The advent of digital blockchain technology and cryptocurrencies has set the stage to redefine financial freedom and self-sufficiency in financial markets. At its core, cryptocurrency is based on a type of decentralized technology called blockchain with inherent encryption. Blockchain allows for the memorializing of transactions in a secure way that is difficult to counterfeit. Over the past few years, cryptocurrencies have boomed, pushing policy-makers to adapt current legislation and find new solutions. 

Cryptocurrency regulation raises certain challenges that current legislation must adapt to address. For example, cryptocurrency is a global means of exchange, but different countries have different views on its existence. Some countries, such as Morocco, Nepal, and Bolivia, have outright banned cryptocurrencies. Meanwhile, countries such as Spain, Luxembourg, and Canada see potential in the technology and are working to institute cryptocurrency-friendly regulation. These disparate approaches taken by different countries lead to confusion for blockchain companies about what regulations their products will be subject to. 

Blockchain also raises unique intellectual property rights issues. In the IP case, Alice Corp. v. CLS Bank Int’l, a computer system was developed as a third-party intermediary between parties to an exchange where it created records that matched the balances in the parties’ real bank accounts. The Supreme Court ruled that because “[T]he concept of intermediated settlement is a fundamental economic practice long prevalent in our system of commerce,” such basic economic principles could not be patented even if incorporated into software. The Alice Corp. v. CLS Bank Int’l decision elucidates how patentability of blockchain technology should be analyzed. The claim to patentability must be a process or machine that includes some development amounting to significantly more than a law of nature or abstract idea. Intellectual property rights for blockchain technology present a challenge because the basic concept of a blockchain may not be patented; only what are seen as novel ways to use the blockchain system may be protected. 

Another challenge of cryptocurrency regulation is that of taxation, which arises from allowing investments using cryptocurrencies. Legislators grapple with how to categorize cryptocurrencies and the specific activities involving them for purposes of taxation. An added challenge is that different countries categorize cryptocurrencies differently in terms of tax bracket. Israel and Bulgaria tax cryptocurrencies as an asset, while Argentina and Spain regulate cryptocurrencies as subject to income tax. In a 2015 European Court of Justice decision, gains in cryptocurrency investments are not subject to added tax in the European Union States. 

The criminal use of cryptocurrency technology poses an additional hurdle to regulation. It has been argued that blockchain is “friendlier to law-enforcers than it is to law-breakers” because of the use of cryptography to verify and confirm all transactions before recording them in a searchable public ledger. Still, the potential for criminal activity exists as new technology designed for legitimate purposes is often used to facilitate criminal activity. To create an open environment for regulation, the cryptocurrency industry has proactively approached law enforcement and regulatory agencies and offered to educate them about how cryptocurrencies work. Fostering an environment of awareness and openness is crucial to battling criminal activity related to blockchain technology.

Existing cryptocurrency regulation can be categorized as either vertical or horizontal. Horizontal regulation concentrates on identifiable layers involved in the technical structure: blockchain at the platform level and the tools that run on the platform at the application level. Because technology evolves at a nearly exponential rate, horizontal regulations will need to constantly adapt to keep up with changes in cryptocurrency technology. Vertical regulation, on the other hand, looks at the different intermediary services in markets separately. Common regulatory actions across the world include government issued notices about the risks of investing in cryptocurrency markets, informing the public that no legal recourse is available to citizens in the event of loss after investing in cryptocurrencies, and warning that cryptocurrencies may facilitate money laundering and terrorism. In some countries, existing laws have also been recycled to extend to cryptocurrency-related activities. Such laws include those against money laundering, investment services, and taxation. 

Certain organizations such as the WSBA and the Blockchain Alliance facilitate the regulatory environment for cryptocurrency. The WSBA, in particular, facilitates cooperation between global member firms by engaging with regulators, policymakers, and technology innovators to guide the public dialogue about blockchain. The WSBA’s Legal Working Group includes 75 attorneys from all around the world who are working toward regulatory solutions for cryptocurrencies. A nonprofit organization, the WSBA, can act in a non-partisan way and can collaborate with players on all sides of the issue. The Blockchain Alliance is another nonprofit organization that facilitates engagement between the blockchain industry and law enforcement agencies on a global scale. Such organizations foster a pro-innovation regulatory environment, which allows for the safe expansion of cryptocurrency technology.

Created to expand financial freedom through blockchain technology, cryptocurrency will thrive in an environment that gives its innovators and users space for creativity. If regulators try to over-regulate and obstruct blockchain from its initial purpose of expanding self-sufficiency and freedom, blockchain developers will retaliate by further developing it and trying to replace the financial system with it. Overregulation is harmful because it can potentially cripple start-ups and limit innovation. The ideal solution is to ensure transparency in cryptocurrency transactions and provide individuals with the necessary information for making their own decisions. To ensure the growth of the industry while protecting consumers and obstructing illicit activities, a pro-innovation approach to regulation is needed. The continued engagement of the industry with lawmakers will allow a secure path to achieving the full potential of blockchain technology.