Bitcoin boom brings new scrutiny from Washington

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Bitcoin and other cryptocurrencies rallied to all time highs this past week, attracting new attention from U.S. regulators.

Professional and amateur investors are flocking to the digital currencies as they explode in value. That’s left lawmakers and regulators scrambling to understand the technology behind digital currencies and their implications on financial markets.

“It’s something that they’re just trying to get their arms around,” said a lobbyist representing financial services companies.

“The reality is the speed at which the technology is evolving is much more than what regulators are able to keep up with at this point in time.”

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Investors find bitcoin, the most prominent cryptocurrency, and other digital currencies attractive because of their underlying technology, known as blockchain. Instead of verifying transactions through third-parties like banks, bitcoin transactions are verified quickly and cheaply on a digital public ledger that updates roughly every ten minutes.
The value of trades is public but the identity of parties is private.

Traders have looked to cash in on the skyrocketing value of digital currencies as commodity prices and bond yields falter. Several regulated exchanges have begun listing or preparing to trade Bitcoin derivatives, bets on the future performance of the currency, this week.

The surge in digital currencies has put the traditional financial sector and policymakers on edge.

Regulators have warned investors that digital currencies are subject to federal financial regulations, and to tread carefully with their trades.

The Commodity Futures Trading Commission (CFTC) warned investors on Friday that digital currencies’ volatility could add unexpected risk to trades and contracts.

Bitcoin’s rapid rise has drawn comparisons to historical financial bubbles, like the dot-com boom of the 1990’s and the Dutch tulip craze of the 1600s. In both cases, investors poured money popular new assets and suffered massive losses when the market reversed.

Outgoing Federal Reserve Chair Janet Yellen on Wednesday called bitcoin “a highly speculative asset” with no inherent value and limited use.

After bitcoin hit an all time high of over $17,000 this past week, Securities and Exchange Commission chief Jay Clayton also warned investors.

Clayton cautioned against promises of “fortunes” from the rapid rise in the value of digital currencies. He urged skepticism of those who say “this time is different.”

Financial titans like JPMorgan Chase CEO Jamie Dimon have been more pointed, calling the currencies a “fraud.”

So far, regulation of digital currencies has been largely relaxed as government agencies and lawmakers watched the technologies develop.

The SEC has begun cracking down on unregistered and fraudulent cryptocurrency sales, which in May they said qualified as securities.

“Foundational principles of the securities laws apply to virtual organizations or capital raising entities making use of distributed ledger technology,” the SEC wrote.

Businesses are also struggling with how to adopt to the new market.

Lobbyists also say their nervous clients, particularly those with consumer businesses, are pleading for advice on how involved they should be in the cryptocurrency market.

“One of the main questions that we get is ‘is this a currency I should be accepting? Is this real? Will I be left on the sidelines if I don’t accept Bitcoin?,” said the financial services lobbyist.

“It’s not necessarily something that’s easy to understand,” the lobbyist added, saying that digital currencies have the “baggage of being associated with the dark web and nefarious businesspeople.”

“This is legitimacy problem, but with time that can be overcome.”

Policymakers were already struggling to understand developments in online banking and lending and are now trying to learn more about digital currency. They have voiced concerns about the potential use of cryptocurrency for money laundering and illicit purchases.

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Even so, some policymakers have cautiously acknowledged the potential benefits of using cryptocurrencies and blockchain technology.

Though Clayton warned investors should be cautious about cryptocurrencies, he said they “can be effective ways for entrepreneurs and others to raise funding, including for innovative projects.”

During congressional hearings in June, lawmakers pressed experts about the potential benefits of the technology.

The reception from Washington so far has been met with optimism from those in the cryptocurrency community.

“I think the reactions have been positive and reasonable,” said Peter Van Valkenburgh, director of research at Coin Center, a D.C. based cryptocurrency advocacy and research group.

“Clayton came out and gave us a lot more info about the SEC’s thinking on cryptocurrency and token sales.”

Van Valkenburgh said that he’s been pleased with the SEC’s recent efforts to crackdown on unregistered securities masquerading as cryptocurrencies.

Earlier in the week, the SEC announced that it would force Munchee’s, a digital coin based app similar to Yelp, to refund $15 million of investor money after deeming its tokens to actually be illegal securities.

Van Valkenburgh also noted growing lawmaker interest. More congressional offices have been reaching out to Coin Center for briefings, he said.

“We have had a lot of briefings lately and they’ve all been very fruitful,” Van Valkenburgh said.

“When the price is higher you see more stories in the press and people start to think about it more seriously as a currency, including lawmakers who want to know more about it.”

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