As cryptocurrency usage becomes more mainstream, governments are working to regulate it. Australia requires exchanges to register and comply with AML/CFT reporting requirements; additionally, tax gains on cryptocurrency trading transactions.
Singapore has taken a measured approach, recently announcing that new legislation will be passed in 2022 to bring crypto assets under financial promotions regulation and is also looking at tightening security protocols for stablecoin issuers.
The US Treasury is working with international financial supervision bodies to develop a framework for regulating crypto assets. A draft version is scheduled for completion by year-end and could give significant power to either SEC or CFTC while still giving an “off ramp” to certain activities that would remain subject to less stringent CFTC scrutiny.
The Treasury Department recently proposed regulations governing sales and exchanges of crypto-related assets that require brokers to report more details to the Internal Revenue Service (IRS). These proposed rules form part of its initiative to combat tax evasion while also legalizing cryptocurrency transactions like bonds and stocks.
These rules would broaden the definition of broker to encompass anyone providing regular services that facilitate transfers of digital assets on behalf of others, including cryptocurrency exchanges, payment processors and decentralized finance services that earn fees from such sales. Miners and validators who perform no other services than validation functions do not fall within this definition, though transaction costs must still be allocated depending on nature of transfer based on nature of sale/exchange occurring after January 1st 2024.
Financial Crimes Enforcement Network (FinCEN), part of the Treasury Department, investigates and analyzes financial transactions to prevent money laundering and terrorist financing. FinCEN collects, analyses and disseminates data to support policymakers; law enforcement, regulatory, intelligence agencies; financial industry stakeholders; foreign FIUs and others at local through international levels. Furthermore, FinCEN exchanges intelligence with other FIUs as well as helping create global anti-money laundering (AML) frameworks.
FinCEN also oversees the rapidly expanding world of virtual currencies and crypto-related activities. The agency has warned crypto firms about potential registration, reporting, recordkeeping and compliance requirements under the Bank Secrecy Act (BSA) and its implementation regulations; as well as discussed risks of ransomware payments and best practices for meeting BSA requirements.
Recently, FinCEN proposed a rule requiring banks and money services businesses to submit reports and verify customer identities in transactions involving convertible virtual currency or digital assets with legal tender status. The aim is to reduce anonymity afforded by these transactions; many cryptocurrency experts fear it will create unnecessary paperwork burden. FinCEN set the comment period on its proposal for just 15 days — an extremely brief timeline compared to typical rulemaking processes.
The Securities and Exchange Commission’s cryptocurrency regulations aim to safeguard investors and increase transparency in volatile cryptocurrency markets. Cryptocurrency exchanges, token issuers and investment advisers must abide by SEC regulatory frameworks; failure to do so may incur heavy fines and penalties. SEC enforcement also helps prevent fraud or any securities-related violations.
Cryptocurrency markets are currently unregulated, leaving them open to fraud and manipulation. SEC enforcement could prevent such activities by setting strict disclosure standards and mandating compliance with anti-money laundering (AML) and counterterrorism financing (CTF) laws by crypto enterprises.
SEC regulations also mandate that companies offering cryptocurrency investments register with and adhere to federal securities laws, such as the Howey test for determining whether an asset constitutes securities. Recently, the SEC refocused its resources towards overseeing this space by creating an office dedicated to this issue.
SEC regulation of the crypto market could help legitimize cryptocurrency enterprises and attract more traditional investors, as well as spur greater innovation within the sector. Furthermore, SEC’s regulations will help create more clarity on where traditional securities end and crypto assets start so entrepreneurs know what’s expected of them.
While CFTC regulates crypto futures and derivatives trading, it has limited authority in spot markets due to its rising popularity. Cryptocurrencies like Bitcoin have challenged traditional regulatory divisions between securities and commodities; for example, the Securities Exchange Commission argued they were securities while a federal judge has declared them commodities; this turf battle between regulators has intensified as they try to establish their roles and protect consumers in this fast-evolved sector.
The CFTC has taken several measures to address this issue, such as issuing customer advisories and raising awareness of virtual currency risks. Furthermore, they encourage customers to verify entity registration prior to investing their funds with companies. Furthermore, funding has been increased for LabCFTC innovation arm.
Regulators’ efforts in dealing with cryptocurrency issues remain incomplete; numerous questions remain unanswered, such as how to distinguish whether a crypto token should be treated as security or commodity for regulatory implications purposes.
However, lawmakers are beginning to recognize the challenges faced by industry. Last year, the Senate Agriculture Committee unveiled legislation giving additional regulatory powers to the Commodity Futures Trading Commission (CFTC). This would enable it to regulate sales of virtual currencies that act as commodities like ether and bitcoin; furthermore, registration pathways have also been created for depository institutions that wish to issue payment stablecoins.