Among fintech enthusiasts, cryptocurrency is often the life of the party — and regulation is the elephant in the room.

For a while now, we’ve heard whispers about the need for crypto-specific regulations in the community, and after appointing the first-ever senior advisor for digital assets and innovation back in June, it’s clear the U.S. Securities and Exchange Commission is entertaining the idea of developing a full regulatory framework for cryptocurrency and initial coin offerings, or ICOs.

It still remains to be seen what exactly those crypto-specific regulations will look like, but I’d like to offer a dissenting opinion: While it’s tempting for a governmental body like the SEC and the U.S. Commodity Futures Trading Commission to draft new rules and regulations concerning a new breed of investments, I don’t believe that it’s necessary.

What is really needed is more definitive guidance. If the SEC examines crypto within the established regulatory framework — rather than trying to regulate it to death — I believe it will encourage growth and assure that cryptocurrency investments come into compliance.

Regulation Is the Wrong Answer

Much of the confusion around cryptocurrencies stems from the difficulty in classifying them as commodities or securities. Since 1946, courts have used the Howey Test to determine whether a transaction qualifies as a security, but for many, cryptocurrencies fall into a gray area. So back in June, the SEC clarified its stance on cryptocurrency and the Howey test by detailing how ICOs and altcoins, such as Monero and Ripple, fit into the definition of a security. For me, it really comes down to common sense: If it looks like a security and smells like a security, it’s a security.

Even still, calls for clarity regarding cryptocurrency regulation prevail. In late September, more than a dozen members of Congress urged SEC Chairman Jay Clayton to provide a clearer picture of how the SEC views the digital asset class, matching similar pleas from representatives from the crypto industry and Wall Street. The constant confusion — coupled with the SEC’s refusal to approve Bitcoin exchange-traded funds — has created an unhealthy amount of uncertainty around these new assets.

It’s a natural response, but I’d argue that excessive regulations won’t fix it or halt the creation of technology, innovation, and wealth around cryptocurrencies, for that matter. It will merely stop them from being created in the United States. Just look at China. Out of financial fear, China’s government has taken regulation to the extreme. While it hasn’t banned cryptocurrencies outright, it did ban ICOs and issued a request to local exchanges asking that they cease trading.

In contrast, the SEC and the CFTC have, thus far, taken a relatively open-minded stance. The two bodies are somewhat late to the game, but a smart approach takes time, and they’ve avoided hasty decisions that turn cryptocurrencies into a black market where the only participants are criminals.

Cryptocurrency can undoubtedly be a risky asset class, as evidenced by the extreme price volatility. A complex regulatory framework built by the government won’t change that, but it will delay market growth for years. What the SEC should strive to do, instead, is ensure that investors are making informed decisions and operating on a level playing field. Once those goals are met, the market will handle the rest.

The DNA of Financial Disruption

TD Ameritrade, Ameriprise Financial, and Charles Schwab are mostly household names today, but once, they were upstarts. The emergence of the low-cost broker that allowed investors to order stocks over the phone was a huge technological advancement, but it was also met with skepticism. Then Nasdaq emerged and let broker-dealers see not only who was offering what stock but also the prices they were offering them at. Still, trades were placed via phone.

Finally, the small order execution system was created to automatically handle orders for traders with fewer than 1,000 shares of a particular stock, and it became mandatory after the refusal of some makers to answer phones during the market crash of 1987. The SOES wasn’t popular at the outset, but it was eventually credited with creating a fairer system for smaller investors.

Looking back, if the SEC had decided to halt the development of electronic trading in its tracks, the biggest exchanges in the industry might have ended up in London, Toronto, or Mexico City.

We’re staring down the barrel of another huge innovation in financial services that has the potential to be even more disruptive than its predecessors. Cryptocurrencies are still relatively young, and given enough time and maturation, the cryptocurrency space will evolve to address its own shortcomings and devise solutions that encourage mainstream adoption. On the other hand, if it is beset by unnecessary regulations in the United States, the market will simply create its immense value in more welcoming countries.

Government officials need to make sure no one is getting hurt or, at least, defrauded. Then, they need to get the hell out of the way.

The post The US Is at Risk of Becoming a Second-Tier Financial Hub If Regulators Don’t Embrace Crypto appeared first on ReadWrite.

rtFor evidence of big tech’s evolution from AV club geeks to big guys on campus, look no further than the influence of companies like Amazon and Google. They’ve crept into every corner of contemporary life; they possess outsized amounts of power and exercise imperial control over the digital landscape — and it looks like taking over the future of finance is their next fait accompli.

I’ve worked closely with a number of crypto startups — I’ve even founded one myself — and witnessed the tense relationship they have with big tech, specifically the leaders in cloud computing. Cryptocurrency requires easy access to bountiful amounts of computing power. Only a few companies can supply it at commercial scale, giving those companies disproportionate control over crypto markets as a whole.

Consider what would happen if Amazon suddenly elected to shut out every cryptocurrency currently in its cloud. Multiple exchanges would crash, and thousands of individual funds would be frozen. Markets would inevitably stumble and likely fall — all because of the whims of one company operating autonomously. It’s a threat that’s inconceivable in other areas of finance, but it casts a long shadow over the independence and distributed nature cryptocurrency.

Those fears may sound unfounded, but there’s already cause for alarm. Amazon Web Services does not support the Bitcoin elliptic curve, secp256k1, which is crucial for generating Bitcoin private keys. It doesn’t matter if the hardware and firmware support the curve — AWS explicitly does not. Worse, Amazon’s motives for doing so are totally opaque. All we really know is that Amazon is actively and intentionally creating roadblocks for crypto.

I fully expect this tension to intensify, owing largely to the deep philosophical differences between big tech and crypto markets. Big tech, throughout its history, has been committed to top-down control and centralized management, but the mindset of crypto is just the opposite. Its acolytes view accessibility, equality, and decentralization as the guiding principles. One industry is totally dependent on the other, yet their missions are in direct opposition. It’s an arrangement that makes friction unavoidable.

The question that begs to be asked is what would compel a company like Google to obstruct an upstart industry like cryptocurrency? One explanation we must acknowledge is that crypto has not always been its own best advocate. A wave of shady coins and dubious claims led companies like Facebook, Google, and Twitter to ban all ads for ICOs. That move was warranted and probably even necessary, given the way unsavory promoters were using them. However, it only partially explains the animus.

The more likely cause is that big tech companies are fundamentally and necessarily aligned with other powerful entities. Those include world governments, multinational corporations, and titans of the 21st century. Cryptocurrency doesn’t just challenge those power structures; it openly aims to disrupt them — first by making cryptocurrency a reality, next by making its ideals a certainty.

We have already seen how threatening crypto looks to those at the top. As those anxieties increase, who do you think Microsoft and others will side with: crypto startups or their fellow elites?

There’s no evidence to suggest the gatekeepers of the cloud have excluded or expelled any cryptocurrency. But they certainly have the means and motive to do so, creating an existential risk for crypto investors and developers alike.

Cryptocurrency is approaching a literal crossroads, where it will have to choose its relationship with big tech moving forward. The first option is to negotiate a truce similar to net neutrality. Crypto continues to rely on big tech. In exchange, cloud providers agree to treat all crypto companies equally and pledge to never throttle service or speeds. This option is appealing because, quite frankly, the resources of something like AWS are difficult to replace. The hard part is getting buy-in from big tech and regulators alike.

The other option is to double down on crypto’s spirit of decentralization and work to bypass or minimize the influence of big tech. Rather than rely on just one provider, companies can prioritize redundancy and distribution to reduce the risk of critical infrastructure components going offline. My own company stores keys and maintains critical infrastructure on different providers and utilizes another for backup. There are also challengers to the cloud monopoly that offer comparable computing power within a less restrictive framework. One day, it may be possible for intrepid crypto entrepreneurs to avoid Google or Amazon entirely.

Right now, crypto markets feel like a wild frontier. But in reality, it’s the illusion of freedom inside the world’s biggest cage. The increasing centralization is unsustainable in its current form, but that doesn’t mean blockchain entrepreneurs need to feel contrite. Rather, we must continue to be diligent and thoughtful when building the foundations of our nascent industry.

The post Crypto Feels Like the Wild West — But Really, Big Tech Holds the Puppet Strings appeared first on ReadWrite.

It seems that these days, cryptocurrency can’t catch a break in the news cycle.

In early April, the Securities and Exchange Commission urged a federal judge to freeze $27 million that was allegedly garnered through the illegal sale of shares in LongFin — a company whose stock shot from $5 to $142 after announcing it was acquiring a cryptocurrency business. At the same time, the Federal Trade Commission charged a group of individuals with fraud. They’re accused of promoting an allegedly deceptive investment scheme by fooling investors into paying them via bitcoin or Litecoin, while another defendant is also accused of promoting the allegedly deceptive cryptocurrency Jetcoin.

Headlines like these give off the impression that the crypto space is inherently nefarious. And you wouldn’t be alone in assuming that bitcoin and other digital currencies are assets aimed at criminals transacting in secret. But it’s important to understand that cryptocurrencies are not anonymous; rather, they’re pseudonymous. You know what else is pseudonymous? Checking accounts.

Cryptocurrencies are actually more transparent than traditional finance. In our current double-blind system, the Fedwire Funds Service and Automated Clearing House (ACH) Network route payments without knowing the provenance of the funds, so we rely on Financial Institution members to self-police. In the world of digital assets, the practice is similar, but we can isolate bad actors and track their funds in the system. Crypto can easily be more secure than your checking account, but there are too many people in the crypto space taking shortcuts — either out of ignorance or laziness.

For instance, Japan’s Coincheck exchange service is the most recent large-scale hacking victim, losing $500 million worth of NEM coins. It’s an alarming sum of money, to be sure, but even more alarming is the fact that Coincheck admitted to storing NEM funds in a “hot wallet” online instead of a “cold wallet” offline. It also failed to use multisignature wallets, which require at least two (and often more) signatures before funds are released.

We don’t have a security problem in the crypto space — we have a competency problem.

Putting Things in Perspective

In a recent article for The Guardian, J.P. Morgan CEO Jamie Dimon was quoted saying: “If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars. So there may be a market for that, but it would be a limited market.”

Dimon’s argument does hold water — to a point. Some terrible things have certainly been financed by bitcoin, including drug purchases, money laundering, prostitution, etc., but U.S. dollars are the most popular currency used to finance these operations.

Dollars backed by the full faith and credit of the U.S. government have financed exponentially more illegal activity and terrorists than bitcoin. Criminals use money just like regular people, but at least bitcoin provides an immutable public record of all transactions. You can’t say the same for cash.

In fact, bitcoin is becoming less popular with criminals as law enforcement units get better at tracking large amounts of the currency linked to criminal activity. Now, bad actors are favoring coins such as Monero, which are designed to prevent tracking. For instance, in December 2017, hackers held as many as 190,000 WordPress sites per hour for ransom for Monero. But because of their association with criminal activity, these currencies are unlikely to gain the legitimacy associated with other digital assets.

The Next Chapter

As I already mentioned, cryptocurrencies are actually a more transparent means of exchange because of the public nature of blockchain. Unlike cash, we can go back to the beginning of its existence and examine the origins of a specific asset, meaning that in the future, banking a crypto business need not be any riskier than banking other digital businesses. As a matter of fact, I expect crypto businesses will be less risky in the future than cash businesses.

Furthermore, as cryptocurrencies continue to gain momentum, we’ll likely see an increase in regulations — a prediction that’s already come to fruition in markets like Japan and Australia. Regulations can initially constrict market activity, but ultimately, they give both individuals and institutions the confidence to make investments.

Companies like Chainalysis have emerged to help track digital transactions associated with criminal activity and prosecute those responsible. Chainalysis caters to bitcoin businesses, banks, and exchanges in order to help them ensure they’re meeting regulatory measures.

By mapping the illicit transactions of individual customers, the startup can help trace the destination of ransom payments and identify criminals when they attempt to “cash out” their illegally procured funds at an exchange. Because this requires bank account numbers and other personally identifiable information, no matter how many times a criminal transfers money between online wallets, he or she will still be associated with the illegal activity.

Meeting Innovation Head-On

The next logical step for the crypto space is to bring it into the banks. In doing so, we’ll make sure transactions are compliant, rather than pushing them into unregulated platforms. Even still, many legacy financial institutions are resisting cryptocurrency and perceiving it as a competitive threat rather than an empowering asset. Some even refuse to acknowledge crypto’s rise in popularity.

Bank of America, for example, banned the 17,000 financial advisors in its wealth management arm, Merrill Lynch, from entering into bitcoin-related investments for clients. Additionally, the bank (along with J.P. Morgan Chase and Citigroup) has prohibited customers from buying cryptocurrencies using its credit cards, citing the increased difficulty they pose when it comes to compliance with laws, including regulations against money laundering.

Not all industry players are failing to consider how they can use blockchain technology to power innovation, though. Companies like Mastercard are pursuing their own blockchain solutions that will enable increased transparency, a dramatically increased transaction speed, and lower costs in payments across international borders.

By embracing digital currencies and the blockchain technology that powers them, financial institutions can position themselves for major competitive advantages.

With cryptocurrency in the news cycle on a weekly basis, it’s easy to fall into the trap of misinformation. But by looking past inflammatory headlines and getting to the root of crypto, you’ll uncover just how many exciting possibilities this unique space presents.

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