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Cryptocurrency is a risky investment. How should the government regulate it?

STEVE INSKEEP, HOST:

This week, the Securities and Exchange Commission fined Kim Kardashian more than $1 million. She promoted cryptocurrency on her Instagram page without disclosing she'd been paid to do it. Did people think she was doing it for free? Anyway, the news opened a window into the frantic promotion of cryptocurrency and its regulation. So we've called Hilary Allen, who is a professor at American University's Washington College of Law. Welcome.

HILARY ALLEN: Thanks very much.

INSKEEP: OK. So for those who don't trade or mine or try to sell this stuff, what are people buying when they buy it?

ALLEN: They're buying computer files. And those computer files live on a database. And that's basically, you know, most of what there is to it.

INSKEEP: Which sounds a little crazy, but I suppose the idea of handing around pieces of little bits of green paper and pretending that they - they're worth something, I mean, it's - in that sense, it's the same, right?

ALLEN: Well, there's something behind the U.S. currency. We have tax and spend power in the military. But there have been lots of other financial assets in history that haven't had much behind them.

INSKEEP: And in this case, the only thing behind cryptocurrency is the faith that somebody else would pay you something for what you buy. Is that right?

ALLEN: For most types of crypto assets, that's right. Yeah.

INSKEEP: OK. Everybody keeps telling me it's valuable. Any time I'm on social media, I'm getting these unsolicited tweets directed at me saying how amazing it is. Apparently, Kim Kardashian was saying how amazing it is. But if it's so valuable, why do people have to keep trying so hard to promote my buying it?

ALLEN: Well, I think you've answered your own question, right? Perhaps it's not so valuable without that demand. And so the whole industry has sprung up about creating demand through social media posts and other things.

INSKEEP: I'm pleasantly surprised that there's even a rule against promoting something without disclosing that you're being paid to do that. Were you surprised?

ALLEN: Well, no, I wasn't surprised. I mean, what is a challenge in all of this is figuring out whether a crypto asset is a security as the SEC defines them 'cause this is an SEC rule, and it only has jurisdiction if the asset falls within that definition of a security. But I think a lot of these NFTs, which is what - the type of crypto asset that Kim Kardashian was promoting, a lot of these, I think, are quite clearly securities.

INSKEEP: Oh, OK. So is it beyond doubt and not something that's going to go to court that this is a security that the SEC can regulate the same way it does a stock?

ALLEN: I don't think it's beyond doubt. I think we can expect to see litigation in the future about which - and not just litigation but also regulatory proposals, trying to create more bright lines about what does count as a security and what doesn't.

INSKEEP: Oh, OK. So there's the question of what it is. There's the question of the SEC's authority. There's the question of new regulations. Are there also new laws needed or at least being proposed and discussed here?

ALLEN: There are definitely new laws being proposed, lots of them. So we are seeing bills coming out of the House and out of the Senate dealing with these crypto assets.

INSKEEP: Doing what sorts of things? Like, how would the law change to make them - what regulation is needed, I guess, is the way to get to the point?

ALLEN: Well, it's not necessarily sure that these bills are what is needed. So a lot of them are trying to take some crypto assets out of the jurisdiction of the SEC and potentially give them to the CFTC, which is a different regulator that has, you know, less experience in dealing with the direct concerns of retail investors.

INSKEEP: Oh, so it sounds like there's no consensus at all about what the problem is, if there is a problem, and what to do about it.

ALLEN: That sounds about right. It's a murky place.

INSKEEP: If you were given 10 seconds, which you're about to be given, to change the market in some way or regulate the market in some way, what would you do?

ALLEN: I would just let people know that they need to be careful in this space.

INSKEEP: OK. Well, thanks so much for the time. Really appreciate it.

ALLEN: Thanks very much. Transcript provided by NPR, Copyright NPR.