Regulation in the Crypto Industry

One of the most common questions I get about cryptoassets has to do with regulation. Understandably, there are concerns about how this industry may be regulated in the future. However, most of the concerns I hear are more speculative rather than based on historical context and understanding of present-day facts. I’ve spent a lot of time reading and trying to understand the regulatory landscape and while I’m far from a legal or policy expert, I thought it might be helpful to present a brief overview about crypto regulation in the US.

The truth is, historically, the biggest challenge with crypto regulation has been lack of clarity from US regulatory bodies rather than harmful or poor regulation. Regardless of what the headlines might lead you to believe, the few formal laws that have been introduced by U.S. lawmakers and agencies have historically had a positive inclination to the use of Bitcoin and other cryptoassets. Most of the regulatory discussion surrounding cryptoassets has been at the agency level, including the Department of Treasury, Securities and Exchange Commission (SEC), Federal Trade Commission (FTC), Internal Revenue Service (IRS) and Financial Crimes Enforcement Network (FinCEN) — all of which have slightly different definitions of “cryptocurrencies,” as well as their stances on how regulation should be applied. For example, with regards to Bitcoin, the IRS treats it as property, the SEC views it as a non-security, and the Commodity Futures Trading Commission views it as a commodity.

Despite interest from these agencies, the federal government has not yet exercised its power to regulate the crypto industry at a national level, thereby leaving individual states free to introduce their own rules and regulations.

Of the few regulations passed in crypto’s history, here are some of the most notable:

• 2017 — Bitcoin took its first major step towards regulatory acceptance when the FTC gave cryptocurrency trading platform operator LedgerX approval to become the first federally regulated digital currency options exchange and clearinghouse in the U.S.
• 2018 — SEC ruled that Bitcoin and Ethereum are not securities, citing decentralization as a key factor.
• 2020 — The Office of the Comptroller of the Currency (OCC) authorized national banks and federal savings associations to provide cryptocurrency custody services for customers.
• 2020 — Wyoming Banking Division approved Kraken as the first licensed bank to provide deposit-taking, custody, and fiduciary services for digital assets.
• 2020 — U.S. Treasury proposed a rule to treat digital assets like major currencies with respect to record keeping, reporting, and verification.
• 2021 — The OCC released further guidance that allows banks to offer crypto custody services to its customers as well as use stablecoins as a settlement infrastructure in the US. This sets the stage for every bank to not only be able to hold and transact in Bitcoin but also CBDCs (aka digital dollars) and other cryptoassets.
• 2021 — The OCC granted a national trust charter to Anchorage, converting it from a South Dakota trust company to a federal one, effectively making it the first crypto-native national bank.
• 2021 — The Federal Reserve released a new Payment Proposal that would add new account access thus allowing new fintech and crypto companies access to the payment system offered by Federal Reserve Banks. According to the agencies, the proposed rule “make(s) it explicitly clear that both payment orders and transmittal orders include any instruction by the sender to transmit any digital asset having the legal tender status to a recipient.” This means that banks, trusts, and other entities holding cryptoassets can have simultaneous clearing of Bitcoin, Ether, and other digital assets which would reduce settlement risk for any institution that handles digital assets.
• 2021 — Passed by the House of Representatives in April 2021, the Eliminate Barriers to Innovation Act is now up for vote in the Senate. This act mandates the creation of a “crypto task force” whose sole purpose is to serve as general counsel to both commissions on how they should address the digital-assets market. The creation of a dedicated team would show commitment to the future development of the crypto economy and hopefully should result in clarification on whether cryptoassets are securities subject to SEC oversight or commodities supervised by the CFTC.

In fact, the only major anti-crypto regulation that has passed in the US was New York’s Bit License, which was later changed to become much less onerous because the state of New York lost a significant amount of tax revenue when a number of crypto related businesses relocated because of it.

Now I will grant you, past crypto friendly regulation does not guarantee a future positive stance towards the digital asset economy. But consider the following:

The number of crypto friendly policy makers is increasing

At a federal level, there are already a number of Bitcoiners in government and regulatory positions. This includes both sides of the aisle.

• The commissioner of the SEC is Hester Pierce, otherwise known as “Crypto Mom.” She is a huge proponent of Bitcoin, DeFi, and all things crypto. In April of this year, she released a new Safe Harbor proposal for newly issued cryptoassets which, if passed, would be an enormously positive development for the crypto industry. The proposal would provide much needed clarity about the classification of cryptoassets, something the crypto community has been longing for.
• In addition to Hester Pierce, Gary Gensler recently became the new SEC Chair. In the past he has called Bitcoin a “catalyst for change” and taught a course on “Blockchain and Money” at MIT.
• Former head of the OCC Brian Brooks previously stated publicly that “The US Wont Ban Bitcoin” and passed pro-crypto legislation. New acting head of the OCC, Michael Hsu, is certainly more reserved and has publicly said that he is reviewing all prior guidance issued with “the ultimate goal [of] determining an overall strategy for digital assets.”
• Cynthia Lummis (Republican senator of Wyoming) and Darren Soto (Democratic congressman of Florida) have both publicly spoken out in favor of crypto as well as proposed very crypto friendly state legislation.
• Tom Emmer, House Representative of Minnesota and public proponent of digital assets, has put forth proposals to create better accounting standards and tax policies regarding cryptoassets. He also put forth a bill to make cryptoassets separate and distinct from a security offering thus providing better clarity around legal status of emerging cryptoassets.
• At last week’s Bitcoin conference in Miami, Ohio representative Warren Davidson and vocal proponent for crypto said there was “more pro-Bitcoin regulation waiting on deck.” Earlier this year, Davidson reintroduced the Token Taxonomy Act to Congress with bipartisan support.
• Texas Governor Greg Abbott recently signed into law a bill that formally defines virtual currencies and offers individuals and businesses a clear legal environment for bitcoin investment. The state governor has been a vocal proponent for crypto tweeting earlier this year “Count me in as a crypto law proposal supporter. It is increasingly being used for transactions and is beginning to go mainstream as an investment. Texas should lead on this.”
• Other publicly pro crypto congressman and women include Thomas Massie, Jared Polis, Ted Budd, Trey Hollingsworth, Stacey Plaskett and Patrick McHenry.
• Both presidential nominees Andrew Yang and Pete Buttigieg were pro Bitcoin. I fully expect to have a Bitcoiner for president sometime in the future.
• The Federal Reserve appointed a pro-Bitcoin chief innovation officer named Sunayna Tuteja.

As younger members continue to hold a greater number of government positions over the coming years, the American government is likely to only become more crypto friendly over time.

States are taking the lead and seeing economic growth

At a state level, Wyoming has enacted some of the most progressive and crypto favorable laws anywhere in the world. Wyoming now has crypto banks legally supported at a state level, clarified the treatment of digital assets in commercial law, and there is no state tax on Bitcoin. Even more progressive, Wyoming is now allowing fully Decentralized Autonomous Organizations (DAOs) to become registered entities in the state. As a result, Wyoming is beginning to attract firms such as crypto exchange Kraken, smart contract platform Cardano and payment protocol Ripple Labs all of whom have relocated to Wyoming’s capital Cheyenne. New companies, such as crypto bank Avanti, are also now being launched in Wyoming. Wyoming State Senator Chris Rothfuss has publicly stated the desire is to diversify the Wyoming economy has been a primary motivator of his state’s embrace of the crypto industry.

“We do a lot of coal, oil and gas, and those don’t necessarily have the bright, shiny futures they once did,” the Democrat said. “We’re really looking for opportunities to bring advanced emerging technologies to Wyoming.”

-Chris Rothfuss, Wyoming

Another state leading the charge is Florida. In addition to Senator Soto, Miami mayor Francis Suarez has been pushing legislation which would pave the way for a wider use of Bitcoin, Ethereum and other cryptocurrencies, and more clearly define how they fit into the existing financial system. Suarez has generated a fair amount of buzz for his forward-looking proposals to allow Bitcoin payments for municipal employee salaries, fees, taxes as well as exploring ways to put part of the city reserves in Bitcoin. Just last week Suarez spoke at the Bitcoin Conference held in Miami claiming he wants “to make this city the Bitcoin capital of the world.”

In an interview with Consensys, Caitlin Long of the Wyoming Blockchain Task Force revealed that a couple dozen states are already beginning to follow Wyoming’s and Florida’s lead. While not every state appears to be copying every bill, at least six states including Rhode Island, South Carolina, Missouri, Oklahoma, and Iowa are looking at Wyoming’s money transmitter license exemption. Other states that have already enacted some of Wyoming’s bills include Montana, Utah, Colorado, and Arizona. Today, there are currently at least 25 states with crypto related proposals in the works, most of which would be very favorable for the industry. Wyoming and Florida are setting precedents that other states will likely continue to emulate because its proving to be a major boom to the state’s economic growth.

Pro crypto lobbying efforts are increasing

There is a lot of money to be made in crypto. Coinbase, Square, PayPal are very large public companies sporting huge growth due to their involvement in crypto. In May of this year, Brian Armstrong (CEO of Coinbase), Katie Haun (Andreessen Horowitz) and Ron Conway (SV Angel) spent a week in DC meeting with members of congress “to establish relationships, help answer questions about crypto, and to see what we can do to help the U.S. get more regulatory clarity in this space.” Citi, Goldman Sachs, JP Morgan, Morgan Stanley and a number of Wall Street Hedge Funds are all entering the crypto market in meaningful ways. A large number of Endowments, Family Offices and wealthy individuals have started investing in crypto over the last couple of years. These are the same people and industries that make political donations and have large lobbying efforts. I do not think it’s a stretch to say that politicians will have increasing pressure in the years to come from their donors and constituents to support the crypto industry.

Furthermore, the crypto industry’s coordinated lobbying effort in DC is rapidly growing. Fidelity, Square and Coinbase recently established a new trade group called The Crypto Council for Innovation which hopes to influence policies that will be critical for expanding the use of cryptocurrencies in conjunction with traditional finance. In addition to The Crypto Council for Innovation, there are a number of other lobbying efforts on behalf of the crypto industry.

• Association for Digital Asset Markets: Founded in 2018, this lobby group is made up of 17 members and is dedicated to “developing industry best practices that facilitate safe, secure and efficient digital asset markets.”
• Blockchain Association: Founded in 2018, this lobby group is made up of 35 blockchain companies divided into working groups on a wide range of topics.
• Chamber of Digital Commerce: Founded in 2014, this lobby group sports over 200 members including a mix of crypto and traditional financial services.
• Coin Center: This think tank founded in 2014 is one of the leading nonprofits focused on the policy issues facing cryptocurrencies.
• Virtual Commodity Association: Nonprofit co-founded in 2018 by the Winklevoss twins. This lobby group is seeking to establish a self-regulatory organization for crypto marketplaces including “fostering consumer protection and market integrity for virtual commodity marketplaces.”

The bottom line is there are a number of full-time folks working only to promote pro-crypto regulation in Washington and its proving to pay dividends. When President Trump tasked Steve Minuchin to propose anti-crypto regulation towards the end of Trump’s term, the industry rallied so fast that they shut it down. Think about that for a second, the president of the United States was unable to pass anti-crypto regulation. Despite what some headlines will lead you to believe, the crypto industry is already wielding some serious political clout.

Where do we go from here?

Without a doubt there will be more regulation passed in the years to come. In fact, many in the crypto industry would argue that there needs to be more regulation. There are lots of issues that need to get resolved and I believe thoughtful regulation would actually be a good thing for the industry. Clearing up a lot of the legal grey area would eliminate a lot of uncertainty and risk for a number of companies and organizations operating in the digital asset economy.

That being said, I’ll be the first to admit that I do not have a crystal ball, nor do I claim to know what direction future regulation will ultimately take. For example, the OCC, Fed, and FDIC are considering creating the first ever unified, interagency body to come up with unified regulation regarding cryptoassets. I can’t tell you what stance this body would ultimately take on digital assets, nor can anyone else.

However, the purpose of this post is not to forecast into the future what regulation will or will not get passed. The point I am trying to make is most people I talk to that have concerns about regulation are surprised to learn everything I covered in this article. Without having done the research and understand the historical context, it’s easy to jump to wild speculation much of which doesn’t make logical sense. My hope is that this article provides a baseline for those who have concerns and want to learn more about the regulatory landscape of the digital asset industry.

Having questions about how future regulation may impact this industry is not only valid, but also prudent for anyone considering investing in this space. It’s something I, and many crypto enthusiasts, pay close attention to. I encourage you to consider all the risks associated with this emerging market just as I also encourage you to do the research and have the facts before coming to a conclusion.