The Crypto Regulator Will See You Now
Which regulatory body is right for you?
The Hippocratic Oath originated more than two thousand years ago, but variations of the principles it outlines for medical professionals have been used for centuries. Today, the most common interpretation of its ethical standards is a directive for doctors:
First, do no harm.
Just like doctors, regulators with oversight responsibility for the crypto markets should ensure that at a minimum, they aren’t harming these developing markets that are slowly transforming financial services and many other corners of the economy.
There are hundreds of state, federal, and international regulatory bodies that in some capacity claim jurisdiction over cryptocurrencies.
With so many moving parts, it’s probably helpful to take a look at a few broad categories of these implementors of public policy in order to better understand their responsibilities and how they may impact this industry.
Securities Regulators: SEC & CFTC
Securities regulators have oversight over the capital markets, which means they are primarily interested in how crypto assets are bought and sold, as well as the impact of this activity to retail investors. As with any other type of investment, crypto assets can be used for fraud and other abusive purposes, so this oversight is a good thing.
In the US, the SEC and Commodities and Futures Trading Commission (CFTC) are the two most important capital markets regulators, although it’s worth mentioning that states have their own individual securities regulators, just like nearly every country does as well.
Fraudsters in the US and beyond have in some cases promoted ICOs and other token sales, which has made the SEC, CFTC, and other securities regulators dedicate more resources to investigating and preventing this type of criminal activity (more on that here).
In an interview, John Beccia, CEO of FS Vector, agreed:
“With the advent of ICOs, tokens and the increased trading activity, agencies like the SEC and CFTC have become more engaged from a policymaking perspective as well as enforcing laws against bad actors.”
The SEC also oversees ETF applications, so it’s had a vested interest in this space since at least the Winklevoss Bitcoin Trust filing in 2013. It also continues to evaluate developments in the ICO space (beyond just cases of fraud).
Jay Clayton, the SEC’s Chairman, has a pretty black and white perspective on ICOs and whether or not they should be considered securities:
“I believe every ICO I’ve ever seen is a security.”
— Jay Clayton, SEC Chairman
Beyond crypto-related products, the SEC has been closely tracking activity with the exchanges. In March of this year, the agency released a detailed statement regarding compliance requirements for digital asset exchanges.
The CFTC, which views cryptocurrencies as commodities, is also closely monitoring on and off-exchange trading of cryptocurrencies. With the trading of bitcoin futures launched in late 2017, these derivatives are now CFTC regulated. Importantly, the CFTC Chairman, Christopher Giancarlo (@giancarloCFTC aka, #Cryptodad), has been one of the more forward-thinking regulators with respect to crypto, fully embracing the “do no harm” approach.
Banking Regulators: Federal Reserve
Banking regulators are responsible for the safety and soundness of the institutions they oversee, which has made them keenly aware of how banks interact with cryptocurrencies. The central banks, tasked with monetary policy decisions and overall financial stability responsibilities, have been more regularly voicing their perspectives, which (broadly speaking) are very skeptical.
In Congressional testimony earlier this month, Federal Reserve Chair Powell was critical of cryptocurrencies but did say that the Fed doesn’t have jurisdiction over these currencies — other than from the standpoint of financial stability.
Powell told the House Financial Services Committee he doesn’t believe cryptocurrencies currently pose a stability threat. This perspective has been echoed by other groups, including the G-20 central bankers tasked with monitoring global financial stability. The activity level of the banking regulators will likely increase as more people and institutions hold crypto assets, but for now, it’s relatively limited.
Money Transmission Regulators: FinCen
In the US, the transmission of money is regulated at the state and federal level. Although the states have historically had an outsized role in this oversight, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) acted in 2013 to require crypto exchanges to register with the federal agency in order to be in compliance with anti-money laundering laws.
The states each have varying laws around money transmission, and crypto businesses wishing to transmit money in a particular state must have the appropriate license. Not surprisingly, applying for and complying with these rules can be a challenging task. Because of this, there are efforts underway to provide some degree of uniformity to state laws.
New York was the first state to establish a license specific to cryptocurrencies. Its vague, overly broad language was warmly met with an exodus of crypto entrepreneurs from New York, which in part has prevented other states from enacting anything similar.
More recently, in a positive state-level development, Wyoming has been proactively moving toward establishing exemptions from securities laws for utility tokens not intended to be primarily investments.
The…Others
There are other regulators, beyond just the securities, banking and money transmission folks, that are also heavily involved in keeping an eye on crypto. These include tax collecting services like the IRS as well as various law enforcement agencies (e.g., see the role of bitcoin in the recent indictment of Russians interfering in the 2016 elections).
And, of course, Congress and other lawmaking bodies have oversight over the whole shebang.
So Doc, What’s the Diagnosis?
While the US hasn’t established a formal regulatory construct for crypto assets, there continues to be talk of creating more uniformity in the rules and regulations, which in turn would (fingers crossed) provide clarity for businesses in this space. Only time will tell.
Anyone that has been paying attention to crypto debates will know that regulation can be a thorny subject. Some view cryptocurrencies as self-regulating without any need for government oversight, while others think all cryptocurrencies should be squeezed into the current regulatory machinery. The answer most likely lies somewhere in between.
Regardless, the health of the crypto ecosystem will no doubt depend in part on regulatory activity in this space. Let’s just hope the medicine doesn’t harm the patient.
For more on this topic of crypto regulation, download our cryptocurrency guide here.
