In a daunting move that is certain to put a crimp into open-source blockchain, on July 23rd, 2017, Washington  passed regulations that all currency exchanges doing business within its borders must now obtain a state license from the State Department of Financial Institutions and submit to regular third-party audits of “all information and data systems”. Further, a bond must now be put up by any cryptocurrency exchange doing business in that state, which depends on the amount of currency that passed through it in the prior year; another burdensome requirement but perhaps necessary to protect the unsuspecting customer. Additionally, reserves must be held by the exchange in whatever cryptocurrency it exchanges, in the amount equal to whatever amounts are retained on behalf of customers.

It appears the new regs are already having an adverse effect as the exchanges Poloniex and Bitfinex have declared that no further business would be conducted with Washington state residents, however the exchange Gemini has in fact complied with the state rules and has obtained permission to conduct its exchange activities there, suggesting substantial financial backing for this entity. When various states attempt to pass their own laws regarding such exchanges the financial burden for compliance will likely become too great and I foresee that most if not all exchanges will move off-shore in order to not be subject to US regulations.

This move by Washington state is likely to be the first in a continued wave of regulation of cryptocurrencies in the US as states move to crack down on this pesky problem which allows movement of money outside the regular fully monitored banking system. Federal action may also be forthcoming, with the SEC signaling that Initial Coin Offerings are probably securities and may be regulated as such.

All in all, throughout this uncertain regulatory landscape, the valuation of the various currencies remains in limbo with a great deal of volatility in the major cryptocurrencies seeming to present a highly speculative venture. While some new regulations may have benefits for the public, such as the periodic 3rd party audits of any given exchange’s security and data protocols, due to the regularity with which they are hacked and cryptocurrency is lost, potential over-regulation such as bond mandates and reserve requirements may have the effect of scaring business away from states that attempt to put the yoke on this new business model. The new laws and rules passed by state and federal regulators will certainly be quite difficult to enforce, unless they attempt to centralize the blockchain somehow; the very purpose of the blockchain is to make it unregulatable.