U.S., Canada Crypto Regulations Update
Cryptocurrency made a roar in 2020 and 2021. Investors saw very nice returns and countries like India saw massive adoption from retail investors.
The United States saw 44% of crypto owners adopting it for the first time that year. With the world’s largest economy, how crypto regulations are defined in the U.S. will significantly impact global crypto adoption.
Investors are continuing to pile money into Canadian cryptocurrency exchange-traded funds despite the sector losing more than US$1-trillion in value globally so far in 2022. Canada has about 40 crypto ETFs — including bitcoin and ethereum funds. Since crypto funds first launched in February, 2021, ETF investors have bought steadily in the sector, which had $4.3-billion in total assets as of May 31, according to research by National Bank Financial.
But, Canada has a few firsts that they officially beat the United States too:
- The first country to design and sign into law Anti-Money Laundering (AML) regulations for cryptocurrency “service providers.”
- The first to register a cryptocurrency-only investment fund. The United States has been putting their efforts on hold as the government tries to get a better grasp of it.
- Applying securities laws to cryptocurrencies
United States, Joe Biden and Crypto
In the U.S., there’s a move to create a coordinated approach to all things crypto using tools such as an Executive Order. Different agencies and regulators are examining the issues, including the Securities and Exchange Commission (SEC), the Commodities Futures and Trading Commission, federal banking agencies and the Departments of Treasury, State, Justice, and Homeland Security.
- Data Protection — Without “sufficient oversight and standards,” firms providing digital asset services “may provide inadequate protections for sensitive financial data, custodial and other arrangements relating to customer assets and funds.”[7]
- Privacy — Key “safeguards” identified in “responsible development” of digital assets include “maintain[ing] privacy” and “shield[ing] against arbitrary or unlawful surveillance.”[8]
- Risk Disclosures — An important facet of protecting investors is ensuring adequate “disclosures of risks associated with investment.”[9]
- Cybersecurity — Cybersecurity issues that have occurred at major digital asset exchanges and trading platforms to date have contributed to billions of dollars of losses.[10]
- Systemic Risk — In order to mitigate systemic risk, digital asset issuers, exchanges and trading platforms, and other intermediaries “should, as appropriate, be subject to and in compliance with regulatory and supervisory standards that govern traditional market infrastructures and financial firms.”[11] Moreover, new and unique uses of digital assets “may create additional economic and financial risks” that require “an evolution to a regulatory approach.”[12]
- National Security and Illicit Finance — Noting that digital assets can pose significant national security and illicit finance risks ranging from terrorism financing to cybercrime, the Executive Order aims to “ensure appropriate controls and accountability” for digital asset systems to “promote high standards for transparency, privacy, and security” in order to counter these activities.[13]
- Sanctions Evasion — Digital assets may be used to circumvent sanctions.[14]
- Climate and Pollution — The United States also has an interest in reducing “negative climate impacts and environmental pollution” from “some cryptocurrency mining.”[15]
Banks and an “odd” relationship with digital assets
Through various Interpretive Letters, the Office of the Comptroller of the Currency (OCC) is allowing U.S. national banks to:
- Take custody of cryptocurrencies
- Hold U.S. dollar reserves against stablecoins
- Use blockchain nodes and stablecoins for payment activities
But, Acting Comptroller Michael Hsu has put out a more recent Interpretive Letter. According to former U.S. FDIC regulator Jason Brett, it will “only add confusion to the marketplace … leaving only the largest and most well-funded incumbent banks in a position to afford conducting cryptocurrency activities.”
Here comes the Travel Rule
Cryptocurrency firms have assembled teams of compliance experts and lawyers to try and navigate the Travel Rule.
The Financial Action Task Force (FATF) guides how its 37 members regulate cryptocurrency exchanges. One controversial guidance is the so-called travel rule that requires obligations to obtain, hold, and transmit required originator and beneficiary information in order to identify and report suspicious transactions, monitor the availability of information, take freezing actions, and prohibit transactions with designated persons and entities.
The key here is that both parties on the sides of the cryptocurrency transaction know and trust each other, at least enough to satisfy regulators.
Threats, Actions and Answers
The United States is already taking actions and making examples of those not in compliance.
Ari Redbord, who served as a senior adviser to the Treasury Department’s undersecretary for terrorism and financial intelligence, suggested
What we are seeing is that the Department of Justice is going to actively go after actors that attempt to use cryptocurrency, but also that it is hard to use cryptocurrency to evade sanctions.
Canada says that anyone who handles cryptocurrency transfers is a money-service-business (MSBs) and have similar requirements to banks in terms of reporting and record keeping duties. A distinction is made between crypto-asset trading platforms (CTPs) that immediately deliver crypto assets to clients and those with custody of the assets. If a CTP holds, possesses or controls the asset, then the asset is treated as a security or derivative, and the CTP is regulated as a security dealer.
Regulators want to ensure that KYC procedures are in place, including identity verification. Low cost and easy to establish kyc/aml exist, the excuse to regulators from small startups on cost and complexity, is not getting a pass anymore.
