The current state of blockchain regulation

April 28, 2017 | by Bradley Cooper

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With new technologies, it takes a while for regulation to catch up. Blockchain technology is no exception. While we are slowly beginning to see standards emerge — for instance, New York state's new BitLicense regulations — the reputation of blockchain is still marred by the criminal aspects of bitcoin.

Bitcoin itself recently took a hit when the SEC ruled against the Winklevoss twins' proposal for an exchange-traded fund for bitcoin. The SEC expressed concern about the ability of powerful, unregulated Chinese exchanges to manipulate the price of bitcoin. This underscores a key aspect of virtual currency regulation: It is still in its infancy.

"The  current  regulatory  landscape  when  talking  about  [distributed ledger technologies]  is  simultaneously  immature  and  complex,  and  it depends on what component of the DLTs we are talking about: cryptocurrencies; blockchains; shared ledgers; smart  contracts;  etc.," Javier Sebastian Cermeno said in a report by BBVA Research. "The  regulatory  treatment  of  each  of  these  components  is  different,  although [the] lack  of specific regulation is a common factor."

Currently, countries such as Brazil, Canada, the United States and many European nations at least allow bitcoin technologies. Others such as China and India have a less friendly relationship with bitcoin, and some — including Russia — are outright hostile, according to the BBVA report.

Even among governments that do permit trading in bitcoin and other virtual currencies, regulation can be inconsistent. For example, the European Parliament believes it should take a hands-off approach to virtual currency regulation and should simply analyze it. However, the European Banking Authority, a regulator agency of the EU,  recommends that banks stay away from virtual currency.

In the U.S., the Financial Crimes Enforcement Network was the first government agency to release a statement on virtual currency. FinCEN was followed by the IRS, according to a blog by Liz Prehn, a tax attorney for Moskowitz LLP. The IRS regulations for taxation, however, leave a number of unanswered questions. For example, how should bitcoin mining be treated for tax purposes?

"Is virtual currency that is held by a merchant considered a capital or an ordinary asset?" Prehn wrote. Is it a "commodity" subject to mark-to-market accounting?"

Other questions relate to how virtual currency should be reported and how to determine the exchange rate of virtual currency for tax purposes.

While the IRS views virtual currency as property, other regulatory agencies see it differently. FinCEN treats it as money, whereas the Commodity Futures Trading Commission treats it as a commodity. This has led to difficulties in court cases related to bitcoin in which judges have had to determine exactly how to treat virtual currency, according to the BBVA report.

For example, in 2016, Judge Teresa Pooler of the 11th Judicial Circuit Court of Florida ruled on the case of a man charged with helping two undercover agents launder money with bitcoin. Judge Pooler threw out the case saying that bitcoin is not money, thus the defendant could not be charged with money laundering.

From  a  global   perspective,  regulatory   initiatives  around  the  broad  field  of  distributed  ledger technologies are in their initial stages, Cermeno said.

Most regulatory bodies now have working groups and task forces in place analyzing virtual currencies and DLTs, however, there still is relatively little progress toward enforceable regulation.

In the case of blockchain technology regulation, Cermeno asserts that it doesn't really exist yet. But users of the technology will come up against existing regulations for activities — such as smart contracts — as they migrate to blockchain technology.

"Any  smart  contract  defined  on  the  blockchain  will  have  to  comply  at  least  with  the  regulation  on  contracts applicable on the correspondent jurisdiction, as exposed in the commercial and trade law," Cermeno said. "Then, depending  on  what  kinds  of  financial  services  are  being  offered  on  the  blockchain  (payments,  lending,  investment,  etc.),  regulation  on  these  services  will  have  to  be  applied. For instance, KYC and  AML regulation, capital markets regulation, lending regulation, and so on."


Topics: Bitcoin, Blockchain, Regulation



Bradley Cooper
Bradley Cooper is a Technology Editor for DigitalSignageToday.com. His background is in information technology, advertising, and writing. wwwView Bradley Cooper's profile on LinkedIn

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