Kin Cheung, AP
In this Dec. 21, 2017, file photo, a Bitcoin logo is shown is displayed on an ATM in Hong Kong. Google says it is going to ban advertisements for cryptocurrencies such as bitcoin, as well as related content like trading advice and cryptocurrency wallets.

It wasn’t really until after the Civil War that America had its own money. Before then, states, banks and even people could print and distribute their own currency as they saw fit. By some historians’ estimates, there were as many as 8,000 different kinds of money floating around before the federal government decided to step in and standardize things.

The lack of a regulatory framework caused a lot of confusion, speculation, distrust and loss of assets when someone’s pet currency went belly-up. Alas, history seems to be repeating itself with the phenomenon of digital currencies.

Creating a new form of wealth isn’t that unusual — companies do that when they issue stock. And modern technology makes non-government-issued money more reliable than it was before we even had the telegraph. But while cryptocurrency brings many advantages, it’s not void of risks.

One of those risks has come starkly into view with the recent death of Gerald Cotten, the founder of Canadian cryptocurrency exchange Quadriga CX. As has been widely reported, Cotten was the only person with access to Quadriga’s offline reserve account — or “cold wallet” — holding $136 million in cryptocurrencies.

Think of the problems when you can’t pay your utilities because you lost the password. Now multiply that by 136 million.

There’s no consensus on where the funds actually are or who has the authority to recover them. British Columbia doesn’t have jurisdiction over the exchange because Cotten and his customers weren’t trading in securities or derivatives. The Nova Scotia Supreme Court has granted the Quadriga a 30-day stay so it can untangle its finances, while the Canadian Imperial Bank of Commerce has tied up $21.6 million in fiat currency, having frozen multiple accounts because it couldn’t determine whether the individuals who deposited the funds actually owned the money in the accounts.

If there was some form of regulatory guidance for cryptocurrencies, this situation would have been dealt with swiftly. For example, when I signed up for my online brokerage for my own retail investing, I was given paperwork to designate a beneficiary when I die. Even if I hadn’t, there are legal mechanisms for my family members to get access to my money upon my death. In this scenario, Quadriga’s many customers have no such protections.

Indeed, there’s now even a conspiracy theory that Cotten could have faked his own death, as the funeral home in India who issued his statement of death listed no cause of death, and has refused to respond to inquiries.

Even The Wall Street Journal wrote, “There are no standards or regulations in the cryptocurrency world that would prevent a situation such as at Quadriga, where one person runs an exchange that handles millions of dollars in virtual currencies using a laptop computer, and has sole access to crucial passwords.”

But if Quadriga’s customers had a reliable legal recourse to get their money back, then such a conspiracy theory would lose all validity. Indeed, as recently as this month Quadriga has transferred bitcoins to cold wallets it can’t access (worth about $468,000). If there was a simple standard for publishing cold wallet IDs on the blockchain, which Quadriga has not done, much of the mystery would be solved and the conspiracy theory would be an impossibility to begin with.

What cryptocurrency desperately needs, for all parties involved, is a regulatory framework to protect consumers in edge cases like this. Defining cryptocurrencies into a new asset class with a specific, light framework would provide clarity in future situations while protecting investors and offering credibility to the blossoming blockchain technology.

Comment on this story

Some suggest applying the Howey Test, which defines a transaction as a security if "a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." But SEC commissioner Hester Peirce noted we shouldn’t use the 70-year-old, “overly broad” standard against cryptocurrency. Indiscriminately imposing SEC preferences on crypto-users could deter investment, hurt business, and drive the technology elsewhere.

Congress needs to be the one to develop the light regulatory framework — let’s think of them like guardrails — in collaboration with key stakeholders. We need to aim this technology in the right direction and provide the adequate support for cryptocurrencies to reach their full potential. We don’t need a repeat of the dot-com bust, nor 8,000 different currencies no one can rely on.