Facebook has suffered increasingly negative publicity as of late due to its cryptocurrency ambitions with the Libra, as the United States harbors concerns regarding the program’s economic and national security implications. However, given its ongoing competition with China, it would serve the United States well to revisit these concerns and their concomitant regulations before cryptocurrencies flourish elsewhere.
Before racing forward, it helps to clarify often-conflated terms regarding digital, virtual, and cryptocurrencies. We start with digital currency, which is any money that is digitally represented instead of the “real” currency such as classic legal tender; this digital currency may be regulated or not with varying levels of centralization. A large subcategory of that digital currency is virtual, which in the Internal Revenue Service’s words, functions “as a medium of exchange, a unit of account, and/or a store of value” which may operate as real currency in some venues (despite not being legal tender in the United States). It is under virtual currency that we come to the cryptocurrencies, of which Bitcoin is a famous example; cryptocurrencies use cryptographic technology to keep transactions secure, decentralized, and anonymous.
Some might say they are frightfully anonymous, as dark web markets including the Silk Road and AlphaBay have used cryptocurrencies for trading illegal goods and services, such as narcotics. ISIS has used cryptocurrencies for funding, and nation-states such as Russia, Venezuela, and North Korea have begun dealing in cryptocurrencies to circumvent various sanctions. These criminal cryptocurrency dealings were highlighted by U.S. Treasury Secretary Steven Mnuchin in July when he labeled Facebook’s Libra as a national security issue. Mnuchin emphasized that the program could be used for money laundering and financing terrorism. The immediate government scrutiny was harsh enough for payment giants such as PayPal, Mastercard, Visa, eBay, and Stripe to withdraw from the program.
But while some are deterred, many others are eager for the government to clarify its cryptocurrency regulations for the sake of innovation. Last month, leaders from the burgeoning crypto-industry, venture capitalists, and Wall Street financiers met with lawmakers in the Library of Congress to ask the government to clarify its stance on cryptocurrencies. Their greatest fear was applying the dated Howey Test from SEC v. W.J. Howey Co. (1946) in determining if cryptocurrencies qualify as securities. The Howey Test essentially requires three criteria: an investment of money, an expectation of profit from it, and that the expectation derives largely from the effort of others. Most Initial Coin Offerings, or “ICOs,” thus qualify as securities open to greater regulation, but many argue that others should fall under a different category for reason of their utility and that potential investors are in “purgatory with regard to regulatory clarity.”
These investors warn that it is more than a matter of regulation but also innovation, for if the United States fails to cater to cryptocurrencies with adequate leniency or clarity, then buyers will simply seek opportunities in overseas jurisdictions. More on-point, China has expedited development of its own “Central Bank Digital Currency” after Facebook’s Libra announcement this summer. Financial analysts have said that if the United States ultimately dismisses Libra and fails to draft pro-crypto innovation, then China’s Digital Currency could be “strategically positioned to become the de facto global digital currency in emerging economies.” In light of China’s advances in the race to dominate 5G, it would behoove the United States not to fall behind in the cryptocurrency race as well. The first step in that race may be for the United States to admit that there is one, and then to offer clear regulation to govern its leg of the race.