This article is a follow-up on a Timizzer.com blog post written on April 17, 2013. On May 06, 2013, in a Financial Times newspaper article, it was reported that the US Commodities and Futures Trading Commission (CFTC) is considering to institute ‘Dodd-Frank’ like regulations on the Bitcoin exchange market, following the steep collapse in prices of the virtual currency during the month of April 2013.
In a Reuters news article on the same day, it was quoted that Bart Chilton, a US Democrat, and one of the five commissioners, has asked CFTC staff members to explore whether consumers needed more protection from any mishaps with Bitcoins as a result of the price volatilities that took place in April. Chilton was quoted to have said, “Here’s what I know for sure: we could regulate if we wanted. This is very clear,” in a subsequent Reuters interview took place on May 06. The price of a Bitcoin plunged to USD 130.00 from a record high of USD 260.00 on a single day in April 10. The regulations proposed by Commissioner Chilton would have placed the status of Bitcoins on par with the current regulation imposed on the USD 650.00 trillion derivatives market. The proposed regulation still requires the support of CFTC Board members, as well as the Commission’s attorneys, and other experts. At press time, a spokesperson for the CFTC declined to comment.
In light of the recent comments brought up by Commissioner Chilton, it brings an interesting twist to the Timizzer.com article on April 17. As the article has highlighted that one of the reasons for setting up the Bitcoin exchange market came out of investors’ lack of confidence in the current global fiat monetary exchange system. With the recent interest in the topic of Bitcoins, it is no wonder that regulators are starting to explore whether investors have been harmed as a result of the April 2013 fallout of the Bitcoin exchange prices. The question is whether regulations are necessary in order to reduce or mitigate any harm caused by fallout in Bitcoin prices.
One of the main roles of regulations is to ensure orderliness and consumers are not harmed by the wilful acts of deceit, and asymmetric information brought on by unscrupulous firms and individuals wanting to make a fast buck out of naïve consumers. Although this can be applied to the Bitcoin exchange, but are existing regulations sufficient to protect consumers and investors from the harm caused by the price volatilities, or should there be additional regulations such as the Dodd-Frank Act. Given the current setup of the Bitcoin exchange market, and the vast amount of reference information on the virtual currency, there is plenty literature for consumers to examine the risks and returns of investing in Bitcoins. I believe that to institute financial regulations on the Bitcoin exchange might be an ‘overkill’, and does not eradicate the lack of investor confidence in the existing monetary exchange system. There should be prudent regulation, rather than ‘blind regulation’. The virtual currency as it stands, did not cause a severe financial meltdown, much like the subprime mortgage market during the Global Financial Crisis (GFC) in 2008 – 2009, where mortgage backed securities (MBS) are being structured as credit quality financial instruments and marketed out as prime.
Also, can regulators specifically identify the root cause for the April 2013 single day fall of the Bitcoin exchange? Although much credit has to be given on the part of the US regulators for being ahead of the game in terms of its tough scrutiny of the Bitcoin exchange market, but I believe that there has to be some caution exercised as market forces are the result of basic economic fundamentals of demand and supply. The supply of Bitcoins is not in equilibrium with the demand for the virtual currency, and this phenomenon is just like any markets where sellers and buyers meet and prices are dictated by arms-length transactions taking place. Although Bitcoins have been around since 2008, there is depth, liquidity and marketability of the virtual currency. It is a fully functional market, and no central authority is managing the currency. To institute regulations might not be sufficient to achieve widespread control, as illicit trades, including drug trafficking, continue to take place, despite the harsh penalties imposed in certain countries for the possession and illegal use of harmful drugs, such as cocaine, etc.
In recent decades, there is a shift towards promoting self-regulation. As it stands now, Bitcoins have originally been setup to prevent unlimited circulation of currency into the monetary system. The amount of Bitcoins in circulation is being reduced every four years until the year 2140, when the number will round down to zero. With this self-regulation in place in the amount of Bitcoins that can be circulated at any one time, should regulators be overly concerned that Bitcoins have caused harm to consumers in an economic sense such as runaway inflation? I believe that there should be a tough examination of the issues involved in instituting more regulations on the Bitcoin exchange market, as there has not been any sufficient evidence so far to point exactly to the root cause of a single day price collapse of the virtual currency, and the long-term effects of harm caused to consumers and investors, much like what the subprime markets did during the GFC of 2008 – 2009.