Regulations can enhance investor protections, deter illicit activities such as money laundering and terrorist financing, and foster mass adoption of digital assets – but strict and cumbersome rules can hinder innovation and slow adoption rates.
In 2021, the US issued new rules requiring cryptocurrency exchanges to undergo identity verification procedures in response to increasing anti-money laundering (AML) concerns.
Legality
The United States has struggled to regulate the cryptocurrency market effectively. Different agencies such as SEC and CFTC have attempted to establish their roles within this industry; however, Congress has yet to pass any laws which establish rules governing cryptocurrency trades.
The US tax code contains certain regulations related to cryptocurrency transactions. One such regulation is the Wash Sale Rule, which currently only applies to stocks and mutual funds but may soon include cryptocurrency as well. A bill introduced in 2021 entitled Build Back Better Act contains language to make this rule applicable to cryptocurrency as well.
Cryptocurrency regulations exist in 45 countries around the world, including tax policy, requirements to counter money laundering and terrorist financing, consumer protection rules, licensing obligations and disclosure obligations. Although no correlation exists between regulatory levels and cryptocurrency adoption rates, many emerging-market economies lag behind advanced economies when it comes to regulatory development.
Lack of oversight has negatively impacted both the security and financial integrity of the cryptocurrency market. A turf war has ensued between SEC and CFTC – two bodies with differing jurisdiction over digital assets – over how to regulate digital assets such as bitcoin. For instance, some argue they fall under securities laws while the latter focus more on futures trading of bitcoin futures contracts.
Regulation
Though the United States has been slow to pass comprehensive cryptocurrency regulations, some steps have begun taking shape. For example, the Treasury Department recently issued sanctions on Russian-based crypto exchange Suex that make it harder for criminals to collect illicit profits from international cybercrime. Furthermore, the Bank for International Settlements recently published recommendations regulating banks’ exposures to crypto-assets.
Although these measures might prove successful, they represent only the first step. A global approach must be devised for combatting money laundering and terrorist financing with coordinated efforts between different nations and regulators – while at the same time being effective and scalable – ultimately with the aim of decreasing illegal money flows from global criminal enterprises.
One of the greatest challenges associated with cryptocurrency regulation is lack of clarity regarding their classification. Some have advocated for classifying them as commodities under CFTC jurisdiction while others suggest classifying them as securities which would put SEC jurisdiction over them. No matter their classification, however, cryptocurrency must be properly regulated.
Companies dealing in digital currencies must abide by both the Bank Secrecy Act and CFTC’s anti-money laundering regulations, as well as create an AML program with recordkeeping and reporting requirements in order to comply with state regulation.
Transparency
At a time of increasing mistrust, we must establish strong standards to protect consumers and investors alike. Furthermore, development of digital assets must align with transitioning towards a zero-carbon economy and increasing environmental justice; this will create an industry that is trustworthy and more likely to thrive long term.
Although some governments have adopted an indifferent stance towards cryptocurrency, others have begun crafting regulations to regulate this emerging sector. Such regulations aim to mitigate traditional financial risks while not hindering innovation.
New York Attorney General Letitia James recently introduced legislation designed to increase transparency in the cryptocurrency industry and protect investors. Her bill aims to eliminate conflicts of interest, reduce fraud risk, impose reasonable protections in line with rules for other financial services, as well as give Letitia James’ office and Department of Financial Services more authority to investigate and prosecute cryptocurrency-related crimes.
The proposals also call on agencies to promote innovation by stimulating private-sector research and helping cutting-edge U.S. firms gain footholds in global markets. Furthermore, agencies will explore ways to mitigate downside risks by setting efficient mining standards or fighting money laundering and terrorist financing; additionally they encourage SEC and CFTC redouble their efforts in tracking consumer complaints against fraudulent practices and enforce against any practices that breach regulation.
Risk
Cryptocurrency regulations can be complex and ever-evolving, requiring investors to keep abreast of local jurisdiction rules while being prepared for policy adjustments that could have an unexpectedly large effect on them. A change in regulation could have both positive and negative ramifications for investors alike.
Due to their remarkable, yet unpredictable growth, cryptocurrency assets have generated renewed efforts at regulation. These include attempts at classifying them as securities and mitigating money laundering concerns; however, decisions by governing bodies tend to take time and may produce regulations that are outdated or irrelevant.
Additionally, these initiatives do not adequately address all the problems related to cryptos. For example, they don’t adequately deal with money laundering and terrorism financing using cryptos, nor include provisions that prevent misuse of customers’ assets by crypto exchanges and limit conflicts of interest – in short they do not go far enough in protecting consumers while aiding law enforcement.
The US government must intensify its efforts to mainstream cryptocurrency regulation. Congress should enhance regulators’ powers to combat misuses of customer assets, mitigate conflicts of interest, and enhance transparency requirements for companies. A national database listing sanctions-listed intermediaries would enable law enforcement officials to quickly identify them for transactions blocking. Furthermore, more law-enforcement capacity with international partners should also be funded.