Digital currencies are more regulated than you think

The past few years have seen significant growth in regulatory clarity for at least a certain segment of this asset class

Digital currencies have quickly become one of the most exciting new investments of the last century. Big names in finance ranging from Fidelity to NYSE are creating on-ramps for investors, and tech companies like Google and Microsoft are partnering with specific digital asset platforms.

But even with the validation of institutional interest, many investors and their advisers remain reluctant to consider even Bitcoin for their portfolio, with “regulatory uncertainty” cited as one of the biggest hurdles. This was recently confirmed in a survey of more than 400 U.S. financial advisers that showed the most common reason they haven’t allocated to Bitcoin is “regulatory concerns” (56%) and the most common improvement they’d want is “better regulation” (58%).

Perceived regulatory uncertainty is understandable. Cryptocurrencies were only invented within the last decade and forced to fit into a regulatory framework written without digital assets in mind. However, the past few years have in fact seen significant growth in regulatory clarity for at least a certain segment of this asset class; at a minimum, it should no longer be the primary obstacle to investing in digital currency.

Clarifying regulatory clarity

It’s important to understand what investors mean by “regulatory clarity.” Bitcoin, for example, has been addressed by nearly every applicable regulatory authority dating back to 2013. Today, Bitcoin is classified as property by the IRS, a commodity by the Commodity Futures Trading Commission, money by Treasury’s FinCEN and a non-security by the Securities and Exchange Commission, and compared to gold by the Federal Reserve.

“Regulatory clarity” most commonly refers to the securities law status of particular digital assets. Whether a digital asset is a security, as opposed to a currency, commodity or something else, may trigger registration, licensing and other operating obligations for those offering services like issuance, exchange, investment management or trading. It is therefore a very important question for a specific group of market participants that has had a meaningful impact on the ability of digital currency businesses to operate in the U.S.

But strictly from an investor perspective, these questions are less important (or in the case of Bitcoin, not questions at all). What is important is that investors are fully aware of the risks that come with any digital asset investment and make an appropriate allocation. With that mindset, investors will be prepared to make a thoughtful decision around what today can be compared to a high-risk, potentially high-reward, early stage tech investment.

Of course, securities laws aren’t investors’ only concern. Some believe that Bitcoin and other digital assets are predominantly used for nefarious acts and carry too much headline risk.However, it’s worth noting that based on blockchain analytics, only 1% of Bitcoin transactions ($1 billion) annually are tied to illicit activity. This pales in comparison to U.N. estimates that 2% to 5% of global GDP ($800 billion to $2 trillion) each year consists of money laundering in U.S. dollars.

Further, the U.S. government has periodically sold Bitcoins seized by law enforcement in connection with investigations. These auctions include other forfeited property the government sells back to the public, including financial instruments, jewelry, art and collectibles. It’s fair to expect that an item the government sells to you to be legal for the foreseeable future.

Conclusion

Investors may ultimately determine digital assets aren’t right for them for other reasons, but it’s important that advisers appreciate how much regulatory clarity does exist. The existence of CFTC-registered Bitcoin futures and SEC-registered publicly traded products like Grayscale Bitcoin Trust (GBTC) is a testament to that. It’s time advisers start to consider digital assets like Bitcoin when constructing investment portfolios for their clients.

Craig Salm is director of legal at Grayscale Investments, the world’s largest digital currency asset manager.