CFTC-Regulated Markets May Give Bitcoin The Stability It Needs

by Ifrah PLLC

The unregulated nature of virtual currencies like Bitcoin plays a big role in their appeal. However, wild swings in prices in addition to the perception that these markets are subject to manipulation, make it difficult—if not impossible—for the average person to rely heavily on Bitcoin and other virtual currencies as a currency, much less as an investment vehicle.

Ironically, some degree of rational regulation may be the answer. If Bitcoins are traded on CFTC-regulated markets, the Commodity Futures Trading Commission (CFTC) will have authority to investigate and crack down on manipulative behavior, hopefully resulting in more stable and predictable prices that are truly based on what the market demands.

There is no question that federal regulators—and particularly the Commodity Futures Trading Commission (CFTC)—are taking an increasing role in regulating virtual currencies.  In 2015, the CFTC ruled that virtual currencies are commodities and, as such, are subject to CFTC regulation.  That ruling closed the door on a wide range of transactions based on digital currencies.

The door began to crack open this past July, when the CFTC granted approval to LedgerX to operate as the first licensed Bitcoin options exchange, and the CFTC will continue to review potential markets in digital currencies.  However, to those who hoped that crytpocurrencies such as Bitcoin would open the door to a wide range of innovative products or transactions outside of the interfering eye of overly conservative regulators, the CFTC has certainly put a damper on things.

These fears may be even more pronounced in light of recent international developments.  When Chinese regulators acted to curtail initial coin offerings (ICOs) and banned digital currency trading entirely, Bitcoin prices plummeted from over $5,000 in early October to below $3,000.  (Bitcoins since have recovered and at the time of this post are over $9,900.)  Should the CFTC decide to flex its muscles by forcing out cryptocurrency transactions, it could provide a similar hit to Bitcoin values and shut down numerous potential businesses.

However, such a doomsday scenario seems unlikely as the CFTC begins to approve contract markets dealing in digital currencies, and has taken the position that its “approach to technology is technology neutral.”  There is no indication that the CFTC is looking to stamp out digital currency trading altogether; to the contrary, there is likely to be a snowball effect as more trading platforms are approved by the CFTC.

While CFTC regulation can make it harder for innovators to bring new products to the general public, when it comes to Bitcoin, a rise in CFTC-regulated exchanges may help to save the Bitcoin market.  Because digital currencies are not anchored on any source of real-world value, Bitcoin has been subject to precipitous swings in value, making it a dangerous investment—particularly for those who cannot afford to weather price swings.  There also is considerable evidence of price manipulation in Bitcoin markets: after Bitcoin suffered its steep decline in response to Chinese regulators last month, massive purchases quickly buoyed Bitcoin prices, helping them to recover hundreds of dollars in value.  Former CFTC Commissioner Bart Chilton has suggested that the only explanation for this behavior is market manipulation.

Even if not everybody has access to CFTC-licensed exchanges, those exchanges still are likely to provide benefits across the board by making Bitcoins less risky for the public at large.  So long as the CFTC is serious about its stated intent to continue licensing digital currency exchanges, the U.S. could be host to a thriving cryptocurrency market.  And if the CFTC brings its enforcement powers to bear to prevent manipulation and fraud in that market—rather than to discourage legitimate trading—it could provide not only a uniquely attractive forum in which to engage in digital currency trading, but could also provide the first forum in which cryptocurrency prices can be reliably and dependably set by market forces.

Of course, limits on the scope of CFTC-regulated markets may limit the public’s ability to access these markets, but that does not mean that the benefits would be limited.  First, Bitcoin trading is unlikely to attract the general public any more than Bitcoin use already has, so these limits may not have a huge effect.  But even if some people cannot access Bitcoin-based markets, increased price predictability can make Bitcoin more attractive to those who wish to use it as a currency rather than an investment vehicle, and the mere purchase and use of Bitcoins is not subject to CFTC jurisdiction.

All these benefits remain to be seen.  But if the CFTC is true to its word, we could be looking at the beginning of a more stable and reliable market for Bitcoins that significantly broadens their mass appeal.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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