There continues to be a lot of discussion about regulating cryptocurrencies around the world. Two of the most recent statements regarding the regulation of crypto, or whether crypto should be allowed in an investment portfolio without regulations being in place have been very direct and specific. These two statements have come from Secretary Yellen of the US and Bank of Canada Senior Deputy Governor Rogers. It appears inevitable that some form of regulation will happen. The questions remains, when, how, what and where.
Janet Yellen on Investing in Cryptocurrencies for Retirement
The topic of whether Americans should be able to put retirement savings in cryptocurrencies continues to be hotly debated.
U.S. Treasury Secretary Janet Yellen was asked at an event organized by the New York Times about Fidelity’s announcement to allow bitcoin as an investment option in 401(k) plans.
Yellen replied:
“It’s not something that I would recommend to most people who are saving for their retirement … To me it’s very risky investment.”
Fidelity’s announcement followed a guidance issued by the Labor Department (DOL) warning 401(k) plan administrators about allowing cryptocurrencies in retirement plans. Fidelity is one of the biggest 401(k) plan administrators.
Ali Khawar, Acting Assistant Secretary of the DOL’s Employee Benefits Security Administration, said the Labor Department has “grave concerns with what Fidelity has done.” He stressed, “cryptocurrencies can present serious risks to retirement savings.”
Treasury Secretary Yellen also noted that Congress could regulate what assets could be included in retirement plans like 401(k). Commenting on whether Congress should act, Yellen clarified:
“I’m not saying I recommend it, but that to my mind would be a reasonable thing.”
The Labor Department’s efforts to restrict Americans from putting crypto in retirement accounts have upset some lawmakers. In response, U.S. Senator Tommy Tuberville (R-AL) introduced the Financial Freedom Act to prohibit the DOL “from issuing a regulation or guidance that limits the type of investments that self-directed 401(k) account investors can choose through a brokerage window.” Furthermore, the Labor Department has been sued over its crypto guidance.
Bank of Canada’s Official Stresses the Importance of Crypto Regulation
Bank of Canada Senior Deputy Governor Carolyn Rogers talked about cryptocurrency regulation in an interview with Reuters Thursday.
“This is an area that is still small, but it’s growing really rapidly. And it is largely unregulated,” she explained, adding:
“We don’t want to wait until it gets a lot larger before we bring regulatory controls in place.”
The total crypto market capitalization has fallen to below $1 trillion following the June 13th sell-off. According to data from Bitcoin.com Markets, the total market cap of the entire crypto market is approximately $918 billion as of June 14th.
According to Canada’s central bank, the share of Canadians who own bitcoin more than doubled to 13% in 2021 from 5% in 2020.
“Like any asset that’s jumping around in price, people see an opportunity for quick gains,” Rogers added, elaborating:
“Our concern is they may not understand the risks. They may not even understand that it’s not a regulated area.”
The senior deputy governor of the Bank of Canada emphasized that the crypto industry needs to be regulated. “These are somewhat like banking assets, somewhat like capital markets,” she described.
However, Rogers pointed out that there are challenges, stating:
“One of the challenges is to figure out how do they fit in the current regime, and if they don’t fit, how do we adjust the regime so that they will fit.”
Fed Chairman Says U.S. Might Need More Crypto Regulation. Here’s What That Means for Investors
The U.S. government keeps laying more groundwork for potential future cryptocurrency regulation. Federal Reserve Chairman Jerome Powell spoke in July about the Fed’s interest in regulating stablecoins and the potential for a central bank digital currency (CBDC), while testifying before the U.S. House Committee on Financial Services.
Stablecoins (Tether and USD Coin, for example) are a category of cryptocurrencies that peg their value to an existing fiat currency, like the U.S. dollar. That helps stabilize their value, so they’re better suited for digital payments — unlike more volatile digital assets like Bitcoin. Ideally, these coins are underwritten by a reserve of the currency they’re tied to, but today there’s little official regulation enforcing that.
Powell compared them to money market funds or bank deposits, which have a strong regulatory framework in the United States. “That doesn’t exist for stablecoins,” he said. “And if they’re going to be a significant part of the payments universe — which we don’t think crypto assets will be, but stablecoins might be — then we need an appropriate regulatory framework, which frankly we don’t have.”
What Does This Mean for Crypto Investors?
Experts we’ve spoken to largely agree that long-term crypto investors should stick with well-known cryptocurrencies like Bitcoin and Ethereum. Unless you’re doing more active trading — and are comfortable with the risks of buying lesser-known coins — the two most popular currencies are the best options for most people.
Regulation like what Powell is talking about is more likely to impact stablecoins and other smaller altcoins, experts say. “They have different use cases,” says Mike Uehlein, founder and financial planner at WealthU Advisors, referring to Bitcoin versus stablecoins.
If Bitcoin is “digital gold,” stablecoins are more comparable to the current money system, he says, having an infinite supply and centralization. Bitcoin is a store of potential value, while stablecoins are better suited for digital transactions and converting digital assets to and from “real” money.
“Investors buying Bitcoin as a store of value and buying stablecoins for a store of value are two different things,” says Tyrone Ross, a financial advisor and CEO of Onramp Invest, a cryptocurrency platform for other financial advisors. A central bank-backed digital currency would be a market competitor for stablecoins, but not Bitcoin, Ross says.
Still, any new regulation has potential to affect your portfolio.
While stablecoin regulation or a CBDC may not have a direct effect on Bitcoin — which is decentralized and operated by users across the globe — it is likely regulation could bring more volatility to the crypto market. Already, we’ve seen crackdowns on cryptocurrency regulation from China play a role in Bitcoin’s recent $30,000 price drop. We’ve also seen how the price of coins often follow each other — when Bitcoin’s price takes a hit, altcoins often follow. Regulation could eliminate many cryptocurrencies available today, Uehlein says.
Still, the regulations Powell mentioned would likely have a much bigger impact on the value of stablecoins or smaller altcoins, rather than Bitcoin. “DeFi, stablecoins, and other things are ripe for regulatory scrutiny,” Ross says. “Don’t make large bets in the space now and stay educated on recent developments and news.”
Why Regulate Stablecoins?
Because crypto trading and prices move very quickly, stablecoins can help traders move their funds within an exchange faster than if they were depositing cash from a bank account. Trading coins for actual dollars in and out of your bank account could take several days (and charge higher fees) than exchanging a coin for a stablecoin.
But without regulation, even these coins are risky.
“Stablecoins are currently used as a replacement for the U.S. dollar, pegged 1:1 with the dollar,” Uehlein says. “Verifying this peg has been in question for many investors and regulators. Many investors would feel better knowing the dollars are backed by the U.S. treasury.” And that’s where a potential U.S. government-issued digital currency comes in — since it would have that backing.
What’s the Purpose of a Central Bank Digital Currency?
Powell’s testimony also reiterated the Fed’s interest in a central bank digital currency for the United States. A CBDC would make it easier to make transactions digitally. Because it would (hypothetically) work on a blockchain network, those transactions would also be secure and much faster than money transfers are today.
While it’s generally unwise to use crypto to make a purchase, that’s exactly the purpose a potential central bank digital currency could serve. “A fed-backed CBDC could replace stablecoins such as Tether or USDC,” Uehlein says.
As far as any real implementation of a CBDC, both Fed officials and the experts we spoke to believe there’s a long way to go before we reach that point, at least in the United States. While he says he’s very interested in seeing how CBDCs in countries across the world continue to evolve, Uehlein says “it is too soon to tell how serious the U.S. is about a CBDC.”
What’s Next In Crypto Regulation?
Now, all eyes are on a coming report from the Federal Reserve, which Powell expects to publish around early September.
“We’re going to address digital payments broadly,” he told the committee. “So that means stablecoins, it means crypto assets, it means CBDC. That whole group of issues and payment mechanisms, which we think we’re really at a critical point in terms of the appropriate regulation.”
In addition, the Fed plans to ask the public about the risks and benefits of cryptocurrency and a potential CBDC, alongside consultation with national groups, including Congress. The purpose of the report, Powell said, is “to lay out the possible potential benefits and also the potential risks” of a central bank digital currency, and how regulators might weigh those costs and benefits.
U.S. Treasury calls for stricter cryptocurrency compliance with IRS, says they pose tax evasion risk
The Treasury Department on Thursday announced that it is taking steps to crack down on cryptocurrency markets and transactions and said it will require any transfer worth $10,000 or more to be reported to the Internal Revenue Service.
“Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion,” the Treasury Department said in a release.
“This is why the President’s proposal includes additional resources for the IRS to address the growth of cryptoassets,” the department added. “Within the context of the new financial account reporting regime, cryptocurrencies and cryptoasset exchange accounts and payment service accounts that accept cryptocurrencies would be covered. Further, as with cash transactions, businesses that receive cryptoassets with a fair market value of more than $10,000 would also be reported on.”
Bitcoin reversed course shortly after the Treasury’s announcement and was last seen trading up 1.6%, according to Coin Metrics. Previously in the session, it was up more than 9%.
A growing number of Wall Street analysts have over the past month sounded the alarm that regulators at the Treasury and the Securities and Exchange Commission could soon take a more active role in cryptocurrency regulation.
The Treasury Department’s release came as part of a broader announcement on the Biden administration’s efforts to crack down on tax evasion and promote better compliance. Among proposals officials are considering are bolstered IRS funding and technology, and more severe penalties for those who evade their obligations.
According to the Treasury’s estimates, the difference between taxes owed to the U.S. government and those actually paid totaled nearly $600 billion in 2019.
Increased regulation will likely upset some cryptocurrency investors, who have seen the value of bitcoin slide about 25% over the past month and talk of capitulation creep into online forums.
With longtime cryptocurrency expert Gary Gensler at the head of the SEC, Raymond James expects it’s only a matter of time until Congress grants the regulator broader jurisdiction.
He told lawmakers earlier this month that allowing the SEC to regulate cryptocurrency exchanges will help ensure investors are protected and prevent market manipulation.
“Chairman Gensler is viewed as a potential ally for cryptocurrencies as a former professor on the topic; however, these statements are likely to revisit debates regarding the regulatory risk to cryptocurrencies and exchanges,” Raymond James analyst Ed Mills wrote earlier in May.
“In the short-term, this could cause headline risk,” he added. “However, in the medium-to-long term, regulation would add further legitimacy to the asset class and could provide a regulatory moat around existing cryptocurrency exchanges.”
While involvement by the Treasury Department and the SEC may ultimately prove a boon for cryptocurrency investors, any near-term regulatory hurdles will likely come as another bother for investors in bitcoin, dogecoin and the like.
Those sentiments were echoed by Miller Tabak last month, when the firm told clients that “cryptocurrency markets are not properly considering legal risk.”
“Confirmation of Gary Gensler as SEC Chairman, and cryptocurrency volatility over the weekend following rumors of tighter regulation, highlight the regulatory risks facing this industry,” strategic economist Paul Shea wrote in April.
“The difference in regulatory risk and progress as a means of payment raises an important question: are other coins’ recent success due to good news about them or are they piggybacking on positive sentiment related to bitcoin?” he added.
Democrats and Republicans alike have made cryptocurrency regulation a top priority in 2021 as run-ups in the price of bitcoin and other digital assets last year sparked concerns of market manipulation and uninformed retail investments.
LCX.com Launched the LCX Regulated Cryptocurrency Exchange in 2021
LCX.com, the Liechtenstein Cryptoassets Exchange, on January 5, 2021 announced the launch of its regulated and compliant digital currency exchange. LCX secured approvals of eight licenses under the new Blockchain laws in Liechtenstein last week.
The LCX Exchange is a regulated trading venue offering a range of digital currencies. The cryptoassets trading platform has been built from the ground up, leveraging the proficiency of a progressive crypto portfolio desk, LCX Terminal, LCX DeFi Terminal and a sophisticated crypto compliance suite. Initially LCX.com offered the most popular cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), USD Coin (USDC) and LCX Token ($LCX) and has since expanded the available cryptocurrencies.
On Dec. 30, 2020, LCX secured approvals of eight licenses with the registration Nr 288159, which makes it the first cryptocurrency platform to achieve this important regulatory milestone in Liechtenstein, allowing LCX to offer the broadest scope of blockchain services.
“LCX Exchange is a new generation of cryptocurrency exchange. 2021 will be the year of blockchain innovation and we see crypto compliance as key to success,” says Monty Metzger, CEO & Founder of LCX.com.
The license approvals include compliant crypto exchange (Exchange Service Provider), digital asset and crypto custody (Token Depositary and Key Depositary), reliable price oracles (Price Service Provider), KYC, AML and crypto compliance services for tokenization and other blockchain projects (Identity Service Providers), safe and secure smart contract creation and delivery (Token Generator) and a token offering platform (Token Issuer on behalf of the clients).
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