Comparing two regulatory approaches to Bitcoin

By: Elizabeth Nwabueze 

On February 1, 2017, Switzerland’s seven-member Federal Council began consulting amendments to the country’s Banking Act and Banking Ordinance.[1] The meeting’s goal was to modify their existing Banking Act and Banking Ordinance, reduce market barriers, and improve competitiveness in the Swiss financial sector. This consultation will run until May 8 and will yield valuable feedback regarding this upcoming change to the regulatory system.[2]

The Swiss government’s response to Bitcoin sharply contrasts current regulations in the United States. Since 2013, when the Senate held the first hearings on Bitcoin, the U.S. has continued to hammer down regulations driving strengthening barriers of entry into the financial technology (“fintech”) marketplace and pushing out established companies.[3]

 

Brief History of Bitcoin

The beginnings of Bitcoin dates back to 2008 when three individuals Neal Kin, Vladimir Oksman, and Charles Bry, filed an encryption patent application.[4] Later that year, the mysterious Bitcoin originator, Sakotoshi Nakamoto[5], released a white paper called “A Peer-to-Peer Electronic Cash System,” explaining his or her idea for the world’s first completely decentralized digital currency.”[6] In Nakamoto’s vision, the use of peer-to-peer version of electronic cash would help eradicate counterfeiting, thus providing a vital foundation for Bitcoin to grow legitimately using Bitcoin mining.[7] After a progressive inaugural year in 2010, the virtual currency came into the spotlight following its first use in commerce, a pizza purchase, and the circulation of Bitcoin increased to 1 million.[8] Moreover, after a major system hack in August 2010 and a subsequent discovery of other vulnerabilities in the blockchain in September 2010, an inter-governmental group published a report on money laundering using new payment methods suggesting that Bitcoin could help people finance terrorist groups.[9] As a result, U.S. regulators started to cautiously look for ways to simplify this emerging technology.[10]

Bitcoin Regulation in the U.S.

            Although the U.S. started as the forefront for Bitcoin, it was not without the burdening of federal regulations. In 2013, the US Financial Crimes Enforcement Network (“FINCEN”), issued some of the world’s first Bitcoin regulations in the form of a guidance report for persons administering, exchanging, or using virtual currency.[11] The Internal Revenue Service (IRS) also stepped in, becoming the first tax agency to clarify the tax treatment of digital currencies.[12] State government officials went even further and implemented harsher regulations. In New York, the Superintendent of the Department of Financial Services (“DFS”), Benjamin M. Lawsky, proposed “BitLicense,” a regulatory framework for virtual currency businesses operating in New York.[13] Other states like California and Texas either attempted to regulate the currency by forbidding transactions[14] or completely disregarded the value of Bitcoin as speculative investment.[15]

Comparative Study: Bitcoin Regulation in other Countries

            As the U.S. tightened its regulatory grip, other countries embraced the emerging currency with an open mind.[16] For example, the United Kingdom created a regulatory framework to make it easier and faster for fintech companies and startups to comply with appropriate consumer protection laws.[17] Additionally, Switzerland’s Federal Council proposed three modifications in its current Banking regulation in hopes of attracting more Bitcoin and blockchain-startups and embracing more fintech companies.[18]

First, the Council plans to amend its current seven-day deadline for holding money in settlement accounts, a type of account commonly used in crowdfunding services, allowing main transactions to be easily structured and predictable.[19] Second, the Council plans to establish an official innovation area, where fintech companies can accept up to CHF 1 million (roughly $1.01 million) that won’t be classified as operating on a commercial basis.[20] Third, the Council plans on revising banking licenses in specific Swiss cantons, thus simplifying authorization and operation requirements.[21]

Advantages of Decreased Regulations

Bitcoin is still an emerging technology within an open global system. Therefore should be limited government influence on Bitcoin’s underlying protocol and development, allowing Bitcoin system to flourish on its own. In fact, if Bitcoin were to be deregulated and treated as a currency, it would gain access into numerous market and ease of transactions across borders.[22]

For the future, U.S. regulators should be more welcoming to the potential technological advancements in the financial sector. After all, these innovations may be here to stay and we do not want to be the ones lagging behind.

[1] Francisco Memoria, Switzerland Aims to Attract Blockchain Startups by Reducing Fintech Market Entry Barriers, Cryptocoins News (last updated Feb. 2, 2017), https://www.cryptocoinsnews.com/switzerland-aims-to-attract-fintech-startups-by-reducing-market-entry-barriers/.

[2] JP Buntinx, Swiss Federal Council Looks For Feedback on new Fintech Regulation, Live Bitcoin News (last updated Feb 2, 2017), http://www.livebitcoinnews.com/swiss-federal-council-looks-feedback-new-fintech-regulation/.

[3] Kyle Torpey, The United States Is Falling Behind in Bitcoin Regulation, Bitcoin Magazine (last updated Aug. 25, 2016),

https://bitcoinmagazine.com/articles/the-united-states-is-falling-behind-in-bitcoin-regulation-1461604211/.

[4] Nathan Jessop, A brief history of bitcoin – and where it’s going next, The Next Web (last updated Mar. 29, 2015),

A brief history of bitcoin – and where it’s going next

[5] Adrian Chen, We Need to Know Who Satoshi Nakamoto Is, The New Yorker (last updated May. 9, 2016), http://www.newyorker.com/business/currency/we-need-to-know-who-satoshi-nakamoto-is (explaining the mystery surrounding the person who invented Bitcoin).

[6] Torpey, supra note 3.

[7] Id.

[8] Grace Caffyn, Bitcoin Pizza Day: Celebrating the Pizzas Bought for 10,000 BTC, CoinDesk (last updated May. 22, 2014), http://www.coindesk.com/bitcoin-pizza-day-celebrating-pizza-bought-10000-btc/; Nathan Jessop, A brief history of bitcoin – and where it’s going next, The Next Web (last updated Mar. 29, 2015),

A brief history of bitcoin – and where it’s going next

[9] Andrew Quenston, The Biggest Bitcoin Hacks and Thefts of All Time, Hacked (last updated Sept. 9, 2016), https://hacked.com/biggest-bitcoin-hacks-thefts-time/; Rebecca Campbell, Former CIA Analyst Says Terrorists Utilize Bitcoin to Boost Funding, Cryptocoins News

https://www.cryptocoinsnews.com/former-cia-analyst-says-terrorists-utilize-bitcoin-boost-funding/.

[10] Nat Wasserstein, Bitcoin Laws and Regulations in the United States: The Use of Bitcoin by Attorneys, 40 Westchester B.J. 59 (2015).

[11] Kyle Torpey, The United States Is Falling Behind in Bitcoin Regulation, Bitcoin Magazine (last updated Aug. 25, 2016),

https://bitcoinmagazine.com/articles/the-united-states-is-falling-behind-in-bitcoin-regulation-1461604211/.

[12] Id.

[13] Wasserstein, supra note 10, at 61.

[14] Id.

[15] Id.

[16] Torpey, supra note 3.

[17] Andrew Quentson, UK Regulators Declare Start of “Beautiful Friendship” With Bitcoin, Ethereum, The Cointelegraph (last updated Apr. 12, 2016),

https://cointelegraph.com/news/uk-regulators-declare-start-of-beautiful-friendship-with-bitcoin-ethereum.

[18] Francisco Memoria, Switzerland Aims to Attract Blockchain Startups by Reducing Fintech Market Entry Barriers, Cryptocoins News (last updated Feb. 2, 2017) https://www.cryptocoinsnews.com/switzerland-aims-to-attract-fintech-startups-by-reducing-market-entry-barriers/.

[19] Id.

[20] Id.

[21] Id.

[22] Michael Beckerman, The Benefits of Allowing Bitcoin to Flourish, The New York Times (last updated Sept. 21, 2015), https://www.nytimes.com/2015/09/22/business/dealbook/the-benefits-of-allowing-bitcoin-to-flourish.html

One thought on “Comparing two regulatory approaches to Bitcoin

  1. Bitcoin is still an emerging technological development, and that is something that will delay any positive regulation or deregulation within the U.S. It has the potential for good, but also has potential issues that until resolved will be a millstone around its neck. For instance, in the realm of virtual currency hacking becomes a more terrifying concept if it can take away ones money or destabilize a currency more easily. Thanks to the U.S. experiences with cyber attackers and hacking by foreign actors, until Bitcoin can prove virtual immunity to such hacking attempts I think it’s unlikely we will see the U.S. moving forward on its views of the virtual currency.

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