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The $2 Trillion Cryptocurrency Market Is Drawing Interest From Investors, Scrutiny From U.S. Regulators

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WASHINGTON—As cryptocurrencies go mainstream, prices for bitcoin and other digital tokens are often displayed on cable-news tickers and finance apps as though they were just like regular stocks, bonds or oil futures.

They aren’t. And that makes them a challenge for U.S. financial regulators.

Oversight of cryptocurrencies, which came into existence in 2009, is spotty. Regulators in the Biden administration are working to clarify rules for a market that roughly tripled in value in 2021 to more than $2 trillion, drawing in millions of American investors and increasing concerns about financial stability.

Here are some of the key questions around setting those regulations:

What is the difference between cryptocurrency and other assets?

The traditional financial system is built around intermediaries—banks, brokerages, stock or commodity exchanges and asset managers. Government and industry regulators police such firms to protect investors, promote fair and orderly markets, guard against financial bubbles and prevent crimes such as money laundering or tax evasion.

This oversight comes with trade-offs. Banks and brokerages are required to set aside money for potential losses and are supposed to know who their customers are; in exchange, their account holders are protected by government-backed insurance. Public companies must follow standardized accounting practices and disclose information about their finances and operations; in exchange, they gain access to tens of trillions of dollars of liquidity on stock and bond markets.

A key belief among cryptocurrency advocates is that technology can substitute for such intermediaries and eliminate the need for trust.

Here is how that sort of arrangement plays out: Bitcoin enables any two people, anywhere in the world with an internet connection, to make a transfer of value in a few minutes without a middleman. Transactions are recorded on a database, called blockchain. It is publicly visible on networks of computers running separate copies of the same program. This should ensure that nobody on the network is counterfeiting the cryptocurrency or double-spending the same bitcoins.

Do cryptocurrencies need to be regulated?

Because cryptocurrency advocates say the assets reduce the role of traditional intermediaries, some argue that they don’t need to be regulated like banks, securities or investment funds.

But beneath the surface, regulators and experts say, there are almost always human beings at work.

Most new cryptocurrency investors access the market through trading platforms such as

Coinbase Global Inc.

or Gemini Trust Co. LLC. These companies take investors’ dollars and convert them to bitcoin, ether or dozens of other digital tokens. They charge fees, custody assets and roll out products that sometimes offer a return to investors.

A rapidly growing set of cryptocurrency applications known as “decentralized finance,” typically allows certain users to vote on how they operate. They are often supported by software developers and charge transaction fees.

And even though networks like bitcoin can execute transactions without a middleman, there is still a small group of programmers, known as maintainers, who have the ability to change the underlying code in case bugs emerge.

Policy makers say the presence of people in all these systems creates the potential for conflicts of interest and necessitates oversight.

The irreversibility and anonymity of many cryptocurrency transactions makes them popular for scammers and criminals, and the assets have fueled a surge in ransomware attacks such as the one that hit Colonial Pipeline Ltd. in 2021. The rapid growth of the cryptocurrency market, its self-governance and its murky links to the broader financial system also have raised concerns about stability. While hiccups have largely been contained within the crypto market, the potential for spillover effects into the real world could grow as more people invest their savings in the asset class.

“Few technologies in history, since antiquity, can persist for long periods of time outside of public policy frameworks,” Securities and Exchange Commission Chairman

Gary Gensler

said at the Wall Street Journal CEO Council in December.

“Few technologies in history, since antiquity, can persist for long periods of time outside of public policy frameworks,” Securities and Exchange Commission Chairman Gary Gensler said.



Photo:

Evelyn Hockstein – Pool via CNP/Zuma Press

Who would be responsible?

In the U.S., an alphabet soup of federal and state agencies oversees financial institutions and markets.

Banks are regulated by the Federal Reserve, the Office of the Comptroller of the Currency and state banking commissions. Brokerages, asset managers and stock exchanges are overseen by the SEC, which also sets disclosure requirements for publicly traded companies. Trading venues for futures and other derivatives are regulated by the Commodity Futures Trading Commission.

Money-transmission services, such as

Western Union,

are licensed by state governments.

These agencies write rules and regulations, monitor financial markets, send inspectors out to examine firms’ compliance with the law and take enforcement actions against companies or executives who are suspected of violating them.

Deciding which ones should regulate cryptocurrencies and what their authorities would be is a work in progress. Some top policy makers have said there are gaps in existing statutes and have urged Congress to fill them. Meanwhile, the SEC and CFTC have taken the lead in cracking down on cryptocurrency projects or trading platforms they consider to be breaking the law or defrauding investors.

Which agency regulates bitcoin?

Thus far, no agency has asserted full jurisdiction to oversee the two largest cryptocurrencies, bitcoin and ether, which together represent more than 60% of the entire market.

That is because the CFTC doesn’t have legal authority to regulate cash markets for commodities, which is the asset class some regulators and courts have suggested bitcoin and ether fall within. Cash markets, or a market where commodities or securities are paid for and received at the point of sale, don’t have an overarching financial regulator.

Congress would likely have to pass a law for the CFTC to gain such powers

The Treasury Department considers the platforms that many investors use to buy and sell bitcoin to be money-transmission businesses. These firms generally need to obtain licenses from state governments to operate, know who their customers are and take certain steps to prevent money laundering. But they face far fewer requirements and less oversight than traditional stock or commodity exchanges.

The CFTC does have authority to police fraud in bitcoin markets, however. It also oversees exchanges, such as the

Chicago Mercantile Exchange Inc.,

that list futures contracts for bitcoin and ether.

How are other types of cryptocurrencies viewed by regulators?

It depends on their attributes.

For example, the Biden administration plans to regulate issuers of stablecoins—a rapidly growing subset of cryptocurrencies that peg their value to a national currency like the dollar—similarly to banks, though regulators have asked Congress to first provide comprehensive legislation

But the biggest question facing the cryptocurrency industry is whether an asset meets the legal definition of a security, or an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” If the definition is met, then its issuer is required to register with the SEC, along with any trading platforms that offer such assets and brokers who sell them.

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How do you predict government regulation around cryptocurrencies will change in 2022? Join the conversation below.

How straightforward is that SEC test?

Mr. Gensler, the head of the SEC, says the law is already clear. The legal test used to identify a security was established by the Supreme Court in 1946, and the SEC provided guidance on applying it to cryptocurrencies in 2019. The agency has also prevailed in dozens of lawsuits against defendants who sold unregistered securities in so-called initial coin offerings.

Mr. Gensler has declined to specify which cryptocurrencies, if any, aren’t securities and therefore fall outside the agency’s remit. But he has repeatedly urged major cryptocurrency exchanges to register with the agency, saying it is highly likely that they are offering securities on their platforms.

Have crypto platforms taken him up on it?

Registering as an exchange with the SEC is slow, costly and bureaucratic. No major cryptocurrency-trading platforms have done so.

Instead, some have tried to stop serving U.S. customers. Others take a different approach. Coinbase, for example, says it only allows trading of assets “for which we determine there are reasonably strong arguments to conclude that the crypto asset is not a security.”

The situation leaves major cryptocurrency-trading platforms open to the possibility of SEC enforcement actions that could force them to pay fines, delist popular tokens or reimburse customers for losses. It is a risk they have been willing to run for the opportunity to reap fast profits in a hot market.

“It’s very profitable to list things that may be securities but call them not securities,” says Douglas Borthwick, chief business officer at INX Ltd., a cryptocurrency firm that says it has worked to set up a registered trading platform with the SEC.

Write to Paul Kiernan at paul.kiernan@wsj.com

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Teladoc Tumbled 38% After Big First-Quarter Loss. Is It Just a Pandemic Play?

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After pandemic drop, Canada’s detention of immigrants rises again By Reuters

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© Reuters. FILE PHOTO: Two closed Canadian border checkpoints are seen after it was announced that the border would close to “non-essential traffic” to combat the spread of novel coronavirus disease (COVID-19) at the U.S.-Canada border crossing at the Thousand Isla

By Anna Mehler Paperny

TORONTO (Reuters) – Canada is locking up more people in immigration detention without charge after the numbers fell during the pandemic, government data obtained by Reuters shows.

Authorities cite an overall rise in foreign travelers amid easing restrictions but lawyers say their detained clients came to Canada years ago.

Canada held 206 people in immigration detention as of March 1, 2022 – a 28% increase compared with March 1 of the previous year. Immigration detainees have not been charged with crimes in Canada and 68% of detainees as of March 1 were locked up because Canada Border Services Agency (CBSA) fears they are “unlikely to appear” at an immigration hearing, according to the data.

The rise puts Canada at odds with Amnesty International and other human rights groups that have urged Ottawa to end its use of indefinite immigration detention, noting CBSA has used factors such as a person’s mental illness as reason to detain them.

A CBSA spokesperson told Reuters that “when the number of entries (to Canada) goes up, an increase in detention is to be expected.” CBSA has said in the past it uses detention as a last resort.

A lawyer told Reuters her detained clients have been in Canada for years.

In the United Kingdom, too, immigration detention levels rose last year after dropping earlier in the pandemic, according to government statistics. Unlike Canada, the United States and Australia, European Union member states have limits on immigration detention and those limits cannot exceed six months.

The rise in detentions puts people at risk of contracting COVID-19 in harsh congregate settings, refugee lawyers say.

Julia Sande, Human Rights Law and Policy Campaigner with Amnesty, called the increase in detentions “disappointing but not surprising,” although she was reluctant to draw conclusions from limited data.

The number of immigration detainees in Canada dropped early in the pandemic, from a daily average of 301 in the fourth quarter (January through March) of 2019-20 to 126 in the first quarter (April through June) of 2020-21.

FEW NO-SHOWS AS DETENTIONS DROPPED

Detaining fewer people did not result in a significant increase in no-shows at immigration hearings – the most common reason for detention, according to Immigration and Refugee Board data.

The average number of no-shows as a percentage of admissibility hearings was about 5.5% in 2021, according to that data, compared to about 5.9% in 2019.

No-shows rose as high as 16% in October 2020, but a spokesperson for the Immigration and Refugee Board said this was due to people not receiving notifications when their hearings resumed after a pause in the pandemic.

Refugee lawyer Andrew Brouwer said the decline in detention earlier in the pandemic shows Canada does not need to lock up as many non-citizens.

“We didn’t see a bunch of no-shows. We didn’t see the sky fall … It for sure shows that the system can operate without throwing people in jail,” Brouwer said.

He added that detainees face harsh pandemic conditions in provincial jails – including extended lockdowns, sometimes with three people in a cell for 23 hours a day.

Refugee lawyer Swathi Sekhar said CBSA officials and the Immigration and Refugee Board members reviewing detentions took the risk of COVID-19 into account when deciding whether someone should be detained earlier in the pandemic but are doing so less now.

“Their position is that COVID is not a factor that should weigh in favor of release,” she said.

“We also see very, very perverse findings … [decision-makers] outright saying that individuals are going to be safer in jail.”

The Immigration and Refugee Board did not immediately respond to a Reuters request for comment.

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Nasdaq futures rise as market attempts comeback from April sell-off, Meta shares soar

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Stock futures rose in overnight trading as the market shook off the April sell-off and investors reacted positively to earnings from Meta Platforms.

Futures on the Dow Jones Industrial Average added 70 points or 0.2%. S&P 500 futures gained 0.7% and Nasdaq 100 futures jumped 1.2%.

The moves came as shares of Meta surged more than 18% after hours following a beat on earnings but a miss on revenue, a sign that investors may see signs of relief in the beaten-up tech sector. Shares were down 48% on the year heading into the results.

Meanwhile, shares of Qualcomm gained 5.6% in extended trading on the back of strong earnings while PayPal rose 5% despite issuing weak guidance for the second quarter.

“I think a lot of people want to believe that earnings are going to pull us out of this, but earnings are not what got us into this,” SoFi’s Liz Young told CNBC’s “Closing Bell: Overtime” on Wednesday. “… But the reality is there are so many macro headwinds still in front of us in the next 60 days that the market is just hard to impress.”

The after-hour activity followed a volatile regular trading session that saw the Nasdaq Composite stoop to its lowest level in 2022, as stocks looked to bounce back from a tech-led April sell-off. The index is down more than 12% since the start of April.

In Wednesday’s regular trading, the tech-heavy Nasdaq ended at 12,488.93, after rising to 1.7% at session highs. The Dow Jones Industrial Average rose 61.75 points, or 0.2%, to 33,301.93 propped up by gains from Visa and Microsoft, while the S&P 500 added 0.2% to 4,183.96.

Investors await big tech earnings on Thursday from Apple, Amazon and Twitter, along with results from Robinhood. Jobless claims are also due out Thursday.

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