Regulating Cryptocurrencies: mapping economic objectives and technological feasibilities

Cryptocurrencies are relatively new, and they are emerging as an increasingly important part of the global and domestic financial system. To the extent they act as partial (or even, arguably, complete) substitutes for fiat currencies and the traditional banking system, they are increasingly coming into the purview of government legislators and regulators. Cryptocurrencies bring novel new features to currency and payment systems and while these features raise new risks, at the same time cryptocurrencies offer potentially large dynamic efficiency gains, from both more efficient transacting and new products and services. If regulations are to be imposed, then to avoid stifling innovation, care must be taken to ensure they address real problems, and not just hypothetical concerns. We find that the greatest point of vulnerability for consumers lies in the new institutions created to mediate between users and the technological elements of cryptocurrencies: cryptocurrency exchanges. Traditional regulatory agencies are ill-equipped to govern these institutions, as they lack the knowledge of "insiders" regarding the novelty, the technologies and the potential ways of using and abusing them. Drawing on the history of emergent regulation of share markets and currency exchanges, we suggest that industry self-regulation offers a better means of governing cryptocurrency exchange activity in their nascent stages. More formal legal regulation can evolve as better information is gained about how these institutions operate and develop. This approach will offer the best chance of cryptocurrency ecosystems evolving without risk of their novel beneficial elements being crowded out by imposing rules better suited to conventional banking, payments and securities governance and regulation. In addition, we highlight the features of cryptocurrencies that make them in inherently almost impossible to regulate in the same way as other instruments.