Last Week in Tech Law and Policy, Vol. 19: Utilizing and Regulating Cryptocurrencies

(by Dustin Rickett, Colorado Law 3L)

This week’s blog post will focus on how cryptocurrencies and their underlying technologies are making their way into mainstream financial markets.  Last week nine major banks announced that they are researching ways to utilize ledger technology—an integral underlying technology found in cryptocurrencies such as Bitcoin—and the Commodities Future Exchange Commission brought its first case against a cryptocurrency firm for illegally trading in Bitcoin.

Ledger Technology in Mainstream Banking

Banks have long recognized the importance of technological innovation to reduce transaction costs and bring new products and services to consumers.  Now mundane technologies such as the ATM, credit cards, and online banking were seen as exciting new innovations when introduced.  Continuing this trend, nine major banks (including J.P Morgan and UBS) have announced that they are researching ways to use ledger technologies to lessen transaction costs and improve efficiency—which could lead to savings exceeding $15 billion annually.

Ledger technologies emerged with the advent of cryptocurrencies such as Bitcoin.  Ledger technology allows for individuals to transfer money securely and with a low risk of fraud without a third party intermediary (e.g., a bank) to verify the transaction.  It does this by creating a public ledger or journal that tracks and records every transaction that has taken place, and it updates this ledger within minutes of a transaction’s completion.

Why would banks invest in and research technology that takes away their business?  Part of the reason may be that these banks are forward looking and realize that if ledger technology will inevitably take away some of their business, they might as well be the ones leading the charge for its adoption in large-scale commercial use.  Though it is not certain how these nine banks will use the technology initially, they expect that one day the technology will be used for real currency transactions.

These major financial institutions are not the only ones turning their sights toward cryptocurrency and their underlying technologies; regulators have started paying more attention to cryptocurrencies as they become more widely used and accepted in the marketplace.

Regulating Cryptocurrency

Last week the Commodities and Future Trading Commission (CFTC) brought its first case against a company that traded in Bitcoins in an effort to crack down on cryptocurrency commodities trading.  Coinflip, the company charged by the CFTC, acted as a platform that connected buyers and sellers of Bitcoin, but failed to register as a commodities trader pursuant to Section 4c(b) of the Commodities Exchange Act. The CFTC had announced in 2013 that it had the authority to regulate Bitcoin trading, but had never exercised this self-asserted right until last week.

The Director of Enforcement of the CFTC noted:

While there is a lot of excitement surrounding Bitcoin and other virtual currencies, innovation does not excuse those acting in this space from following the same rules applicable to all participants in the commodity derivatives market.

It is uncertain the extent to which cryptocurrencies will be regulated like their real currency counterparts. How will regulators strike a balance between protecting consumers who utilize cryptocurrencies while respecting the decentralized nature of cryptocurrency itself?  Less strict regulations may foster further innovation in the marketplace, while more regulation may better mitigate risks associated with these decentralized currencies.