The challenges for crypto regulations in the US

Cryptocurrency is a new and innovative asset class that has attracted the attention of investors, entrepreneurs, and regulators worldwide. However, the need for a clear and consistent regulatory framework for crypto poses significant challenges to its development and adoption. In this article, we will focus on the approaches and difficulties faced by the United States (U.S.) to regulate crypto.

The U.S. has taken a more fragmented and reactive approach to regulating crypto. The U.S. does not have a specific federal law for crypto. Still, it relies on existing laws and agencies to oversee different aspects of crypto, such as securities, commodities, money transmission, taxation, and anti-money laundering. This creates a complex and inconsistent regulatory landscape, where different crypto activities may fall under the jurisdiction of multiple regulators, such as the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN), the Internal Revenue Service (IRS), and the Office of the Comptroller of the Currency (OCC). Moreover, each state may have its own rules and requirements for crypto, adding another layer of complexity and uncertainty for crypto businesses and users.

Some of the main challenges for crypto regulation in the US are

1. Defining and classifying crypto assets: Crypto is a novel and diverse asset class that does not fit neatly into existing legal categories and definitions. Regulators must provide clear and consistent guidance and definitions for crypto, such as what constitutes a security, a commodity, a currency, or a utility token. For example, the SEC has applied the Howey test to determine whether a crypto asset is a security. Still, this test is unclear or applicable to all crypto purchases. The CFTC has claimed jurisdiction over crypto assets that are commodities, such as Bitcoin and Ether, but not over those that are securities, such as most initial coin offerings (ICOs). The OCC has granted national banks and federal savings associations the authority to provide custody services for crypto assets. However, this does not necessarily apply to state-chartered banks or non-bank custodians.

2. Balancing innovation and regulation: Crypto is a fast-evolving and dynamic industry that offers new opportunities and challenges for the financial system. Regulators must balance fostering innovation and ensuring consumer protection, market integrity, and financial stability. Regulators must also keep up with technological developments and adapt their rules and standards accordingly. For example, the SEC has created a Strategic Hub for Innovation and Financial Technology (FinHub)  to facilitate communication and collaboration with the crypto industry and provide guidance and clarity on regulatory issues. The CFTC has launched a LabCFTC initiative to promote responsible innovation and fair competition in the crypto market. The FinCEN has issued guidance and advisories on applying the Bank Secrecy Act (BSA) and anti-money laundering (AML) regulations to crypto activities.

3. Addressing cross-border issues: Crypto is a global and decentralized phenomenon that transcends national borders and jurisdictions. Regulators need to coordinate and cooperate to address the cross-border issues and risks posed by crypto, such as tax evasion, money laundering, terrorism financing, cybercrime, and market manipulation. Regulators also need to harmonize their rules and standards to avoid regulatory arbitrage and fragmentation. For example, the U.S. has participated in the Financial Action Task Force (FATF). This intergovernmental body sets global standards and recommendations for combating money laundering and terrorist financing, including for crypto activities. The U.S. has also engaged in bilateral and multilateral dialogues and cooperation with other countries and regions, such as the European Union (EU), Japan, and Singapore, to exchange information and best practices on crypto regulation.

Antonio Palacio, Managing Director of Bitsa Card, said: “Policies play a substantial role in the crypto industry while establishing clear guidelines on the rights and obligations of companies and consumers. Lawmakers must create laws understanding the balance of power between crypto companies and regulators”.

Crypto regulation is a challenging and evolving topic that requires careful and collaborative efforts from regulators, policymakers, industry players, and stakeholders. By addressing the challenges and embracing the opportunities, crypto regulation can pave the way for a more inclusive, innovative, and resilient financial system.