Maintaining Trust Is Key To Cryptocurrency’s Future Success

Updated on

The cryptocurrency boom has proven to be more lucrative for its early investors than practically anything else since the dot-com boom of the late 90s. However, there is no guarantee that cryptocurrencies will remain in vogue, and actions by regulators will largely determine whether they continue gaining in value or end up being little more than a way for people to conduct illicit transactions. How–and who–regulates this relatively new and rapidly evolving form of currency to ensure robust consumer protections is vitally important.

Get The Full Warren Buffett Series in PDF

Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q4 2020 hedge fund letters, conferences and more

A Cautionary Tale Of William Hinman

The case of William Hinman provides a cautionary tale. Hinman left one of the nation’s top tech law firms in 2017 to take the helm at the Securities Exchange Commission’s Corporation Finance Division, where he won accolades for introducing policies intended to protect investors in an industry regarded as a kind of Wild West.

But from his perch, he also appears to have weighed in on issues involving the interests of his old firm – Simpson, Thacher & Bartlett – whose clients include some of the biggest players in the cryptocurrency marketplace and some with ties to China.

Hinman’s appointment has raised conflict-of-interest questions with some people in the industry. For starters, he received an annual pension from Simpson Thacher & Bartlett that totaled about $1.6 million while at the SEC, vastly larger than his SEC salary.

What’s more, after stepping down from his SEC post late last year Hinman returned to his previous employer, another example of a revolving door between government and private industry.

To be sure, there appears to be nothing illegal about taking his pension while at the SEC, but a former SEC ethics lawyer told Business Insider that the payments were "a little unsettling.”

The Global Race For Crypto Dominance

To appreciate why this matters it’s critical to first understand the global race for crypto dominance. While Bitcoin’s market value recently topped $1 trillion, a plethora of other digital currencies are competing in the marketplace as well. China recently rolled out a digital yuan – the eCNY--that is being used in retail transactions in major Chinese cities, and the Federal Reserve is now beginning to explore rolling out a digital currency of its own at some point.

China is clearly leading in bitcoin mining, mining hardware production, and strategic priority.  Roughly 2/3 of the Bitcoin hash-rate calculations are being executed in China, which means China has twice as much capacity to mine new Bitcoins as the rest of the world combined. This year, approximately 328,000 bitcoins will be mined, worth roughly $17 billion at today's prices. As there are over 60 cryptocurrencies worth in excess of $1 billion, there is competition for mining attention, and China is certainly making Bitcoin a strategic priority.

A global cryptocurrency market that results in China simultaneously being the de facto regulator and a main competitor would be a potential disaster for the U.S. To prevent this, the US must ensure that we have appropriate regulatory guardrails so that American can prosper and not be vulnerable to the machinations of the Chinese or any other big player with dubious motives.

The Right Regulatory Framework For Cryptocurrencies

In the absence of federal leadership, New York – as the financial center of the world – is trying to find the right regulatory framework for cryptocurrencies. Two years ago, the Empire State created a crypto taskforce to determine how best to regulate, utilize, and define cryptocurrencies, with special attention to the cost of mining cryptocurrencies and tax collection.

But reactions to New York’s efforts have been mixed: while some supporters welcome the transparent, rigorous framework, critics complain that its proposed regulations would be too severe and might make it impossible for U.S.-based cryptocurrencies to compete globally. And a sub-national regulatory regime for crypto-currency makes little sense: several New York--based crypto startups reacted to the new rules there by merely decamping to locales with more amenable regulations like neighboring New Jersey and Connecticut.

This sub-national patchwork of regulations is--unfortunately-- symptomatic of the current patchwork of policies that have failed to provide the nascent technology with the regulatory umbrella it needs. Which is why some experts believe the federal government should take a more active role in this industry.

Hinman played a significant role in establishing regulations for digital currency while at the SEC. For example, in 2018 he proposed that the SEC take into account the level of decentralization of a digital currency before classifying it a security at a time when the agency was considering classifying most digital currencies as securities.

His time at the SEC also coincided with his former law firm’s effort to lead a $100 million IPO of Chinese-based crypto-miner Canaan Inc, the world’s second-largest maker of bitcoin-mining machines.

XRP And Ethereum

Two other cryptocurrencies that have become valuable and somewhat useful are XRP--which is used for inter-central bank clearing--and Ethereum, a smart contract global computer blockchain. However, a recent SEC lawsuit against the XRP crypto caused it to lose roughly ⅔ of its value. The lawsuit came as Hinman left to return to Simpson Thatcher, which is a member of the Ethereum Alliance.

Investors and other adherents of cryptocurrencies may reflexively resist regulatory authority, but without some sort of robust federal governance of the market it will remain a niche offering used by a small cohort of investors.

What’s more, the common use of cryptocurrencies to facilitate illicit transactions makes it problematic for governments across the globe: if it is impossible for them to rein in such actions, the Biden Administration may conclude that it would be more prudent to try to end these altogether--a difficult or impossible task--or else encourage the Federal Reserve to issue a competing digital currency. Introducing government competition to financial markets is a modus operandi for Obama-Biden technocrats.

Many investors in the cryptocurrency industry are already wary of federal regulatory authority, and the established players in financial markets have yet to fully embrace cryptocurrencies themselves. Anything done by regulators that enforces these prior notions--such as SEC regulations that could potentially be perceived as self-dealing--makes the task of bridging these divides even more difficult.

About the Author

Hassan Tyler is a former Legislative Assistant to Senator Joseph Lieberman and an analyst for Capital Policy Analytics, a consulting firm in Washington, DC.

Signup to ValueWalk!

Get the latest posts on what's happening in the hedge fund and investing world sent straight to your inbox! 
This is information you won't get anywhere else!