Feds Shouldn't Regulate all Blockchain Applications Like Bitcoin, Stakeholders Say
Federal lawmakers and regulators should be careful to regulate bitcoin and other applications that use blockchain distributed database technology by function, rather than lumping all blockchain-based applications together as currencies requiring financial regulation, stakeholders said Friday during a Congressional Internet Caucus Advisory Committee event. Federal agencies are becoming increasingly interested in regulating bitcoin, with the Commodity Futures Trading Commission defining bitcoin and other virtual currencies Thursday as commodities in its settlement of charges against bitcoin exchange Coinflip for operating a commodities exchange without complying with agency regulations.
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The federal government shouldn't apply bitcoin regulations to all blockchain-based applications since blockchain technology has potential uses that shouldn't fall under federal financial regulation, said Chamber of Digital Commerce President Perianne Boring. Blockchain is essentially open source infrastructure that works as a “public ledger” that can be used to transfer anything of value online, Boring said. Bitcoin is a specialized use of blockchain's “basic formula,” said Digital Currency Council Vice President-Strategy Jinyoung Englund. Blockchain applications are still in the “very early days” of development, with bitcoin and other virtual currencies being the most visible use of that technology, Boring said. Blockchain's uses are "potentially limitless,” so regulating it based solely on its application for bitcoin trading would be problematic, she said. If the U.S. had regulated the Internet more than two decades ago based solely on its then-dominant use -- email -- then “we would have stifled” then-unforeseen uses of the technology, Boring said.
Even federal regulation of virtual currencies should be broken up by specific uses of the currency, Boring said. The CFTC now recognizes bitcoin as a commodity under its jurisdiction, while the SEC should regulate virtual currencies only when they're used as a security, she said. U.S. bitcoin investors are primarily using virtual currencies to “make money,” but bitcoin also has the potential to be an effective way to quickly and efficiently transfer money overseas to anyone who doesn't have access to a financial institution, said Consumers' Research Executive Director Joseph Colangelo. Law enforcement agencies also have a stake in bitcoin policy because of its use in illicit activities like the Silk Road online black market, Boring said. Still, law enforcement should view bitcoin as it would U.S. currency in its investigations rather than as an inherently illicit activity, she said.
The virtual currency industry needs to continue to improve its consumer protections, but the private sector should be allowed to develop those protections internally, Colangelo said. The industry is already developing some best practices and guidelines for consumer protections, though U.S.-based entities like Coinbase already provide consumer protections within the virtual currency market that aren't as plentiful elsewhere, Boring said. U.S. investors have been used to a financial landscape since 1933 in which they haven't needed to investigate whether banks are solvent because of FDIC regulations, so they need to be aware that they'll need to research whether a particular bitcoin exchange is safe, Colangelo said. “It's up to the consumer to do due diligence,” Englund said.