What’s the current state of crypto regulation in the US?
- President Biden's executive order on crypto does not prescribe specific rules or policy recommendations, but rather enlists government agencies to cooperate in driving these objectives.
- A number of agencies are jockeying to be the prime regulator of the crypto industry, resulting in a lack of overall regulatory clarity.
Cryptocurrency regulation in the United States is currently working under President Biden’s executive order, which focuses on six key objectives: consumer and investor protection, financial stability, illicit finance, US leadership in the global financial system and economic competitiveness, financial inclusion, and responsible innovation.
Brilliant or baffling, the executive order does not prescribe specific rules or policy recommendations, but rather enlists government agencies to cooperate in driving these objectives. The unfortunate consequence of that is government agencies jockeying to be the prime regulator of the industry. This leaves the industry with the lack of regulatory clarity that we are dealing with today.
“The United States is generally the leader in global markets and liquidity. But for crypto, that’s not the case. New York is usually the leader in finance. But when it comes to digital assets, because of this regulatory situation, it’s not the case either,” says Eliora Katz, director of government relations and policy at FTX US.
Katz explains that 96% of FTX’s crypto trading happens outside of the US because of this lack of regulatory clarity over crypto markets. In addition, even though much of the intellectual capital, ideas, and innovation are created by Americans, the market activity, tax revenue, and economic benefits are taking place outside the country. FTX has a United States partner, FTX.US, but its offers are more limited than those of the global exchange platform. Due to tight crypto regulations, US residents are geofenced from accessing more sophisticated crypto products.
At the moment, the ongoing debate is whether cryptocurrencies should be considered securities or commodities. In his ‘Kennedy and Crypto’ speech, Gary Gensler, chairman of the US Securities and Exchange Commission, doubled down on his conviction that most of the 10,000 cryptocurrencies are securities, and should be governed by the SEC.
The SEC uses three laws to govern cryptocurrency activities in the US: The Securities Act of 1933, The Securities Exchange Act of 1934, and The Investment Company Act and Investment Advisers Act of 1940.
Under the Securities Act of 1933, cryptocurrency issuers must disclose all company information before listing a token for sale to the US public. It protects investors from fraudulent projects, also known as ‘rug pulls’ in the crypto community.
The Securities Exchange Act of 1934 comes into play after the token is issued. It mandates that intermediaries or cryptocurrency exchanges must disclose market activities to the SEC on a periodic basis. It protects investors from market manipulation, also known as ‘pump and dump’ in the crypto market.
And finally, the Investment Company Act and Investment Advisers Act of 1940 dictated that all companies and financial advisors who get paid for recommending cryptocurrencies must register with the SEC. It protects investors from being taken advantage of by so-called ‘crypto influencers.’
The consensus from a panel of experts at the Shifting Tides Webinar was that America regulates by enforcement. “There’s a big line to be drawn between enforcement action and regulatory action. A clear message I’m trying to push out consistently is that enforcement is not regulation, regulation is not enforcement,” said Liat Shetret, director of global policy & regulation at Elliptic.
The argument here is that regulatory enforcement actions are borderline fit for purpose when it comes to fiat, but they are not fit for crypto. In fact, the enforcement action that has happened in previous months has not added any more clarity for crypto firms or consumers. Instead, it creates a challenging environment for crypto companies to operate. Companies spend a lot of resources on evidence trailing instead of redirecting all those resources toward areas like security, consumer protections, investor protections, and growing compliance programs to help mature the industry.
Regulatory enforcement events
The year 2022 has been marked with regulatory enforcement headlines – the most notable being the SEC v. Ripple, OFAC sanctioning decentralized protocol Tornado Cash, and the FDIC sending a cease and desist letter to five crypto companies.
In 2020, the SEC sued Ripple for allegedly conducting illegal security offering through sales of XRP, which would violate Securities Act 33. The lawsuit is still ongoing, and the outcome will set a precedent for crypto investors in the US and worldwide.
Recently, the FDIC sent a cease and desist letter to five crypto companies, including FTX US, demanding that they stop misleading users by using their logo and name. The FDIC stated that it does not offer insurance to cryptocurrency exchanges, nor does it cover cryptocurrencies. It only insures deposits held in FDIC-insured banks, and only covers the losses caused by the failure of insured institutions.
The US Treasury’s Office of Foreign Assets Control (OFAC) released a virtual currency guideline to promote understanding of and compliance with sanctions requirements and due diligence best practices. However, OFAC has come under fire from the crypto community for banning Tornado Cash, and is being sued by Coinbase, among others, for overstepping its authority.
“There’ll probably be a lot of enforcement actions for the next couple of months. I think we’ve seen that in the tea leaves of Gensler’s speech. I think also just the general market crash has reinvigorated the SEC and given them a reason now to go a lot more aggressive in this space,” said Ron Hammond, director of government relations at Blockchain Association.
Hammond reckons that we will see the US Congress making a lot of noise on the digital commodities bill, which seeks to settle the score between the SEC and CFTC once and for all. Given that Congress doesn’t have much time before the elections, he tables the decision for early next year.
Another thing he is focusing on is the issue of stablecoins. On that front, the decision-making is up to Maxine Waters, the lead Democrat, and Patrick McHenry, the lead Republican, who must agree on regulating stablecoins. There is a lot of political pressure from regulators, industry, and Congress, and there’s bipartisan support for this.
Finally, we will probably see a lot more scrutiny on the industry, especially when it comes to mining. The climate change agenda is a high priority for the Biden administration. Hammond expects to see a lot more aggressiveness from the administration in terms of disclosures about energy usage.
“But the one thing to take away is that Congress will be reasserting its role here and legislating on crypto now. It may not be exactly what we want. It may be exactly what the industry needs. But we’ll see that it’s gonna be very, very busy in Congress, especially starting January 2023,” he said.