When blockchain is created, regulators will follow

The hardest part of drafting a new regulation is defining the new thing. In fact, much of the work in developing policy is defining entities, and once an entity is defined, subsequent policy considerations are minimal.

Every institution wants a piece of the cryptocurrency pie

The very definition of cryptocurrency illustrates this regulatory problem. Basically, to commodity regulators, virtual currency is a commodity; to bank regulators, it is a bank; to securities regulators, it is a security; to those who regulate money transmitters, it is a money transmitter; to those who manage asset taxes, it is an asset. Everyone wants a piece of this new virtual currency world.

The "default choice" of regulators is to do something, which has led to confusion in the regulation of virtual currencies. For example, in 2015, the U.S. Commodity Futures Trading Commission (CFTC) stipulated that Bitcoin is a commodity. Goelman, the CFTC's implementation director, said at a press conference: "Bitcoin and other virtual currencies have many bright spots, but innovation is not a reason to violate commodity derivatives market management regulations."

Cryptocurrencies are simply classified as commodities under the Commodity Exchange Act of 1936, which provides an all-inclusive list of commodities that ends with "all other goods and articles." But according to the Internal Revenue Service (IRS), virtual currencies are assets, with a 2014 IRS notice stating that "payments made with virtual currency are taxable to the same extent as payments made with other property, and that the use of convertible virtual currency as payment for real-world goods or services is taxable."

However, many state regulators still view virtual currencies as money transmitters. According to the definition of 31 CFR 1010.100, a money transmitter is:

(A) A person who provides money transmission services. Money transmission services are any service that involves receiving money, funds, or other money substitutes from another person or transferring money, funds, or other money substitutes to another place.
(B) or any other person engaged in the transmission of funds.

Such definitions make the overlap between regulators even more serious. The Bank Secrecy Act gives the Financial Crimes Enforcement Network (FinCEN) the power to regulate money transmitters, and a FinCEN guidance document states that cryptocurrency is a virtual currency and is subject to the Bank Secrecy Act enacted in 1970. The FinCEN guidance document reads: "Compared to real currency, 'virtual' currency is a medium of exchange that is used similarly to currency in some environments, but it does not have all the attributes of real currency. There is no equivalent real currency behind the virtual currency, and it does not play a substitute role for real currency."

It may be helpful to first define what virtual currency is not. It is easier to define it as not money or legal tender. The use of the terms “currency” and “coin” in the digital world is inappropriate.

Cryptocurrency would be illegal if it was designed as a competitor to the dollar. However, avoiding the potential adverse consequences of trusting a third party is not an attempt to compete with the dollar; deploying a blockchain is not an attempt to create counterfeit money; it is just creating a ledger, not issuing a currency. Similar payment systems that have existed for decades do not violate the laws that protect the dollar.

If cryptocurrency is not money, then it is not legal tender. Section 31 of the United States Code does not distinguish between legal tender and legal tender, and treats both the same. Generally speaking, legal tender is any form of money that cannot be rejected when used to pay a debt. A virtual currency is not an investment representation of a large platform. Thus, a virtual currency can be an investment contract, a type of security.

The U.S. Securities and Exchange Commission (SEC) has considered the application of blockchain in securities regulation. SEC Chairman Mary Jo White recently said in a speech at Stanford University: "We are closely following the development of blockchain technology and have already started work in this area in some areas. A key regulatory issue is whether blockchain needs to be registered under the Commissioner's regulatory system. We are actively exploring these issues and the consequences they bring."

It’s clear that federal agencies are rushing to regulate cryptocurrencies, and local governments are defining the technology in their own terms. The FreedomWorks Foundation will release a detailed analysis of the topic later this month.