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Washington Mulling Cryptocurrency Regulations — What This Means for the Insurance Industry

by Precise Leads

March 22, 2018

The SEC and Commodity Futures Trading Commission say cryptocurrency deals need more oversight — and lawmakers agree.

As businesses and consumers increasingly conduct transactions in bitcoin, lawmakers and federal regulators have begun to consider how to regulate the use of cryptocurrencies. Last month, Securities and Exchange Commission Chairman Jay Clayton and Chairman of the Commodity Futures Trading Commission Christopher Giancarlo spoke before the Senate Banking Committee in support of laws governing cryptocurrency trades and investments in order to protect investors.

Several members of the Senate committee also signaled their willingness to impose oversight on cryptocurrency transactions, citing bitcoin’s valuation plunge from the beginning of the year and the hacking of the Japanese exchange Coincheck in February, during which thieves stole more than $534 million in bitcoin.

“There’s no question about the fact that there is a need for a regulatory framework,” said Sen. Mike Rounds (R-SD), a Senate Banking Committee member. His sentiments were echoed by Rep. Tom MacArthur (R-NJ), who serves on the House’s Financial Services Committee. “We have to look carefully at all of the cryptocurrencies and make sure individuals don’t get taken advantage of,” MacArthur said.

Before lawmakers approve any regulations, however, they must first decide which agency or jurisdiction has the ultimate authority over cryptocurrencies — or if they all do. As it stands now, the SEC, CFTC, the Treasury Department, the Federal Reserve, and individual states can all claim some form of regulatory power over these virtual coins.

A Security, a Commodity, or Both?

In early March, the SEC issued a statement declaring its oversight of cryptocurrency exchanges and digital storage companies known as wallets. “If a platform offers trading of digital assets that are securities and operates as an 'exchange,' as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration,” it announced.

The SEC has also started to investigate possible fraudulent activity related to more recent initial coin offerings (ICOs) to ensure that investors aren’t duped. This is in line with SEC Chairman Clayton’s belief that ICOs qualify as securities and therefore fall under the same investor protections written for equity market offerings.

Meanwhile, the CFTC, which oversees commodity, futures, and derivatives markets, has argued as far back as 2015 that cryptocurrencies function as commodities. The agency’s assertion was further supported in March when a federal judge in New York ruled that commodity laws apply to virtual coins like bitcoins. The decision arose from a fraud case brought by the CFTC against Coin Drop Markets, which it claims never registered with the agency. The company also allegedly failed to provide the advisory services it promised to its paying customers, the CFTC said.

In an interview with Reuters, Rounds said that lawmakers may eventually decide to regulate cryptocurrencies as both a security and a commodity. Peter Van Valkenburgh, Director of Research at the lobbying group Coin Center, agreed with that stance, saying that ICOs should be overseen as securities transactions, but that actual virtual currencies such as bitcoin are similar to commodities like gold.

Insurers Have a Stake

Several insurers currently offer insurance against cryptocurrency theft, so any new regulations could impact their coverage parameters. Although lawmakers have so far focused their attention on regulating cryptocurrency activity, they have also stated that they don’t want to impede advances in blockchain technology, the underlying digital platform that facilities virtual coin transactions. “The goal here is to have rules of the road that protect consumers without trying to squash innovation,” said Sen. Chris Van Hollen (D-MD), a member of the Senate Banking Committee.

Last year, a group of major players established the Blockchain Insurance Industry Initiative B3i to explore how insurers can use this digitally distributed platform to streamline operations. Potential benefits range from speeding up the claims process through smart contracts, quicker data verification, and fraud detection.

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