For many people, cryptocurrencies like Bitcoin are part of an exciting and lucrative new financial frontier. But for the country's top market watchdog, Gary Gensler, they seem "like the Wild West" – and he's promising a crackdown.
The market for cryptocurrencies has ballooned. It is currently estimated to be worth about $2 trillion, thanks to the exploding popularity of Bitcoin and other virtual money like Dogecoin.
Amateur investors, particularly younger ones, have started buying and trading cryptocurrencies, attracted to the thrill of big returns. In the past year, the value of Bitcoin has risen 300%. And cryptocurrencies are increasingly also attractive to traditional investors.
But the cryptocurrency market is extremely volatile, and even as it becomes more mainstream, it continues to be popular among bad actors.
In recent months, hackers have demanded ransomware payments in Bitcoin, because it is easy to transfer and hard to trace. And there have been plenty of reports of thefts and heists at cryptocurrency exchanges in which cybercriminals have absconded with other people's virtual holdings.
In a recent speech, Gensler, the head of the Securities and Exchange Commission (SEC), denounced the lack of transparency and clear regulations, and promised the commission will take action to protect investors, which is a key part of the agency's mission.
"Investors really aren't getting the information to judge the risk, and understand the risk," Gensler said. "If we don't address the issues, I worry a lot of people will get hurt."
The process is still at the very beginning, but here's what to know.
Gensler is an experienced regulator, who has worked on Capitol Hill and in the Treasury Department. When he ran the Commodity Futures Trading Commission during the Obama administration, he played a key role writing and implementing new rules that apply to a segment of the market called derivatives.
Gensler also knows a lot about cryptocurrencies. Most recently, he was a professor at the MIT Sloan School of Management, where he focused "on blockchain technology, digital currencies, financial technology, and public policy." (One of his courses is available for free online.)
The market has developed so fast, regulations haven't kept up. So policymakers have talked about reining in cryptocurrencies under a new regulatory framework for years. But so far, that hasn't happened.
That leaves millions of people who trade cryptocurrencies and assets related to them without clearly defined rules of trading.
It has also complicated life for professional investors and companies that do business with cryptocurrencies. Tiffany J. Smith, a partner at the law firm WilmerHale, who runs a cryptocurrency regulatory practice, helps her clients mitigate risk.
"In the absence of, you know, definitive regulation that applies to crypto assets, we work with them to craft policies, procedures, and processes," she says.
Clearer definitions is one of the most pressing issues.
Because cryptocurrencies are relatively new, there are not even universally agreed-upon definitions for some of the most basic terms. Can assets being traded on cryptocurrency exchanges be called securities, or are they something completely different? Is Bitcoin a commodity?
This goes beyond semantics; It can determine which regulator has the authority to regulate cryptocurrencies and related assets.
New York University Law School Professor Robert J. Jackson Jr., who used to be an SEC commissioner, says clarity is incredibly important.
"It's past time for regulators to be clear about who is responsible for this, and that clarity will be beneficial to the market," he says. "It will be beneficial to investors. It will even be beneficial to those members of Congress and the other public policymakers who want to know whom to ask, and who to hold accountable for what is going on in those markets."
Determining jurisdiction will be critical as well.
So far, the SEC and the CFTC have shared regulatory responsibilities. They have tried to police cryptocurrencies with laws that are already on the books, even though they were really written for other traditional kinds of assets like stocks or bonds.
Smith expects this is likely to continue until there are new, cryptocurrency-specific regulations, meaning regulators will continue to adapt current frameworks for the virtual currency market.
"We are going to see both the SEC and the CFTC using their current authorities to regulate the market as best they can," says Smith.
But Gensler has called on Congress to give regulators the authority to write new rules.
He also wants more resources — more money and manpower — to regulate cryptocurrencies. For years, leaders of the SEC and the CFTC have complained that Congress hasn't given them enough money for them to their jobs.
There will be new proposed regulations for sure; It's just not clear in what form.
Gensler has not tipped his hand, and he did not spell out specific actions the SEC might be contemplating during his speech.
But in his speech, Gensler called for the need of "guardrails," or actions intended to protect individual investors, for cryptocurrencies.
So the SEC is likely to take a closer look at aspects like the potential for market manipulation, determining basic rights for amateur investors and bringing in more transparency.
Congress is also proposing new rules. The Senate tucked in a provision to toughen tax enforcement on cryptocurrency players in its recent infrastructure bill, though the final fate remains uncertain given that the House has yet to weigh in.
So far, professional investors say they would actually welcome new regulations – as long as they are not too stringent.
Robert Jackson, the former S.E.C. commissioner, argues regulation will widen the appeal of cryptocurrency assets.
"The market will be better off, because assuring investors that they are getting the kind of transparent pricing they are used to in American markets will encourage other investors to consider the possibility of investing in cryptocurrency," he says.
But rules perceived as too stringent will inevitably spark fights. Lobbyists for the cryptocurrency industry tried to fight off Senate rules, calling the tax crackdown too broad.
This is a fascinating existential question. Cryptocurrencies were borne of this iconoclastic desire for there to be assets untethered from governments and central banks. No one is really sure what will happen to it when that structure changes.
But many believe new regulations could help cryptocurrencies become a bigger part of our daily lives. For example, some companies, including AMC Theaters, have already announced they will accept cryptocurrencies as payment.