Get in the NODE #5: US Regulation of Crypto Investments
It’s no secret. The regulatory landscape as it relates to cryptocurrencies is CONFUSING. Governments around the world have been grappling for a while now to figure out the best way to oversee the movement of digital currencies. Unfortunately, blockchain technology, including crypto, isn’t the easiest thing to grasp, especially in such a nascent stage. As a result, it’s taking some time for regulators to come out with clear guidelines regarding how companies and investors should proceed.
Since it will take a while to go over everything that’s happening in the world, I’m going to focus solely on regulatory oversight in the US.
Investment Risks
Every investment bears a risk. However, cryptocurrency investments are especially risky, given the current lack of guidance from the SEC or any other regulatory agency. In the case of a cybersecurity breach or hack, there may be no recourse if cryptocurrencies disappear. Unlike traditional banking accounts, which are insured by the US government up to $250,000, cryptocurrency accounts are not insured at all. Last but not least, parties making investments in crypto must rely upon companies that may not be accountable to any regulators in charge of protecting investors. In short, all cryptocurrency investors are investing at their own risk.
Regulatory Challenges
Digital currency transactions provide greater anonymity than traditional non-cash payment methods. Transactions are generally characterized by non-face-to-face relationships, which may permit anonymous funding and transfers if the parties aren’t adequately identified. Decentralized systems are particularly vulnerable to anonymity risks — for example, by design, Bitcoin protocol does not require individuals to provide identifying information. This, combined with Bitcoin’s global reach, greatly increases the ability of criminals to move value into and out of fiat currencies and regulated systems, thus increasing money laundering and terrorist financing risks.
Additionally, current blockchain protocols rely on complex infrastructures that involve several parties to transfer funds — in the event that something serious were to occur, it would be difficult to identify who or what should be held responsible for a regulatory misdeed. Along the same vein, it would be difficult to determine the jurisdiction under which the crime was committed and should be tried.
That said, there has been movement by regulators to make sense of things. The SEC is currently seeking to apply securities laws to movement of cryptocurrencies through cryptocurrency exchanges and cryptocurrency wallets, among others. Over the past year, the agency has also started taking the stance that utility tokens are securities and should be managed as such. Other agencies, such as FinCEN are strongly hinting that any party that sells tokens will be considered an unregistered money transfer business and will be considered to be outside of the law unless they register their businesses with the federal government and collect information about their customers. The IRS is also stepping into the fray by requiring investors to report income stemming from investments.
Companies Making Efforts to be Legitimate
In anticipation of regulations to come, many companies are making efforts to be as compliant as possible with current banking regulations by conducting KYC on all investors. Though this comes at odds with crypto ideology, these companies recognize that if they want to be seen as legitimate businesses in the eyes of the law (pre- and post-dissemination of clear regulatory guidance) they must make sure that all sources of their funds are coming from “clean” sources and not from illicit, sanctioned, or terrorist-affiliated ones.
More and more companies considering ICOs are also being mindful of the SEC’s stance on crypto by making sure to file for exemptions under Regulations D, A+, or CF. Companies have also attempted compliance by entering into SAFT deals. However, these deals are currently being investigated by the SEC, which may hinder companies from participating in further SAFT transactions.
Pressure on Regulators to Provide Guidance
With so many people interested in and investing in crypto, it’s only a matter of time before the SEC follows up to its investigation of The DAO and its statement on ICOs with further instruction on how companies and investors should proceed. Lack of guidance will only prolong the risks that current investors are exposed to, which will run counter to the SEC’s role as an agency whose goal is to protect investors. Adding pressure to the need for more clarity is the fact that major banks, such as Goldman Sachs, are now jumping onto the crypto investment bandwagon.
Impacts of Regulation
Improved guidance and governance of crypto investments will signify growing acceptance by the US government of both blockchain technology and cryptocurrencies, and will facilitate growing acceptance of cryptocurrencies by the general population. Movement by the SEC will also signify to other countries that crypto investments can be effectively regulated and will enable other governments to leverage the SEC’s framework for management of crypto investment activities, if desired.
Stronger oversight of the cryptocurrency market will also lead to continued enforcement against fraudulent or potentially fraudulent companies seeking to launch ICOs. Companies will be expected to meet specific standards if they want to participate in the ICO market, which will help make investments safer for investors.
All opinions expressed in this blog are mine.
