By Heather Morton
Los Angeles—The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) defines virtual currency as “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency.“
Peter Van Valkenburgh, a speaker at the session Cryptocurrency: Currency of the Future or Just a Fad? during the 2018 NCSL Legislative Summit, explained that cryptocurrencies reinvent bearer instruments, like a paper bearer bond, which makes them more efficient due to the lack of a middle man.
Virtual currencies can be centralized or decentralized. A centralized virtual or digital currency has an administrator, who can set the value of the currency by promising to redeem the tokens for a fixed amount of national currency or some item of value, or they can allow the value to float according to market supply and demand.
In contrast, decentralized virtual currencies are created and maintained in an open community, without an administrator.
To date, all decentralized virtual currencies are also known as cryptocurrencies because they utilize cryptography, like public and private keys, to track and control the digital tokens. Bitcoin is one of the most famous of the decentralized cryptocurrencies in use.
According to Van Valkenburg, state legislation and regulation regarding digital currencies falls into the following categories: consumer protection, investment protection, anti-money laundering and tax. In the 2018 legislative session, there are 55 bills in 22 states and the District of Columbia regarding the issue.
Some states are using regulations, rather than enacting new legislation, to work with businesses and consumers. Lucinda Fazio, chief of regulatory affairs–consumer services with the Washington state Department of Financial Institutions, described the process her state took in drafting its regulations after her agency determined that digital and virtual currencies fell under the existing state money services statutory act.
In developing their regulation, Fazio explained that the more the underlying activities are examined for what they are—if they are, in fact, securities, money transmissions or storing something of value for another person—these underlying activities themselves are not new, so that they are regulated in a way that businesses can understand and continue to innovate.
According to Andrew Beal, senior manager with Ernst & Young, an insane amount of demand exists in the market for this new asset class and the demand is fueled by a desire to speculate on these assets. Between 2016 and 2018, cryptocurrency exchanges increased from 48 to more than 500 worldwide.
Initial coin offerings (ICOs) are a quasi-public offering, similar to initial public offerings, but without the expensive federal regulatory requirements. Small businesses and entrepreneurs have looked at ICOs as a potentially less-regulated way of cutting out intermediaries such as investment banks and law firms, to go directly to individuals to raise capital for their business idea.
Michael Pieciak, commissioner of the Vermont Department of Financial Regulation, cautioned that ICOs are highly speculative and attract bad actors trying to take advantage of consumers.
Heather Morton is a program principal in Fiscal Affairs. She covers financial services issues for NCSL.