accurately enough to feel comfortable recommending them to their retail clients and to potentially even invest in the currencies themselves. ((Id.))
As far as regulations go, it remains to be seen what new controls the CFTC will have in place, and whether “our historical approach to the regulation of currency transactions is appropriate for the cryptocurrency markets.” ((Clayton & Giancarlo, supra note 8.)) What is certain, however, is that in order to optimize the functioning of cryptocurrency exchanges, greater transparency and stability are needed—whether that comes in the form of private solutions, public regulations, or a combination of both remains a mystery.
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