The virtual currency Bitcoin has been a hot topic in FinReg for some time, but in recent weeks mainstream interest in Bitcoin has grown in light of the approaching “halving” or “halvening.” So what is the “halvening” and why does it matter from a regulatory perspective?
What Is Bitcoin?
First, a bit of background. Bitcoin is based on technology known as “blockchain.” As it relates to Bitcoin, blockchain is a publically available ledger that provides a permanent record of Bitcoin transactions. Each “block” constitutes a series of transaction records, which builds on the block before it. Taken together, these blocks form a permanent “chain” showing the entire history of Bitcoin.
Bitcoin’s blockchain relies on a system of “miners” who confirm the legitimacy of each transaction before it can be added to a block. As a reward for their participation in the process, the miners can earn newly created Bitcoin. By design, the amount of Bitcoin given as a reward to the miners is cut in half or “halved” after every 210,000 blocks.
Those halvings will continue until the reward is reduced to nothing, and no new Bitcoin will be created. This aspect of the Bitcoin blockchain ensures that there will only ever be 21 million Bitcoin in existence. Today, over 18 million Bitcoin have already been created and are in circulation.
What Is the “Halvening”?
The term “halvening” refers to “the happening” of the next “halving” event, expected to occur within the next 24 hours. Some observers speculate that this event may drive up the price of Bitcoin in light of past surges following halving events in 2012 and 2016. Others speculate that the price of Bitcoin already reflects the coming 2020 “halvening,” which is by nature a reoccurring feature of the virtual currency.
Regardless of the outcome, investors appear to have taken note and are watching with interest. Google searches for the term “bitcoin halving” have risen to levels five times the peak of the last halving.[1] At the same time, trading activity on major cryptocurrency platforms has surged on the cusp of this technical event.
Regulatory Scrutiny
As Bitcoin is continuing to gain public attention and new investors are entering the cryptocurrency market at a fast rate, cryptocurrencies are coming under ever-increasing scrutiny by regulators across the globe. The regulatory landscape is constantly evolving and certain regulators have been grappling with how to regulate cryptocurrencies in a way that protects consumers, but without stifling innovation. Some countries have even banned investment in Bitcoin and other cryptocurrencies altogether.
In the United States, a patchwork of federal and state law has been developing in the area of virtual currencies for several years, and is likely to continue to develop for the foreseeable future. While these early regulations have at times produced conflicting or contradictory guidance, the federal government has more recently recognized the need for clear guidance. As one example, the proposed Token Taxonomy Act of 2019 seeks to amend the Securities Act 1933 and the Securities Exchange Act of 1934 to exclude digital tokens from the definition of a security, while further preempting conflicting state regulations and judicial decisions that have muddied the regulatory waters.
Similarly, the proposed Cryptocurrency Act of 2020 seeks to categorize digital assets and clarify which federal agency (e.g., the Commodity Futures Trading Commission, the Securities and Exchange Commission, or the Financial Crimes Enforcement Network (FinCEN)) is tasked with the oversight of each. Such legislation is consistent with past signaling that the federal government has the long-term goal of promoting innovation in this space, while at the same time providing market oversight and stability for retail and institutional investors—including those seeking to capitalize on “the halvening” or otherwise.
Across the pond, the UK’s Financial Conduct Authority (FCA) warned consumers in July 2019 that Bitcoin and other cryptocurrencies have no intrinsic value and that they should be cautious when investing in them. The FCA stated in its July 2019 policy statement PS19/22 that it will not regulate cryptocurrencies such as Bitcoin, as it considers that they are “exchange tokens” that do not currently fall within the FCA’s regulatory scope. However, the FCA has clarified that while cryptocurrencies themselves are not regulated, derivatives that reference cryptocurrencies are capable of being regulated financial instruments. It has proposed a ban on the sale of derivatives and exchange-traded notes referencing cryptocurrencies to retail customers, saying they cannot reliably assess their value and risks. Further, the UK government has committed to consult on whether and how exchange tokens such as Bitcoin could be effectively regulated and has announced its intention to consult later in 2020 on the broader regulatory approach to crypto-assets.
We will continue to monitor and report on US and UK developments relating to the regulation of cryptocurrencies such as Bitcoin as they occur.
[1] Omkar Godbole and Paddy Baker, First Mover: Search Interest in Bitcoin’s Halving Reaches Fever Pitch as Price Hits $10K, CoinDesk (May 8, 2020).