Cryptocurrency has been a digital Wild West for over a decade. In the past 13 years, bitcoin alone has minted tens of thousands of millionaires, and a trillion-dollar industry has risen up to serve cryptocurrencies that proponents call the future of finance. At the same time, fortunes have been lost to scams and frauds. As all of this happened, crypto evolved too quickly for regulators to catch up.
That's about to change. Slowly but surely, both regulators and legislators have been homing in on the industry. Though there's polarized uncertainty over how to best do the job, what's clear is that crypto's Wild West days are coming to an end.
To understand how, first consider the US Securities and Exchange Commission. It's seeking to classify most cryptocurrencies as securities rather than digital currencies. Most companies that issue coins would have to meet the same standards as companies that issue stocks, and the SEC would have the power to restrict the activities of crypto firms that don't.
To that end, the SEC has reportedly opened an investigation into Binance, the world's largest cryptocurrency exchange. The commission is looking into whether BNB, Binance's crypto token, should have been classified as a security upon its launch in 2017. The SEC has already been embroiled in a 16-month case against Ripple, making the similar accusation that Ripple's XRP coin should be treated like a security rather than a virtual currency.
Then came the legislative side. On Tuesday, two senators, New York Democrat Kirsten Gillibrand and Wyoming Republican Cynthia Lummis, proposed a sweeping bill that would create a wide-ranging framework in which the entire industry could be regulated. The bill, called the Responsible Financial Innovation Act, is expected to change form over the next year or so, but reflects the bipartisan desire to integrate cryptocurrency into the country's financial and legal systems.
That regulatory impulse has been seen across the country over the six months. New York's Democrat-controlled Senate, in an attempt to address environmental concerns, approved a proposed a government body to oversee stablecoins – and that was before . The desire goes all the way to the top: In March President Joe Biden released an executive order that called on the Treasury to craft policy that protects Americans from the dangers of crypto investing.. Republican Sen. Pat Toomey in April
"The necessity to take regulation seriously is what's key here," said David Shafrir, CEO of Secure Digital Markets, a crypto brokerage firm. Shafrir said the industry can't afford "another Mt. Gox," a reference to an infamous 2014 hack of the Mt. Gox exchange that saw $460 million in bitcoin stolen, causing the exchange's bankruptcy and customers to completely lose their investment.
"You can't have these kinds of very clear fraudulent activities occurring, because if you do you completely discredit the industry as a whole."
Regulated, but by who?
Regulating cryptocurrency is much easier said than done. Bitcoin and ether make up about half of the entire $1.2 trillion crypto market, and both are open source. Neither is operated by a company, and both can operate on a peer-to-peer basis, meaning they don't require an intermediary exchange. The whole point of these technologies is that they're decentralized -- so how do you regulate them when there's no central entity to regulate?
Instead of taking on the technology, regulators have until now sought to confront particular companies that have sprung up around it. Binance and Ripple, both under investigation by the SEC, make easier targets than developers who work on open-source ethereum code. If regulators can target people and companies, Shafrir notes, they serve as a proxy for regulating the technology itself.
"If the brokers, the executives, the employees of all the major industry players all operate under the guise of a regulated industry, then by default a vast majority of everything that's going to happen in the periphery of the industry will behave in a regulated manner," he said.
Yet just because consensus exists over the need to regulate doesn't mean there's consensus over the details. At the moment, there are largely two camps tackling crypto. One believes cryptocurrencies should be treated as securities, and another that thinks they should be classified as commodities.
It sounds dry, but how these crypto tokens are categorized will determine who regulates them. Commodities come under the Commodity Futures Trading Commission, which many argue will give the industry far more leeway and far less scrutiny than the Security Exchange Commission.
Lummis and Gillibrand's bill makes many suggestions, including that goods paid for with crypto under $200 go tax-free, but the most controversial is its proposal to classify most cryptocurrencies as commodities. The positive reaction of many within the crypto industry, as well as the fact that Lummis herself owns six figures' worth of bitcoin, has raised eyebrows.
"When it comes to the goal of both investor protection and financial stability, this bill is a deregulatory departure from the status quo," tweeted Hilary Allen, professor of law at American University's Washington College of Law. "It gives most jurisdiction over crypto assets to the CFTC, which has no investor protection mandate and far fewer resources than the SEC."
Others argue that the SEC would stifle innovation. Patrick Daugherty and Louis Lehot, cryptocurrency experts at the Foley and Lardner law firm, support the bill's proposal to classify cryptocurrencies as commodities.
"The CFTC has a strong record of thoughtful and collaborative regulation over industry, and with other jurisdictions," said Daugherty and Lehot via email. "The SEC, by contrast, has focused on enforcement tools that have served to inhibit the growth of a legal digital asset industry from the start, and is doing everything in its power to block further development with unprecedented regulation."
The SEC declined to comment for this story. The CFTC didn't immediately respond to a request for comment.
A Binance spokesperson told CNET, "We have been working very diligently to educate and assist law enforcement and regulators in the US and internationally, while also adhering to new guidelines. We will continue to meet all requirements set by regulators."
Crypto's explosive Wild West days may be coming to an end. But the spat over who governs the territory may bring some tense moments.