Crypto Frontline

On March 27^th, the Technology Advisory Committee of the US Commodity Futures Trading Commission (CFTC), one of the two main financial regulators in the country, had put into the discussion once again the issue of regulation for cryptocurrencies and adoption of distributed ledger technology (widely known as the blockchain technology).

Blockchain applications for trading

According to the speech testimony published on CFTC’s website, one key issue that was discussed has to do with automated trading. The “Impact of Automated Orders in Futures Markets” report analyzed the impact of manual and automated trading on commodity futures markets. The study tried to find any correlation between automated trading and volatility, by examining 30 futures contracts between 2013 and 2018, and no correlation was found.

Cryptocurrencies among the topics

Peter Van Valkenburgh, the Director of Research at Coin Center, held a presentation about the consensus mechanism used by cryptocurrencies. Bitcoin and Ether had been the main tokens discussed since they rely on a proof-of-work mechanism. Still, one of the main issues had been linked to an announcement from the Ethereum Foundation, which plans to shift to a proof-of-stake mechanism. The CFTC views such a move with skepticism:

Currently, both Bitcoin and Ether rely on a proof of work consensus mechanism to validate their respective ledgers.  However, the Ethereum Foundation has announced its plans to shift to a proof of stake consensus mechanism at some point in the future, in part to reduce energy consumption.  The transition from proof of work to proof of stake consensus mechanisms raises important questions for both market participants and regulators, including how the use of either mechanism affects the likelihood that a bad actor could manipulate or falsify the ledger.

The Ethereum platform had already gone through an important update, and it seems like the proof-of-stake mechanism will be more effective in terms of energy consumption. Whether or not that will become a serious issue in terms of regulation for the second largest cryptocurrency is still uncertain.

What’s even more frustrating is the difficulty to come out with a regulatory framework for blockchain and cryptocurrencies. We’re still at the phase where public regulators are debating, but the market expects some real actual steps. So far, we’ve seen the SEC, the other main financial regulators, charging several ICOs like Gladius, but it still did not manage to come out with clear information about which cryptocurrencies fall under the US Securities law.