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Regulatory Confusion Stalls Bitcoin's Success

Aug 4, 2016 | 14:34 GMT

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Regulatory Confusion Stalls Bitcoin's Success

If cryptocurrencies are ever to be widely trusted and accepted, the regulations surrounding them must be clear. Regulation, through legislation and legal rulings, is often the key factor determining how quickly an emerging technology is adopted. Individuals and businesses must inevitably wait for laws to be figured out and enacted before new technologies can be fully utilized. This has been particularly true of cryptocurrencies — most notably, bitcoin and financial technologies — which have been hindered by a lack of regulation and an abundance of confusion.

In the United States, several different courts and agencies have claimed jurisdiction over cryptocurrencies and have made conflicting rulings on them. This has muddled the very definition of cryptocurrencies and the way they are used. Most states have taken a reactive, rather than proactive, approach to regulating the digital currencies, which means that for the most part they are governed by the same laws as fiat currencies. But that is like trying to fit a square peg into a round hole. At the federal level, the United States has taken a more pragmatic approach, albeit slowly. But cryptocurrencies still involve many different agencies. The IRS, for example, defines cryptocurrencies for tax purposes, while the Securities and Exchange Commission and the Commodity Futures Trading Commission oversee their use in trade.

Despite the handful of rulings that cryptocurrency companies must register with the states out of which they operate, only a few states have any guidance on cryptocurrencies — and even then, the rules of the states and the federal government tend to be contradictory. New York has made the most progress toward regulating bitcoin, which is unsurprising considering its place at the center of the U.S. financial system. In June 2015, New York finalized BitLicense, which will likely become a model for other states to emulate. Under the new regulations, anyone with a virtual currency business must obtain a BitLicense and maintain certain cybersecurity, anti-money laundering and customer protection standards. Still, it is important to note that though the new regulations resolved many questions surrounding cryptocurrencies, they also prompted many bitcoin startups to leave New York because of the high cost of complying with the licensing requirements (estimated to range from $5,000 to $100,000). In fact, during the first year, New York issued only two BitLicenses.

Cryptocurrencies and their applications have the potential to change how people spend money, transforming global markets in ways that are currently unimaginable. But for now, the technology's use will continue to be limited, in large part because of regulatory questions at every level of government in the United States and elsewhere.