The Clock is Ticking but what Regulatory Avenue to Take?

Currently, crypto has become more of a wild west than ever before. With the lack of federal clarity, crypto has been much of a free-for-all, leaving investors to suffer losses due to terrorist financing, money laundering, and fraudulent actors like FTX (thanks, Sam Bankman Fraud) and Celsius. We have heard growing calls for regulation… but how would regulation take shape?

There is currently no federal-level regulation. US states are trying to handle crypto themselves. Oftentimes, at the intersection of law and tech issues, regulatory sandboxes have been implemented to help provide some stability to such environments. This could be a possibility for crypto—to test out different regulations to see what works and what does not work for the crypto space. 

Furthermore, who should regulate crypto? Will it be the SEC, CFTC, FinCen (e.g., Bank Secrecy Act), Office of Foreign Asset Control, etc.) ? Should it be a combo of sorts? Currently, the SEC and the CFTC seem to be the main agencies trying to manage crypto. The SEC’s current approach is one of regulation by enforcement, which is reactive by nature in that the SEC makes decisions upon suing various crypto players and exchanges, and basically just waiting for things to happen before the agency intervenes. 

One major issue is that crypto has no limits—code “knows” no limits. There is no geographical tie. The international level has seemingly grappled with this issue in numerous ways whether officially classifying crypto as legal tender, outright banning crypto, or taking a moderate regulatory approach. In the EU, cryptocurrency regulation centers around MiCA (Markets in Crypto Assets) Legislation, the BSA (Bank Secrecy Act), and the ToFR (Transfer of Funds Regulation) proposals. On the other hand, US cryptocurrency regulations revolve around the SEC (Securities and Exchange Commission), FinCEN (Financial Crimes Enforcement Network), CFTC (Commodity Futures Trading Commission), and a Presidential Executive Order that has six policy objectives in its regulatory approach to digital assets: (1) consumer protection, (2) financial stability, (3) the use of crypto for illicit crimes, (4) U.S. competitiveness, (5) financial inclusion, and (6) responsible innovation. While the US rules and regulations surrounding cryptocurrency and digital assets focus on an analysis on whether a digital asset is offered or sold as an investment contract and, thus, is a security, the EU rules and regulations surrounding cryptocurrency and digital assets are focused on bringing all crypto-assets and crypto-assets service providers and platforms under a single regulatory framework in order to “ensure a harmonized market, provide legal certainty for crypto-asset issuers, guarantee a level playing field for service providers and ensure high standards for consumer protection” (see https://www.euronews.com/next/2022/07/01/eu-agrees-on-landmark-mica-crypto-regulation-in-wake-of-terra-meltdown-and-bitcoin-plunge#:~:text=The%20EU’s%20crypto%20rules%20%22will,he%20said%20in%20a%20statement.)

Moreover, in the EU, the Markets in Crypto Assets bill (MiCA) has been key in regulating crypto in the EU since 2018, specifically focusing on out-of-scope crypto-assets and EU crypto service providers. Unlike the regulations in the US, MiCA allows crypto in the EU to be governed by one regulatory framework, one that brings crypto-assets, issuers, and service providers under the same framework. Further, MiCA protects investors and preserves financial stability and security thus fostering innovation and further digital asset investment. Among the rules and regulations under MiCA is one that places the burden on service providers to protect consumer wallets and places liability on providers if they do in fact lose investors’ crypto assets. MiCA also covers market abuse including but not limited to insider dealing, anti-money laundering, and market manipulation.

To be regulated or not to be? It eventually will be but the real question is how . . .

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