Cryptocurrencies plunge again

Bitcoin dropped to below $8,000 on Friday, reflecting a plunge of almost 60 percent from its record high of more than $19,000 in December.

The crytpocurrency’s steep decline comes as regulators from the Securities & Exchange Commission and the Commodity Futures Trading Commission (CFTC) are scheduled to testify Monday before the Senate Banking Committee. Regulators in countries including South Korea and India have cracked down on the cryptocurrency market over concerns about fraud and volatility, among other issues.

Financial regulations were developed at a time when few could have imagined the development of an asset class like bitcoin and other cryptocurrencies, which are lines of code that hold monetary value and  are designed to provide anonymity to their owners. Their dramatic surge in popularity and value caught many in the investing world by surprise, adding to the challenges of regulating the market.

Fans of cryptocurrencies argue they are the equivalent to gold or other commodities, which are regulated in the U.S. by the CFTC. Meanwhile, when new tokens come to market through Initial Coin Offerings (ICOs), they fall under the jurisdiction of the Securities & Exchange Commission.

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One problem facing regulators is that the legal standard for defining a security was set more than 70 years ago in a Supreme Court Case called SEC v. W.J. Howey Co. But that legal definition hasn’t been tested much in the years since, according to Clyde Tinnen, a partner in the corporate team at Withers.

“The federal government has to play a role there,” he said in an interview. “No one has certainty where this train is going.”

He added, “In some cases, it’s probably better to wait to try and understand the end-use applications.”

On Monday, the Senate Banking Committee will hear from the SEC and the CFTC about their approach to the issue. Some groundwork has already been laid. The CFTC has approved the listing of bitcoin futures and the SEC has warned investors about the dangers of ICOs and cryptocurrencies. Treasury Secretary Steven Mnuchin recently discussed the need to keep cryptocurrencies out of the hands of “bad guys.”

Managing the balance between the positives of crytocurrencies and regulators’ mandate to protect investors will likely be discussed on Monday, said Nolan Bauerle, director of research of the news site CoinDesk, in an email.

“The CFTC and SEC are fully empowered to regulate certain aspects of cryptocurrencies and it’s unlikely they’ll need to ask the Senate for any additional legislative tools,” he said. “Ponzi schemes built from cryptocurrencies themselves and not derivatives have already and will continue to be pursued by the CFTC.”

In a recent op-ed in the Wall Street Journal, SEC head Jay Clayton and his counterpart at the CFTC, J. Christopher Giancarlo, argued for a more robust regulatory approach to cryptocurrencies, vowing to “vigorously pursue those who seek to evade the registration, disclosure and anti-fraud requirements of our securities law.” Their warnings are taking an added significance given the recent drop in cryptocurrency markets.

The SEC is monitoring the cryptocurrency activities of investment advisors, trading platforms, investment advisors and broker-dealers. Futures exchanges, in consultation with the CFTC, implemented stiff margin requirements for their bitcoin contracts and required them to have information-sharing agreements in place.

Indeed, there is no shortage of blockchain fans such as Jillian Manus, a venture capitalist and managing partner at Structure Capital, which invests in companies developing the technology. She argues cryptocurrencies are “transforming industries.” Clayton and Giancarlo, even as they called for more regulation, described the underlying blockchain technology as “the next great disruptive and productivity-enhancing economic development.”

Manus noted, “Cryptocurrencies are worrisome as a whole because of their volatility, their lack of application and their lack of security,” she said. “The blockchain is not overhyped. It is going to be the new Internet.”

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