Bitcoin and Regulation 101

Leave your thoughts


When a crisis happens, government usually intervenes if there is a perceived public interest. For example, in response to the financial crisis of 2007 to 2010, Congress passed and the president signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the Consumer Financial Protection Bureau. So when Americans lost money via Mt. Gox, that becomes the impetus for Congress and the executive branch to look for ways to intervene to prevent this type of crisis from occurring again.

As a former federal government regulator (director of the federal Office of Health Maintenance Organizations, or OHMO) who worked closely with state regulators like the insurance commissioners, as well as a former senior U.S. Department of the Treasury official, let me offer some insights into the regulatory maze that cryptocurrencies need to navigate.

It all starts with a law. The legislative branch (e.g., Congress) needs to pass a law delegating power to the executive branch to create and enforce rules to execute the law. If the president agrees, he signs the law on behalf of the executive branch and either starts up a new regulatory agency mandated by law or directs the appropriate administrative agency to administer the law.

Then the administrative agency starts the rulemaking process:

1. It analyzes the legislation.

2. Sometimes publishes that analysis as an Advanced Notice of Proposed Rulemaking to get public input.

3. Proposes regulatory language in the Federal Register along with analysis and justification for the language and any public response to the Advanced Notice of Proposed Rulemaking.

4. The public has 30 to 180 days to submit written comments to the agency.

5. The regulations are modified to accommodate appropriate written comments and published as a final rule.

6. The final rule is codified into the Code of Federal Regulations.

7. The public can file for judicial review if they believe the agency’s final rule exceeds the authority granted by the authorizing legislation.

8. The effective date is determined to allow the regulated parties to come into compliance.

There is currently no federal law in the United States that specifically addresses bitcoin or any other cryptocurrency.

For example, consider Janet Yellen’s recent testimony before the Senate Banking Committee. Speaking as chair of the Board of Governors of the Federal Reserve, she stated, “The Fed doesn’t have authority with respect to bitcoin. But certainly it would be appropriate for Congress to ask questions about what the right legal structure would be for digital currencies.”

In other words, a law is needed and that is Congress’ job.

Absent a law, each interested administrative agency evaluates their current regulations to see if they can be applied to solve the problem.

For example, Yellen observed that administrative agencies that are responsible for enforcing anti-money laundering laws like the Federal Bureau of Investigation and the U.S. Attorney’s Office, both part of the U.S. Department of Justice and the Financial Crimes Enforcement Network of the U.S. Department of the Treasury, find that current U.S. law and agency regulations were “adequate to meet enforcement needs.” After all, the U.S. Attorney for the Southern District of New York had enough on Charlie Shrem and Robert Faiella to have them arrested for alleged money laundering related to the shutdown of Silk Road, a bitcoin marketplace.

Others are taking a wait-and-see approach. The Commodities Futures Trading Commission is considering whether bitcoin is a commodity (this is the position that China took). The Securities Exchange Commission is considering whether bitcoin is an investment. In addition to money laundering, the Financial Crimes Enforcement Network is considering how to monitor if bitcoin is used for terrorist financing. The Internal Revenue Service is considering the tax treatment of bitcoin. You get the idea.

If current regulations are not sufficient, the agency evaluates its authorizing legislation to determine if it does have authority, and if it does not, suggests to Congress that it consider appropriate legislation.

That is why Yellen said, “Bitcoin is a payment innovation that’s taking place outside the banking industry. To the best of my knowledge there’s no intersection at all, in any way, between bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Fed doesn’t have authority to supervise or regulate bitcoin in anyway.”

If an agency determines that current law is sufficient but their regulations are not, it must start the rulemaking process to craft new or revised regulations to solve the problem. So far, no federal agency has done this.

In the absence of federal leadership on bitcoin, regulation leaves a door wide open for each individual state to consider an approach. The process would be similar to the federal process, except that the legislative body would be the state legislature and the executive branch head would be the governor.

Is federal or state regulation better? The advantage of federal regulation is one consistent approach, while the disadvantage is that it may be the wrong approach or that one size does not fit all. The advantage of state regulation is the potential for 50 different experiments that would allow for a nascent technology to find the right approach. The disadvantage of state regulation is the administrative burden of 50 different sets of rules (e.g., health insurance).

And bitcoin’s decentralized nature, while offering a lot of advantages, also makes it very difficult to hold accountability or speak with one voice.

You can bet that if a bitcoin crisis happens on U.S. soil and Americans are hurt by it, government will step in to quickly develop a regulatory scheme before bitcoin can realize its promise. Please note that when that happens, the result will not be pretty. When the Bureau of Consumer Financial Protection was stood up, many acknowledged that the agency would not have prevented the financial crisis, but yet that was the reason why it was created.

To avoid a similar fate, bitcoin needs to step up and self-regulate in a very transparent and consistent way, which would provide leadership for the government to follow. The alternative is for government to react to a crisis and deliver laws and regulations that would severely hamper bitcoin and other digital currencies from reaching their full potential.

There is an old saying in Washington that says a camel is a racehorse designed by a government committee. I am afraid that we could end up with a camel.

Originally printed at

Tags: ,

Categorised in:

Leave a Reply

Your email address will not be published. Required fields are marked *