The SEC doesn't often issue warnings to the public. When they do, it's worth paying attention to them.

The agency recently warned that some cryptocurrency trading and initial coin offerings (ICOs) might be in violation of the law, and that much of this activity is taking place without the standard protections for investors. In this unregulated environment, fraudsters have a long leash, the SEC said.

Soon after, Facebook and Google banned cryptocurrency ads on their platforms that have not been thoroughly vetted by the SEC, and Capitol Hill started buzzing with talk about which agencies should be regulating cryptocurrencies, and how they should be going about it.

If you're a Bitcoin enthusiast or investor, you should read the tea leaves.

Bitcoin isn't the best cryptocurrency poster child.

There are good reasons cryptocurrency was invented. All over the world, it has given people much needed access to financial and economic transactions.

Additionally, cryptocurrencies and the distributed ledger that underpins the technology offer an audit trail that can make fraud and theft considerably more difficult. Their time has come, especially on the international stage.

But better access and auditability is hardly the rallying cry of Bitcoin nowadays, especially in the United States. Rather, the focus seems to be on anonymity and decentralization. The digital currency is most frequently billed as way to buck the banking system and remain beyond government control.

In the long term--and, arguably, the short term--this argument will collide with both economic and political power dynamics. Currency has the power to take down nation-states, crash financial markets, and tip the world's power balance. If you need evidence of this fact, consider China's massive state mining operations and stake in Bitcoin, undeniably viewed as a tool for leverage on a global scale.

Anonymous currency or financial transactions without sufficient oversight have the potential to allow for an endless number of criminal and dangerous transfers of wealth and contraband. That's another challenge to legitimate national and international interests.

Beyond these higher-level implications, consider the plight of the unsophisticated citizen buying cryptocurrency and participating in associated unregulated coin offerings. There's tremendous capacity for rampant fraud and theft in an anonymous and decentralized system, and without the appropriate protections, minimal recourse for the everyday investor.

Financial systems require stability and oversight to protect legitimate societal interests. Bitcoin and cryptocurrency overall continue to neglect these important stakeholder concerns.

And in an ironic twist, ignoring these concerns is what will bring centralization and regulation, so maligned by current cryptocurrency evangelists, directly into Bitcoin's front yard.

The regulators are coming.

Living in Washington D.C., I can tell you that lawmakers are thinking about cryptocurrency regulation. And when lawmakers think about things that they hardly understand, nothing good comes of it for those on the receiving end of their regulatory wrath.

Expect nation-by-nation regulation of cryptocurrency, perhaps a requirement that national cryptocurrencies be decoupled from international systems, and maybe even a government issued cryptocurrency in the longer-term future. Also, expect the imposition of investor protections, reporting requirements, know your customer requirements, and associated criminal and civil penalties for any violations.

In America, Bitcoin is, in a sense, solving all the wrong problems. Or, at least, solving "problems" in a way that creates even more dangerous problems for lawmakers, investors, and everyday citizens. So:

If you're a Bitcoin entrepreneur: It's time to engage Capitol Hill and build flexibility into your platform to accommodate future regulatory requirements. 

If you're thinking of an ICO: You had better think about meeting traditional standards of good faith and fair dealing, because you're going to be held to them one way or another. 

If you're a Bitcoin investor: You'd be wise to build in these risks into your investment decisions sooner rather than later.

Americans love the mystique of the Wild West, and we frequently glamorize the lawless and unpredictable. Just not when it comes to our money.

Published on: May 2, 2018