An insight into the future of cryptocurrency regulation in the USA

On 30 July 2019, the United States Senate Banking, Housing and Urban Affairs Committee convened a hearing entitled, Examining Regulatory Frameworks for Digital Currencies and Blockchain.

The hearing witness panel comprised Jeremy Allaire co-founder and CEO of crypto payments company Circle, who presented on behalf of the Blockchain Association; Rebecca M. Nelson, an international trade and finance specialist at the Congressional Research Service; and law professor Mehrsa Baradaran from the Irvine School of Law at the University of California. The full written testimony from each of these witnesses can be accessed here.

Notably, in his written statement, Chairman Mike Crapo commented: It seems to me that digital technology innovations are inevitable, could be beneficial, and I believe that the U.S. should lead in developing these innovations and what the rules of the road should be. He further commented during the hearing that, if the United States were to decide — and I’m not saying that it should — if the United States were to decide we don’t want cryptocurrency to happen in the United States and tried to ban it, I’m pretty confident we couldn’t succeed in doing that because this is a global innovation.

Whilst Mr Crapo highlighted the US Treasury's serious concerns regarding the growing misuse of digital currency by money launderers, terrorist financiers, and other bad players, Mr Allaire testified that the current centralised system of banking is far from impervious to money laundering, citing a statistic that as much as 99 per cent of money laundering goes undetected in the existing banking system. Allaire further commented that, the rapid growth of the internet has led to a hyper-connected world, but one where our major institutions—financial, government, and communications platforms—are built on legacy technology platforms that are centralized and therefore inherently more fragile and at risk of cyber-attacks, data breaches, and privacy violations.

Commenting on the global and domestic (US) regulatory landscape for cryptocurrency, Allaire noted that governments and regulators globally are adopting very different approaches, and that whilst advances have been made in countries including Bermuda, Singapore, Switzerland, Malta, France and Japan, the regulatory uncertainty in the US as well as the application of laws that do not easily accommodate cryptocurrency, has led to a significant loss of opportunity for the US in the space. With this, he commented that, Congress should consider new laws that protect consumers while not causing companies to fixate on nearly century-old definitions rather than innovation, and that the US has lost considerable market share in this sphere, whilst working through these issues. By way of example, Allaire noted that Circle has now commenced relocating its international-facing products and services to Bermuda, given that, in his view, Bermuda's forward looking Digital Asset Business Act provides a comprehensive regulatory framework for companies offering this new type of financial service, which framework can and should be emulated by other countries.

Noting Mr Crapo's view that cryptocurrency is seemingly here to stay in the US and that the US should lead in developing digital technology innovations and the rules of the road, it seems that a strong case has been made for greater bespoke regulation in the US pertaining to cryptocurrency, to allow this to happen.

The Cayman Islands Government has been proactive in this space, and is currently reviewing the extent to which bespoke legislation which treats digital assets as a distinct asset class is required. We'll watch this space. In the meantime, the Cayman Islands' self-designation as a regulatory sandbox for digital asset technologies (amongst other features of the jurisdiction) renders it a highly competitive place to innovate in this sector.