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The Shyft Perspective
A New Regulatory Summer for the USA
US crypto regulations are multi-layered and involve multiple agencies, requiring strict adherence to specific laws and registration.
Crypto regulations vary significantly across the US states, leading to different compliance requirements for Virtual Asset Service Providers (VASPs), such as exchanges.
Compared to the UK, EU, Japan, Singapore, and Hong Kong, the US lacks a comprehensive and unified regulatory framework for cryptocurrencies.
It is summer, it is hot, and the crypto regulatory sentiments in the USA are increasing with the temperature.
At this present moment, the USA crypto climate is rather multi-layered. Multiple agencies and acts pose plausible scenarios and their outcomes.
The agencies are the likes of the Financial Crimes Enforcement Network (FinCEN), the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), etc.
Among the laws and regulations are the Bank Secrecy Act (including the amendments offered by the US patriot act and AMLA), the Commodity Exchange Act, the Securities Exchange Act, as well as new laws such as the Responsible Financial Innovation Act.
To survive in such a crypto climate and stay compliant with the industry-specific laws of the land, digital asset companies are expected to adhere to the Bank Secrecy Act requirements and register with the FinCEN, SEC, or CFTC.
The US crypto regulations may appear overwhelming, but to grasp them, one needs to look into their intricacies and nuanced wording and definitions due to their intricate construct.
Historical Context and Evolution
Since the inception of cryptocurrencies, the regulatory climate in the United States has gone through several ups and downs. Some of the major moves are:
2013 - FinCEN classified crypto exchanges and administrators as money service businesses.
2014 - the Internal Revenue Service (IRS) categorized cryptocurrencies as property for tax purposes.
2015 - the Commodity Futures Trading Commission took a different stance, designating Bitcoin as a commodity.
2017 - the Securities and Exchange Commission (SEC) declared that Initial Coin Offerings (ICOs) should fall under the purview of securities regulations.
As the US crypto regulations kept evolving, the objective behind these regulations remained more or less the same: protecting investors, preventing fraud, and ensuring compliance with AML/KYC regulations.
This regulatory intent underpins the responsibilities and actions of the various regulatory bodies.
Who Regulates What?
The complex nature of digital assets often raises the question of which regulatory body should oversee which asset.
Depending on whether an asset acts as a money transmitter, security, or commodity/derivative, it could fall respectively under the jurisdiction of the Financial Crimes Enforcement Network (FinCEN), the Securities and Exchange Commission (SEC), or the Commodity Futures Trading Commission (CFTC).
FinCEN works tirelessly to prevent digital assets from being utilized in money laundering or terrorist financing. The SEC oversees the issuance and resale of digital assets that bear a resemblance to securities—meanwhile, the CFTC steps in when digital assets qualify as commodities or derivatives.
Yet, a clear-cut categorization has proved elusive so far, leading to potential overlaps in jurisdiction. As such, a financial institution dealing with digital asset futures might find itself under the scrutiny of both FinCEN and CFTC.
The Battle for Cryptocurrency Jurisdiction
The murky lines dividing these regulatory territories gave rise to an inter-agency struggle in 2021. This battle emerged between the CFTC and the SEC, both vying to expand their regulatory control over the crypto industry.
At one point, CFTC Commissioner Brian Quintenz stoked the fires with a decisive statement on Twitter.
His words had more than just rhetorical weight, as a Massachusetts District Court had ruled in October 2018 that digital assets, including cryptocurrencies, were commodities. This ruling effectively declared that the CFTC held jurisdiction over crypto-related fraud.
It became heated. Was this a stone against SEC for overstepping its jurisdiction frame? The answer could be found most probably in the Federal Legislation.
Federal Legislation and Cryptocurrency
The Bank Secrecy Act is the most powerful piece of US federal legislation concerning cryptocurrencies. Amendments also play a role - the US Patriot Act and Anti-Money Laundering Act (AMLA), the Commodity Exchange Act, and the Security Exchange Act.
The Bank Secrecy Act, the Patriot Act, and AMLA amendments cover the anti-money laundering aspect, while the Commodity Exchange Act and Security Exchange Act - the registration of digital assets as securities and commodities.
The Bank Secrecy Act
Those creating digital currencies, or using them to buy goods and services, are not considered money transmitters. Hence, they are not governed by the Bank Secrecy Act (BSA). The law also exempts individuals or businesses that utilize digital currencies, like Bitcoin, for various purposes, including mining activities and investment trading for their own accounts.
The BSA's scope extends to certain operations within the digital currency ecosystem. Those who serve as intermediaries in cryptocurrency transactions—accepting cryptocurrencies from one party and transferring them to another in return for additional cryptocurrencies, monetary funds, or physical currency—fall under the act's regulations.
In addition, platforms that facilitate the matching of cryptocurrency purchase and sale offers, essentially operating as trading platforms, are required to comply with the BSA. The law also applies to payment systems that act as money transmitters, orchestrating the transfer of digital money from one party to another.
Thus, while certain participants in the digital currency landscape are exempt from the BSA, others must ensure compliance, affirming the law's influence within the world of virtual currencies.
Commodity Exchange Act and Securities Exchange Act
The Commodity Exchange Act and Securities Exchange Act apply to cryptocurrencies depending on whether they are seen as commodities or securities.
If a cryptocurrency is considered a security, the issuers and exchanges must obtain necessary licenses from the securities regulators. However, the regulatory agency CFTC has long argued that BTC and ETH are commodities and, therefore, must come under the Commodity Exchange Act.
The recent outcome from one of the most heated US crypto legal battles, SEC vs. Ripple Labs, significantly contributed to the ongoing cryptocurrency discourse of whether they fit into the US legal framework.
The ruling of the case showcased the nuanced climate of digital asset regulation. The court ruled that Ripple’s native token XRP sales on public exchanges did not violate the law. Yet, the company's dealings with institutional investors, such as sophisticated hedge funds, fell afoul of securities laws.
This verdict showcases the urgent need for clear and precise crypto regulation.
Zooming in: State-by-State Look
Predictably, regulations across the US states vary and, in a way, reflect the crypto climate in each of them.
In California, the Department of Financial Protection and Innovation remains uncertain about the regulation of digital currency transmission. It is yet to decide whether it falls under California's Money Transmission Act.
In contrast, the Department of Financial Services adopts a different approach in New York, offering a unique BitLicense for virtual currency businesses. This requires a license for nearly any commercial transfer, sale, purchase, or issuance of virtual currency.
The state of Washington defines virtual currency as money transmission. Nevertheless, the storage of virtual currency without the unilateral power to transmit is not considered money transmission.
The District of Columbia treats dealing in digital currency as a form of money transmission, requiring a license under D.C. law.
For the crypto exchanges, these multiple legislative frameworks mean being compliant with all of them, obtaining licenses in each State, and jumping through all other documentation loopholes.
Is SEC Omnipotent?
The SEC is asserting itself as the ultimate authority when it comes to cryptocurrency in the USA. To stand by its claims, SEC lately undertook multiple legal actions against major crypto exchanges (e.g., Gemini, Coinbase, Binance) and high-profile figures such as ex-NBA star Paul Pierce.
The Ripple Labs win cast a serious blow on the SEC's unilateral decision power and its claim that 99% of cryptocurrencies are securities.
Nevertheless, the storm is far from over. Crypto juggernauts, such as Coinbase and Binance, are engaged in ongoing legal tussles with the SEC, and the outcomes of these court battles could critically shape the future trajectory of the crypto industry.
Measuring the Regulatory Temperatures from the US through Europe to Asia
The major difference between the US and the UK & EU crypto climate is the level of conclusiveness achieved by the UK and EU in regulating the industry.
In the United Kingdom, the Financial Services and Markets Act received royal assent from King Charles on June 29th, 2023. The law turns crypto trading in the UK into a regulated financial activity. The legislation proceeds with the vision of encouraging a transparent, thriving, sustainable, and technologically advanced financial services industry of which cryptocurrencies would be a part.
The same applies to the EU, where the European Parliament’s approval of the Markets in Crypto Assets regulations will introduce structural governance practices to crypto assets. Apart from looking at crypto assets from an AML/CFT perspective, the MICA also wants to become a proactive deterrent to stop people from selling crypto assets in panic.
In Asia, Hong Kong has stood out with its forward-thinking approach to cryptocurrency regulation.
On June 1, the city's financial regulator rolled out new rules for digital currencies. With this, exchanges hoping to operate in Hong Kong now have to follow strict Anti-Money Laundering guidelines and laws that protect investors. This includes letting retail investors trade virtual assets, something that was previously limited to professional investors and traders with big bank balances.
Not far from Hong Kong, Japan is also making its mark in the crypto regulatory space. The Financial Services Agency there works hand-in-hand with two industry associations to oversee cryptocurrency regulations. Together, they have fine-tuned rules around things like derivatives trading.
Japan's Payment Services Act even recognizes cryptocurrencies as a valid form of payment, and there are no rules stopping Japanese people from owning or investing in them.
Moving further southeast, Singapore has carved out its niche in the crypto regulatory domain. The Monetary Authority of Singapore (MAS) has managed to navigate the tricky balance between overseeing the risks associated with crypto transactions and encouraging tech innovation.
With the launch of the Payment Services Act (PSA) in January 2020, MAS established singular legislation that governs both traditional and crypto exchanges. This Act not only brings clarity to licensing requirements but also tightens the compliance rules for crypto businesses to prevent money laundering.
Singapore further sets itself apart by referring to digital currencies like Bitcoin and Ether as "digital payment tokens" under the PSA, effectively granting approved cryptocurrencies legal status and treating them similarly to other asset classes.
Compared to the UK, EU, and leading crypto-friendly countries in Asia like Japan, Hong Kong, and Singapore, the US still lacks a comprehensive and unified regulatory framework for cryptocurrencies. This stark contrast underscores the significant strides the US needs to make in order to match the regulatory clarity and support for digital assets seen in these jurisdictions.
Becoming and Staying Complaint
Crypto businesses already operating or planning to do so in the United States need to become and stay compliant with multiple agencies and regulations. Depending on the types of service they provide, they would have to register with the FinCEN, SEC, or CFTC. If the businesses qualify as money transmission, adhering to the BSA is also a must.
The Bank Secrecy Act (BSA) requires financial institutions active within the country to help the government detect and prevent money laundering. It has to be done within the AML program framework. The businesses have to carry out risk assessment activities to ascertain their exposure to money laundering activities.
The AML program requires crypto businesses in the United States to have policies, procedures, and internal controls commensurate with the BSA and its regulations.
There should be independent testing for compliance, where individuals shall be responsible for implementing and overseeing the efficiency of the control measures. The appointment of such supervisory individuals must be complemented with ongoing training, keeping them updated on changing regulations.
As heated as this summer is, the United States keeps working towards making its crypto regulations well-augmented, effective, and more extensive and precise.
The recent Lummis-Gillibrand Responsible Financial Innovation Act to the Senate was a decisive step in this direction. If approved, the legislation promises to provide a clear framework for digital asset regulation. This includes delineating the jurisdictions of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) over digital assets.
Moreover, the bill paves the way for depository institutions to issue payment stablecoins. To ensure stability, the proposed legislation mandates that institutions hold 100% of the value of all outstanding stablecoins in reserve. It also guarantees stablecoin holders the ability to redeem their assets one-to-one.
The bill would also create an outline for the tax treatment of digital assets. It advocates for an exemption from income tax for purchases using digital assets that result in a gain or loss of US$200 or less.
Overall, the bill is also expected to enhance the consumer protection standards.
Concluding Summer Thoughts
The US crypto climate remains rather fluctuating when it comes to regulations. Yet, the need for such is undoubted. Moreover, the interest shown by major financial entities, such as BlackRock, in entering the crypto industry underscores the urgency of establishing these regulations.
The crypto market is considerably large-sized in the United States. Revenue in the cryptocurrency market is about to reach US$18 Bn in 2023. Experts predict it to nearly double and become close to US$32 Bn in 2027.
Regulating such a high-growth market poses different challenges. One of the core challenges remains how to strike a balance between the rate of innovation and the security of the law.
Whatever the next steps are, technology keeps thriving, demanding a thriving jurisdiction.
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