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SEC And CFTC's Early Regulations On Cryptocurrencies Are Here: What It Means For Market Participants

Mar. 08, 2018 2:43 PM ETPYPL, SQ, COIN-OLD, GBTC, BTC-USD24 Comments
Rian Insights profile picture
Rian Insights


  • The CFTC has been validated on its stand that cryptocurrencies are 'commodities' and hence it has the power to regulate them.
  • The SEC will be making it mandatory for crypto platforms to register with regulators.
  • Bad players will make a rush to get out of the cryptocurrency market.
  • Existing players in the cryptocurrency space will either have to clean up their act or make way for more established players.
  • Investors and speculators can expect several benefits when regulations come into play.

People who have read my previous articles would be aware that I have advocated for regulations on the cryptocurrency market, calling them imminent. That's not because I am pro- or anti-cryptocurrencies, but because as a securities professional I know that for any market - with sizeable assets and participants - to survive it is crucial for it to be properly regulated. Well, my prediction regarding regulation to be imminent has come true pretty soon.

In the last two days, we have seen two big news coming from the cryptocurrency space, both related to regulators. The first was a ruling from a federal court, which agreed with Commodity Futures Trading Commission's (CFTC) assessment that cryptos are commodities and should be regulated like commodities. The second news, which also came as a shock for crypto participants, was the Securities and Exchange Commission (SEC) releasing a public statement in which it reiterated its stand and strongly advised crypto platforms to get registered if they want to continue doing business in the United States. Before getting into how these events will impact participants in the crypto market, let us take a closer look at both these stories.

CFTC Is Validated

Back in 2015, in a case related to a Bitcoin Option trading platform that was offering derivatives on Bitcoin illegally, the CFTC had issued a press release in which it remarked, 'CFTC Holds that Bitcoin and Other Virtual Currencies Are a Commodity Covered by the Commodity Exchange Act.' In the same release Aitan Goelman, then CFTC's Director of Enforcement, had commented:

While there is a lot of excitement surrounding Bitcoin and other virtual currencies, innovation does not excuse those acting in this space from following the same rules applicable to all participants in the commodity derivatives markets.

This determination of cryptocurrencies being commodities by

This article was written by

Rian Insights profile picture
Often fooled by randomness, yet driven by curiosity, trying to find needles in a haystack.My investment philosophy can best be summarized by this quote from James 'Jim' Grant, founder of Grant's Interest Rate Observer:"To suppose that the value of a common stock is determined purely by a corporation's earnings discounted by the relevant interest rate and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin, and believed Orson Welles when he told them over the radio that the Martians had landed."  I post my analysis here on Seeking Alpha primarily to keep a journal that records my thoughts about a company (industry) as I am learning about it, and secondarily to avoid hindsight bias in the future. Writing helps me to deepen my understanding of companies and industries. It also helps me to process my thoughts and keep a track of the industry (or stock) I might find worthy of investment. I am not on Seeking Alpha to sell or promote any stock, product or service. Any article or blog post I publish is not an investment recommendation and should not be relied upon when making investment decisions - investors should conduct their own research.

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Comments (24)

I do not see cryptocurrencies having a future. Although it is not a necessary condition, being able to pay taxes with a currency is a sufficient condition to making a currency useful. I doubt that many taxing authorities will accept a cryptocurrency as payment for taxes.

The existence of these currencies seems to be based on the greater fool theory that someone will pay more than you did. People do speculate and hedge foreign currencies. But there is a way to predict their value which is not the case with cryptocurrencies.

It is a fringe area for kooks.
Rian Insights profile picture
I agree to a large degree.

However, to drive the prices of cryptocurrencies to zero the 'believers', whoever they may be, will have to stop believing in it. As long as there is a sizeable crowd that 'believes' in something, that thing will have value. If there comes a day when the followers leave in droves, we will see most of the value that cryptos have today, wiped out.
Just so you know you can pay your taxes in Arizona using cryptocurrency. Not sure about other states but I’d bet more will follow suit if they haven’t already.
Opportuna Investments profile picture
Major payment processor Stripe will no longer be accepting Bitcoin. http://bit.ly/2tCPOFF
Peter Palms profile picture
rypto currencies are no money, The emperor has no clothes
Well it looks like the SEC has it figured out, how to manipulate the crypto space. Well done regulators. Where were you when Bernie was running his scam?
Durwood Dugger profile picture
First, government regulation in any form adds significant operating (especially accounting and reporting) expenses and associated other legal and tax liabilities. The economic and legal playing field for private cryptocurrencies is becoming more level with all other payment platforms. The US government in their typical methodology has laid out their interpretation of the laws they will use to force compliance of all cryptocurrency exchange with US currency. Economically, this is a disaster for private cryptocurrencies because it means that their greed trade will become non-existent as their ability to compete with other regulated and established payment becomes obviously non-existent as well. The only good news is that blockchain will eventually be basis of all payment platforms, at least for larger transactions and those transactions will be more secure. Unfortunately, these benefits support established payment platforms that already dominate the market far more than newer startups like cryptocurrencies.

Cryptocurrencies have essentially become legally recognized for what they technically always were (without their quasi-legal greed trade) - just another technological electronic payment platform option using the blockchain technology base. If you look at the use of BitCoin and most other current cryptocurrencies - their use as a retail payment devices is still a fraction of a percent of other methods. Their acceptance as a retail payment method has not and is not growing significantly. Removing their greed trade attraction essentially leaves them with only their competitive economics as payment platform - which is next to nothing competitively with other major payment companies.

As major payment platforms such as credit card companies, PayPal, banks and others deploy blockchain technology in their own payment platforms - and regulatory requirements are the same for all of them - those major payment platforms gain even more control of the payment market of which they already totally and absolutely dominate. Once the greed trade disappears from private cryptocurrencies, as is inevitable as their regulation ensues, and the mythical nature of private cryptocurrency anonymity becomes more broadly recognized - there is really nothing left to warrant private cryptocurrency economic existence.

The nature of the private currency (including cryptocurrency) economic evolutionary path has always been historically (3,000 years without deviation) obvious to those who were historically informed of the associated economic limitations to private currencies of all types. As cryptocurrencies have become significant in the equity markets their regulation became inevitable and their economic fates - assured.
Rian Insights profile picture
Wow Mr. Dugger, wasn't expecting such a highly detailed comment and that too with so much clarity. I subscribe to some of the views that you have presented, but also have my disagreements. I agree with you on things like crypto/Bitcoin should only be seen as a payment mechanism and that large institutional payment platforms will continue to have the upper hand in that domain. Even the other points you mentioned, 'greed trade' and liabilities related to reporting and taxation, makes complete sense. However, I have a major disagreement with - the US government imposing regulation will kill bitcoin/cryptocurrencies as the justification for their existence will come under threat.

Let's take the example of the US Dollar (yes I get the irony that I am using a fiat currency to defend the existence of cryptos, but please let me clarify my point using this example).

Now, we know that the US Dollar is the 'global currency', the reserve currency of the world. We also know that a US citizen regardless of where in the world he/she lives has to report to the IRS every year about their income and has to pay taxes on it. But, does that mean the US government has complete control over it across the world? Can it track all the dollars that it has ever printed - where they went, who has them in what amount? No. Is the US Dollar backed by an asset? The gold standard is long gone.

Forget the white market, everyone from narcos to communist guerrillas to terrorists to corrupt politicians and bureaucrats in countries across the world uses US Dollar as a store of value or for transactions. The US Dollar gets its value and its legitimacy from the very fact that it is printed and regulated by the Fed (and hence the US government).

Now remove the Dollar and in its place put Bitcoin (or any other crypto you think is better than Bitcoin). Will regulation in the US kill cryptocurrencies altogether/ drive them to zero? I don't think so.
"No. Is the US Dollar backed by an asset?"

Yes. One U.S. Dollar is worth $1 of taxes due. Federal taxes can only be paid in U.S. dollars. That is the backing of the dollar. If there were no taxes there would be no backing.

It also controls the value of the dollar. The cost to obtain a dollar by say exchanging gold for a dollar can not rise or fall very quickly because after all with a dollar you can only pay $1 of taxes. So people are resistant to exchange too much to get a $1 to pay 1$ of taxes.

You do not have that with cryptocurrencies. So they can go up or down very rapidly as they have no backing. They only have their own supply and demand curves. They are a lot like tulips.
mr charles profile picture
Well this is great news .. but doubt our beloved Attorney Gen.. would make any easier.. has already Shotden med Juana....and having cryptos
are already attached ...mmmm
gonna b quite interesting....watching this movie...
don't know when this thing will stabilize but hodl and when the cloud clears this is long-term good news
GaltMachine profile picture
This was a profound statement from the SEC:

“Lastly, many of these platforms give the impression that they perform exchange-like functions by offering order books with updated bid and ask pricing and data about executions on the system, but there is no reason to believe that such information has the same integrity as that provided by national securities exchanges.”
Rian Insights profile picture
Yes, I found that interesting as well.
It would not surprise me if many of the exchanging were skimming... just like that famous fraud case from years ago where the programmer skimmed the rounding change into his own account.

Some FX trading platform offer "commission free" (commission embedded into the bid/ask) trading but that is stated up front.
This is all positive news for crypto bulls and should at least be interesting news for those agnostic on crypto but who watch the world evolve technologically.

There is a certain segment of society of the "Get off my lawn" mindset that despite all the news above will CONTINUE to offer nothing but the repeated chorus of "ponzi scheme, fraud, tulips, worth zero" - thus clogging up the comment sections around here on crypto articles
The Don't Pass Line profile picture
Get off my lawn. Cryptos are going to zero.

Jokes aside...they won’t go to zero, but they will go to $1. My take is completely different from the fraud and tulip chorus. Cryptos will be a victim of their own success, to the extent that they will one day be deemed necessary as an alternative or even a replacement for fiat currencies. And when that day comes, they will be exchanged on a 1:1 basis at the price of existing fiats. Blokchain tech is a great investment, but that needs to be distinguished from an investment in the crypto markets, which are doomed to fail.
So you're a big one world government dreamer aren't you. People from multiple nations all around the world are going to all en masse give up their cryptos for fiat?

Who orders such an event. The antichrist?
Rian Insights profile picture
Thankfully, we haven't seen those comments till now. Dissing something just for the sake of it has never made sense to me. People who just shout their views in comments sections, message threads here or elsewhere, instead of having a conversation/debate don't add any value - Why do it at all?

Just to make sure, I don't agonize too many of them I write my articles from a neutral viewpoint without any sort of bias, be it personal or professional.
D Lombardo profile picture
Based on my knowledge of mobile payment cos, I would say that Paypal and Square will benefit as they have good reputations and execute well.
Rian Insights profile picture
Hi Dominic,

I share the same view. The payment processing companies have a lot to gain, just by the virtue of being dependable. In my PayPal article, I also highlighted that PayPal has almost nothing to lose if it enters the crypto space; the risk-reward is quite appealing for it to ignore this opportunity.
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