As crypto market players continue looking for concrete guidance
regarding industry regulations, how will regulators respond to
their requests for action? Read fintech expert Dr. Peter
Vinella’s insights on what he thinks is next for those in the
digital assets space.
The financial industry has been wading through troubled waters
since the start of the pandemic, and its struggle has been
exacerbated by the emblematic rise and subsequent fall of
fintech’s crown jewel: cryptocurrency. Without a doubt, some of
this volatility has been driven by the many front-page crypto news
scandals that have rocked the markets recently. While regulators
have generally taken a fairly cautious approach, they are finally
taking serious action to reign in some of the more egregious actors
and business practices. However, this has been largely ad
hoc and in response to specific events rather than in the
context of a comprehensive regulatory framework. In short,
regulators have simply tried to apply existing regulations to what
is ostensibly an entirely new financial services paradigm.
For instance, it can be argued that recent actions by the SEC
against crypto companies like Coinbase, Ripple Labs, Binance, and
most recently, Bittrex, were prompted by FTX’s
industry-altering crash last fall. While some policymakers have
applauded SEC actions, this “regulation by enforcement”
approach has done little to make the cryptomarkets markedly safer
in the long run or dampen the “irrational exuberance”
shown by their most ardent proponents.
Interestingly, now that they are faced with an uncertain
regulatory environment, some crypto purveyors have taken matters
into their own hands by filing suit against the SEC moving business
operations overseas to other regulatory jurisdictions, establishing
cryptomarket standards organizations, and engaging with industry
experts to enable risk management strategies.
As regulations ramp up, legal action in the industry increases,
and the cryptomarkets continue to boom and bust, we wanted to know:
what is next for cryptocurrency players?
A Financial Technology Expert’s Insight
To better understand what types of actions we should expect to
see throughout 2023 and beyond, we asked WIT IP Panel Member and top fintech industry
expert, Dr. Peter Vinella, for his thoughts on the
crypto industry’s legal landscape. Dr. Vinella has more than 40
years of experience in the financial industry as a consultant and
executive with leading institutions. Let’s take a look at what
he has to say about the state of the market and potential future
conflicts.
WIT: Recently, there have been some conflicting accounts
on what is to come for crypto, and Bitcoin, specifically. Some sources say that it could surge, while
other market players think that the industry is essentially dead. Which
line of thinking do you feel is the most accurate? Do you feel we
are moving out of the “crypto winter” into a “crypto
spring”, or is there still more conflict to come on account of
the lack of regulatory framework?
Dr. Vinella: I think any extreme is wrong. I
think the thing to consider is that the regulatory frameworks
various countries are adopting are still incredibly fluid. Until
that gets somewhat settled, I think you’re going to see a lot
of volatility in the market because there’s just a huge risk of
the unknown.
The IRS has already stated that they don’t care whether
crypto is a financial product or not; if you make a dollar gain on
it, they’re going to tax you. Through that, regulators have
established that they’re limiting the freedom of the
cryptomarkets to the extent that they’re saying, “We
don’t care what it is but if you’re making money on it, we
want our taxes.” So, I think until the regulatory environment
becomes somewhat more straightforward, I don’t believe that
anything’s going to happen viability of cryptomarket in a big
way. When examining the amount of resources universities, fintech
companies, and traditional financial services providers are
investing in blockchain and cryptocurrency applications, it becomes
clear that this technology is here to stay, both in terms of
financial investment and practical implementation.
WIT: Do you think that the SEC, and, more specifically,
Gary Gensler, is correct in his assessment of the current
regulatory environment when he said: “We have a clear
regulatory framework built up over 90 years. The exchanges are just
a bunch of intermediaries in this market that think they have a
choice. They don’t have a choice. They’re noncompliant
generally, and they need to come into
compliance”?
Dr. Vinella: First, let me say I have a great deal of respect
for Mr. Gensler. His MIT course on cryptocurrency is first-rate.
However, the US regulatory framework is far from satisfactory.
It’s probably the worst of all the developed countries given
its highly siloed architecture that is based largely on experiences
from the 1930s. I understand that as the head of the SEC, he’s
got to say something positive to instill confidence in the markets.
However, you can’t simply apply current regulations to crypto.
To start with, the US regulatory framework is based on a legal
foundation of statutes and common law. There’s a thing called a
“security”, it has a legal definition; it’s a legal
claim and if a party does something wrong, you ultimately can go to
court for recourse. However, a crypto-financial product such as a
token or even a cryptocurrency is not a legal claim. It is a piece
of code- how do you apply regulations based on laws to that? And
when it comes to the law, how do you ensure that “regulation
by enforcement” isn’t completely irrational in the case of
cryptomarkets which are extralegal by design?
Let’s just take FTX as an example. In court, the government
could argue that crypto financial products are securities. On the
other hand, FTX can argue that these aren’t securities because
they don’t fit the legal definition of a security. Essentially,
we are asking the finder of fact to determine what is and what is
not a security. And importantly, this then becomes common law
unless it is successfully appealed or overwritten through
legislation. It seems to me that a much better approach is to
carefully construct an efficient and effective regulatory framework
that promotes both safety and innovation rather than leaving it up
to the courts. Or worse, leaving it up to the SEC, the Fed, and the
CFTC to argue over which agency has regulatory authority over the
cryptomarkets.
One other thing to consider is that the US essentially sets the
regulatory standards for the global financial system by virtue of
its size and dominance. So, when people say, “Well if we
can’t do it in the US, we’ll simply set up shop
offshore,” that really is not viable. FTX was incorporated and
operated outside of the US and that did not make them immune to US
regulators and law enforcement.
WIT: Thinking of that, do you see crypto companies (like
Coinbase) moving overseas en masse if regulators don’t act
soon? And if so, where will they head and how will the industry
shift?
Dr. Vinella: The cryptomarkets are a completely
antithetical financial system to what we currently have in almost
every way. As I said, traditional financial systems are generally
based on a legal foundation, whether it’s the United States,
the UK, or Japan. The cryptomarkets, on the other hand, were
designed to be extralegal. There are no laws. There are no borders.
There are no companies. They’re software applications without a
traditional owner that are running on equally privileged computers
around the globe. Now again, this is one of the things that judges
are going to have to decide: can you sue an app or a piece of
software? And because it’s in the public domain, typically as
open source, who are you going to sue? The individual
developer?
WIT: Now that Coinbase is pushing back against the SEC
about their lack of action, do you think that regulations (and
legal action) will start to ramp up?
Dr. Vinella: I think that Coinbase and all the
other crypto companies have some justification to claim that
current regulations don’t apply to them without some clarity.
You’ll see a lot of lawsuits and pushback toward regulators. In
fact, traditional financial institutions frequently push back on
the regulators. Regulations are constraints that limit what
financial institutions can do. However, like speed limits, such
constraints are necessary to maintain safe and sound markets. The
key is to adopt efficient and effective regulation that promotes
safety while still allowing for reasonable profits and
innovation.
How Experts Can Help Mitigate Risk
When considering the complications above, let’s evaluate the
essential role that experts play in preparing for complex
litigation involving cryptocurrencies.
To start, having an established expert on your side that
understands how to prepare a company for future litigation is
clearly advantageous. The expert can create a risk management
program to identify and control a company’s risks in both their
financials and operations through planning, testing, and framework
implementation. This will help to reduce fraud and determine if a
business’s practices are aligned with the greater market.
Further, collaborating with a crypto expert offers insights into
blockchain transactions, suspicious activity, and potential
breaches of contract. These experts can help your company
understand the uncertain regulatory environment currently facing
the industry and help promote transparency and accountability among
crypto players.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
