The US has lost its crypto lead to the EU: what it means for investors

The EU has agreed a preliminary text for its Markets in Crypto Regulation framework. US-based innovation could be a casualty.

US lost crypto lead to EU

This site is littered with articles proposing the thesis that continued regulatory progress in countries as diverse as the US, Saudi Arabia, the UK, and India will quicken the pace of crypto adoption worldwide.

But within this debate, there’s an important secondary component to consider.

China has banned cryptocurrency. While an ineffective prohibition, new tech is not being developed in the country at any scale that matters. And India’s central bank has made clear it considers non-centralised digital currencies a danger to the economy, with the country imposing stiff new taxes and a shadow ban on exchanges.

This has left the US and the EU as twin global epicentres of cryptocurrency research and development. However, given recent developments, the Europe may soon leave the US in its wake.

Crypto regulation: Europe surges

October has seen the EU finally agree a text for the unified licencing regime for cryptocurrency exchanges such as Binance and Coinbase. This will help all exchanges to operate seamlessly across the 27-member block within its Markets in Crypto Regulation framework.

But the US, commonly seen as both the market leader for crypto innovation, and global leader for legal frameworks regarding technological innovation in general, has not given exchanges the same legal clarity.

Instead, like much of America’s regulations, exchanges are regulated through a patchwork of financial laws developed at both the federal and the state level. These laws sometimes contradict each other, often creating legal problems for exchanges in addition to weak consumer protection for their clients.

And this situation is likely to continue. A key problem is how the US plans to treat cryptocurrency going forward: is it a commodity like gold, or a security akin to equities? This question remains unresolved.

To settle it, US lawmakers need to pass core legislation through the various hurdles, including both houses of congress to clearly define what constitutes a digital currency, in order to create clear judicial water for the Commodities Futures Trading Commission (CFTC) regulatory quango to supervise exchanges.

Commodities Futures Trading Commission

The issue is that currently, the US allows individual states to regulate crypto exchanges, so each state passes their own legislation to prevent the theft, loss, or misdirection of client money. But because crypto is sent across state borders, and exchanges have clients across multiple states, each exchange must abide by every regulation imposed by every state in the country and update their processes with every legal change.

Further, case law is creating a situation where identical laws written by two states are interpreted differently, which means that a client’s protection can depend on where they are physically located while trading an online, and theoretically borderless, currency.

In essence, this creates a regulatory black hole. If cryptocurrencies function as securities — a position vigorously denied by both Binance and Coinbase — then they would fall under the purview of the Securities and Exchange Commission (SEC), which so far has refused to take total responsibility for them.

Indeed, US Senator John Hickenlooper recently exhorted the SEC to establish rules to protect crypto exchange clients.

But if they are defined as commodities, the CFTC would have to take responsibility. But problematically, it currently only has power over derivatives and not spot markets, including exchanges.

This leaves crypto regulation as an unwanted political hot potato, constantly tossed between different bureaucracies. And until the mess is cleared up, client protections, burdensome regulations, and ill-defined regulatory responsibility will continue.

Where does this leave crypto investors?

Increased regulation leads to increased adoption; this is a core tenet of all investing, not just cryptocurrency.

For any one crypto to become used as a functional currency rather than as a store of value, it needs to reach a critical use mass. And to become as credible as the Visa or Mastercard system, the EU move to defining crypto through legislative text comprises a huge step forward to solving this ‘acceptability’ problem.

New cryptocurrencies launched in the EU now have a substantial advantage over those in the US. And with mid-terms coming up next month amid a fractious debate over abortion rights and student loans forgiveness, the chances of the US catching up anytime soon appear slim at best.

Further investment in Europe appears certain, and a transfer of specialists including developers and even whole altcoin teams cannot be ruled out.

And as innovation leaches out of the States to cross the Atlantic, a fast-tracked Euro-based CBDC could be imminent.

This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.

Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.