States, Not Washington, Should Decide on Blockchain Regulation

Bitcoin is ready for the big-time, with the list of billionaire investors and corporate treasuries buying up coins only getting longer. The BTC price is inching closer to its all-time high of nearly $20,000, and the signs are all pointing toward greater bullish momentum going forward.

Even as bitcoin’s market capitalization balloons to an all-time high of $329 billion, surpassing companies like Disney, Verizon and PayPal in value, and blockchain infrastructure continues to mature, Washington, D.C. has been dragging its feet on the regulatory front. As a result, it might be high time for states to take matters into their own hands.

Bitcoin ATMs, which give users the opportunity to buy and sell cryptocurrencies with cash, are one key indicator of the growth that the blockchain space is experiencing. In the last six months or so, the number of Bitcoin ATMs has surged roughly 57%, according to Coin ATM Radar. Last month, there was a net increase of 848 machines, or about 8% between Oct. 1 and Oct. 31, Coin ATM Radar data reveals.

With interest rates hovering at near zero or below in some jurisdictions, investors are hunting for yield, and they have been flocking to bitcoin as a safe-haven asset in the economic storm. The BTC price has gained roughly 150% year-to-date, trouncing the 28% returns for rival store-of-value asset gold in the same period.

Bitcoin and blockchain technology have proven to be resilient over the years. And while nothing may be able to stop it, a lack of proper regulatory guardrails in the United States threatens to slow progress down with a one-two punch of talent fleeing for greener regulatory pastures overseas and consumers becoming at risk of falling for scams.

Washington’s Wall of Worry

Bitcoin is maturing, but it remains a nascent market in which the kinks continue to be ironed out, similar to any emerging technology. For instance, during bitcoin’s recent run-up to $18,000, cryptocurrency exchange Coinbase suffered an outage after being flooded with increased traffic, leaving users unable to access its web and mobile applications.

The US-based exchange is in the process of bolstering its capacity and customer service to deal with this increase in demand, and it is one example of the issues that the industry continues to face. During the outage, CoinFlip, the world’s largest Bitcoin ATM operator, reminded the crypto community that it has round-the-clock customer service.

It is not the brief interruption in service that has policymakers worried, however. Instead, they are fixated on the stigma attached to bitcoin and the blockchain world that the industry has been trying to shake for years. It hasn’t helped that Washington, D.C. is already at odds with tech giants such as Facebook and Twitter, which only adds fuel to the fire of their distaste for innovation.

Bitcoin’s features such as anonymity have paved the way for nefarious activities that have taken place on the dark web and given bad actors the opportunity to use bitcoin as a safe-haven, only not in the way it was intended. Instead they have used it for criminal activities such as to fund terrorism and perform money laundering, for example.

Anti-money laundering (AML) and Know-Your-Customer (KYC) protocols are helping on that front, but more needs to be done. According to crypto market data company Chainalysis, last year alone bad actors moved $2.8 billion in bitcoin to various cryptocurrency exchanges — including to popular trading platforms such as Binance and Huobi — moves that are often tracked by the Whale Alert account on Twitter. That amount represented an increase from $1 billion in the prior year. The trend highlights the need for proper guardrails in the space, yet Washington, D.C. has mostly kept its proverbial head buried in the sand about the need for a proper regulatory framework.

Ben Weiss, chief operating officer at CoinFlip, described Washington, D.C.’s reticence toward technology as “somewhat justified skepticism,” saying the problem is two-pronged, comprising the security lapses at major social media platforms that have placed the personal information of millions of Americans at risk and a lack of understanding among lawmakers about how the tech actually works. Digital currencies are even more complicated than what has already come down the pike, and it is therefore unsurprising that Congress has been slow to act in a field they are unable to navigate themselves. He calls for a collaboration between the industry and lawmakers to make progress at both the state and federal levels.

The problem is that by doing nothing, or at least barely anything, there are repercussions. Regulators are in essence leaving consumers with a target on their backs and zero protection from fraudsters and placing the United States at risk of losing top tech talent to Asia and Europe, where there is greater regulatory clarity and countries are advancing with their plans for central bank digital currencies.

One segment of the cryptocurrency industry that has been a bright spot has been the Bitcoin ATM market, where service providers like CoinFlip are giving bitcoin a good name. The world’s leading Bitcoin ATM provider has made it its mission to abide by anti-money laundering laws, as evidenced by its compliance with the U.S. Treasury’s Financial Crimes Enforcement Network, or FinCEN.

The alternative is seeing their machines shuttered by regulators, which is a scenario that has unfolded in Germany, where the Federal Financial Supervisory Authority, known as BaFin. The German authority was forced to shut down unlicensed Bitcoin ATMs that failed to get the green light from the regulator to operate. One company, Shitcoins Club, saw all of its machines in the country seized by BaFin after it failed to comply with the licensing requirement. They are just one of several examples.

Patchwork Regulation

While Washington passes the buck, individual U.S. states are stepping up to fill in the crypto regulation gaps, with California, New Jersey and Wyoming leading the charge. Blockchain startups have flocked to California, which like Switzerland has become known as a crypto-friendly state. New Jersey is inching closer to crafting its own policy — the Digital Asset and Blockchain Technology Act — in which crypto firms would need to be licensed to operate in the state. And Wyoming has recently granted two crypto firms — Kraken Financial and Avanti — banking charters.

The industry also has market leaders in its corner, such as Bitcoin ATM company CoinFlip, which has been advocating for a clearer regulatory roadmap in the United States. The company has already seen success on this front on the state level. CoinFlip partnered with the Blockchain Advocacy Coalition in support of California’s Assembly Bill 2150 legislation, which would establish a regulatory framework for cryptocurrencies and the underlying blockchain technology in the state. CoinFlip has also been influential in the state of New Jersey.

Regulatory Model

There is no doubt that the United States has taken a backseat when it comes to blockchain regulation. Meanwhile, other jurisdictions have embraced tech innovation and are crafting their own rules in the interim. These policies could serve as a model for the United States if and when Washington gets its act together. In the meantime, the patchwork regulatory approach that is currently unfolding in the United States will have to suffice.