Jacquelyn Watson 

Cryptocurrency as it currently exists inherently crosses the boundaries between existing legal precedents. Though neither a sovereign currency nor a traditional investment mechanism, cryptocurrencies can operate as both in portfolios, which leaves regulators to deal with the intricacies. As a complicated and relatively new piece of financial technology, cryptocurrencies occupy a complicated place in the regulatory landscape. Globally, regulation has taken several different shapes and countries have found a variety of ways to deal with the complicated issues created by the new financial technology. Since cryptocurrencies are designed to operate as a currency, and were designed, in some ways, to operate without a traditional regulatory scheme, governments have tried a variety of strategies to deal with a technology that does not operate under traditional metrics.

Sovereign Attempts to Leverage Cryptocurrency

Currency is traditionally defined as “something that is used as a medium of exchange.”[1] Since cryptocurrencies like Bitcoin were designed to be decentralized and not tied to a single country, they are not constrained to the banking and financial laws of an individual country in the way conventional national currencies are.[2]  To combat the issue of decentralization, certain countries have attempted to create their own cryptocurrencies to operate as a supplement to their own existing national currency. China is currently in the process of attempting to create a national digital currency that could be used to more effectively track consumer spending.[3] Venezuela attempted this with the Petro in February 2018. However, as it was partially seen as a scheme to dodge U.S.-based sanctions due to Venezuela’s economic crisis,[4] it hasn’t gained nearly as much traction as other more popular cryptocurrencies like Bitcoin or Ethereum. As of October 15, 2019, Venezuelan President Nicolas Maduro was still attempting to prove the legitimacy of the currency in a tangible way, as evidenced by his public statements.[5]

While the Petro has failed to gain credence from the Venezuelan public, Bitcoin traffic hit a record high in Venezuela this month.[6] The struggle the Petro seems to face is that the implementation of government regulation has taken away some of the appeal of traditional, decentralized, cryptocurrencies. With an industry focus on decentralization, a currency like the Petro that requires government registration of all mining efforts and has a government-set exchange rate seems out of place.[7] While the Petro was originally created to avoid intervention from foreign governments in the form of sanctions, the Venezuelan government failed to consider the ways that its involvement might deter widespread and voluntary adoption of the cryptocurrency. National cryptocurrencies in this sense cannot operate like traditional cryptocurrencies due to decentralization concerns, and cannot operate like traditional currencies due to a need for voluntary adoption.

Regulating Cryptocurrencies in the Existing Regulatory Framework

The disconnect between the traditional currency model and the decentralized cryptocurrency framework causes tension in multiple regulatory schemes, creating a range of responses from leaving regulation up to individual sub-federal entities (U.S.), to not allow financial institutions to facilitate transactions (China), to banning any activities involving cryptocurrencies outright (Vietnam).[8] Without a model to base regulation off of, countries have taken a variety of approaches to regulating a volatile market. Regulators globally are forced to either refuse to address the issue at all and classify cryptocurrencies as something outside currency entirely (New Zealand categorizes them as securities and the U.S. treats them similarly) or legitimize them and deal with the resulting questions and complications (Venezuela as it tries to deal with the volatility of a legitimized cryptocurrency).[9] This lack of consistency between regulatory regimes could lead to dilemmas surrounding global cryptocurrency exchanges as international investors try to deal with the changing landscape.

Though used like traditional currencies, cryptocurrencies lack the legitimate backing that traditional currencies have. Without a central bank regulating changes in currency value, currencies like Bitcoin are subject to large degrees of fluctuation, with Bitcoin’s volatility against the dollar settling at around seven times as volatile as other national currencies.[10] This consistent uncertainty, especially as it pertains to staying power, creates a landscape of complicated issues. For example, if cryptocurrencies are used in the same manner as traditional currencies, what happens if, without a backing like a standard or a central bank, the cryptocurrency collapses? Or, what if, as it did in 2018, the entire cryptocurrency market collapses?[11] Are regulators expected to handle this type of repercussion? Or is the assumption meant to be that cryptocurrencies are traditionally bought and sold by sophisticated investors and thus they don’t need the same level of governmental protection as the average consumer? If this is the case, could it be argued that cryptocurrency markets should only be accessible to experienced and knowledgeable investors? This type of reasoning inherently leads to a line-drawing problem.

Federal agencies in the U.S. seem especially hesitant to jump in to regulate cryptocurrencies, leaving it mostly to states.[12] For example, Oregon seems to treat cryptocurrencies like traditional currencies,[13] while other states like Maine have less or no explicit regulations. Arizona took a different approach, implementing a “regulatory sandbox” to attract entrepreneurs with the promise of low regulation.[14] Without interstate consistency, there could be issues surrounding the effective use of cryptocurrencies, since they may be treated differently in different places. This gets broader as it applies to global regulation. Consistent uncertainty could contribute to the volatile nature of the market. The complicated implications of regulating a digital financial landscape make the questions around the legal status of cryptocurrencies more difficult than they could be otherwise. If cryptocurrencies are seen as an indicator of future potential in financial technology, the way they are regulated now could have lasting effects on how future FinTech breakthroughs are treated.

Without an easily comparable precedent, and delving into multiple branches of law including financial and cybersecurity, cryptocurrencies pose a complicated problem and a regulatory anomaly. While not a currency in the traditional sense, they operate in similar ways, while also, according to some countries, hold a similar type of weight as securities. The advent of initial coin offerings (ICOs) as a form of fundraising for companies has prompted more exploration into the role cryptocurrencies can have in generating revenue for businesses. Traditionally used by startups, ICOs can be structured to avoid regulations that would apply to traditional equity fundraising.[15] Avoiding regulation like this has led to statistics showing that roughly 80% of ICOs conducted in 2017 were identified as scams.[16] This incentive to dodge regulations puts regulating cryptocurrencies in a complicated position. The SEC has started to treat most cryptocurrencies as securities, to try to implement consistency since most cryptocurrencies operate most similarly to securities.[17] However, they have left Bitcoin and others deemed to be “replacement[s] for currency” out of the securities model, thereby leaving them out of SEC regulation.[18] If the appeal of ICOs and other cryptocurrency activity is to avoid traditional regulation, does imposing traditional regulation take away the appeal and thus make them null and void? Can cryptocurrencies be regulated without global consistency, or are they inherently subject to a sort of regulatory arbitrage as countries attempt to balance consumer protection with the proliferation of a globalized market?



[1] Definition of Currency, Dictionary.com (2019), https://www.dictionary.com/browse/currency?s=t (last visited Nov 10, 2019).

[2] Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, Bitcoin White Paper 1 (2008), https://bitcoin.org/bitcoin.pdf.

[3] Raymond Zhong, China’s Cryptocurrency Plan Has a Powerful Partner: Big Brother, N.Y. Times (Oct. 18, 2019), https://www.nytimes.com/2019/10/18/technology/china-cryptocurrency-facebook-libra.html.

[4] Corina Pons & Girish Gupta, Venezuela Says Launch of 'Petro' Cryptocurrency Raised $735 million, Reuters, (Feb. 20, 2018) https://www.reuters.com/article/us-crypto-currencies-venezuela/venezuela-says-launch-of-petro-cryptocurrency-raised-735-million-idUSKCN1G506F; BBC, Trump Bans Venezuela Crypto-Currency Deals, BBC News (March 20, 2018), https://www.bbc.com/news/world-us-canada-43466465.

[5] Nicolas Maduro, Gobernaciones y Protectorados Recibirán un Millón de Petros Bimensuales a Partir de Noviembre, Multimedio, VTV (Oct. 15, 2019), https://www.youtube.com/watch?v=ZZ4AFlxeNTs&feature=emb_title.

[6] Local Bitcoins Volume (Venezuela), Coin Dance (Nov. 16, 2019) https://coin.dance/volume/localbitcoins/VES.

[7] David Floyd, Venezuela's Petro Isn't Oil-Backed. It's Not Even a Cryptocurrency (Opinion), Investopedia (June 25, 2019), https://www.investopedia.com/news/venezuela-petro-not-cryptocurrency/.

[8] Library of Congress, Regulation of Cryptocurrency Around the World, Law Library of Congress 106, 124 (2018), https://www.loc.gov/law/help/cryptocurrency/cryptocurrency-world-survey.pdf.

[9] Id. at 17–18, 117.

[10]Max Gulker, Bitcoin Remains Vastly More Volatile Than Traditional Currencies, Am. Inst. Econ. Research (June 28, 2019), https://www.aier.org/article/bitcoin-remains-vastly-more-volatile-than-traditional-currencies/#:~:targetText=Bitcoin%20Remains%20Vastly%20More%20Volatile%20Than%20Traditional%20Currencies,-Max%20Gulker&targetText=While%20remaining%20many%20times%20greater,levels%20seen%20in%20late%202017.

[11] Anthony Cuthbertson, Cryptocurrency Price Collapse: Why Have Bitcoin, Ethereum, and Ripple Suddenly All Crashed?, The Independent (Nov. 20, 2019), https://www.independent.co.uk/life-style/gadgets-and-tech/news/cryptocurrency-price-bitcoin-cash-ethereum-ripple-crash-a8642551.html.

[12] Max Yakubowski, Why Is the US Not Yet a Leader in Crypto Regulation? Experts Answer, Cointelegraph (Aug. 4, 2019), https://cointelegraph.com/news/why-is-the-us-not-yet-a-leader-in-crypto-regulation-experts-answer.

[13] Or. Admin. R. 461-145-0583.

[14] Aaron Stanley, Arizona Becomes First U.S. State To Launch Regulatory Sandbox For Fintech, Forbes (March 23, 2018), https://www.forbes.com/sites/astanley/2018/03/23/arizona-becomes-first-u-s-state-to-launch-regulatory-sandbox-for-fintech/#369076031372.

[15] Spotlight on Initial Coin Offerings (ICOs), U.S. Sec. & Exch. Comm’n (2019), https://www.sec.gov/ICO.

[16] Ana Alexandre, New Study Says 80 Percent of ICOs Conducted in 2017 Were Scams, Cointelegraph (July 13, 2018), https://cointelegraph.com/news/new-study-says-80-percent-of-icos-conducted-in-2017-were-scams.

[17] Neeraj Agrawal, SEC Chairman Clayton: Bitcoin is not a security, Coin Center (Apr. 27, 2018), https://coincenter.org/link/sec-chairman-clayton-bitcoin-is-not-a-security.

[18] Id.