Crypto firms have been vocal about how the US’s damaging approach to their industry is stifling innovation to the benefit of Asian and European competitors. While change might be in the air, there is still plenty for the industry to worry about.
Engaging in crypto-related activities in the US can be a minefield, potentially landing companies and individuals in hot water with the regulator. But there are encouraging signs that US policy-makers are striving to create some much needed regulatory clarity.
What is happening?
The US Securities and Exchange Commission (SEC) has been raining down crypto enforcement actions like confetti. Admittedly, many relate to outright frauds, but certainly not all of them, and these actions are leaving the industry dazed and confused, particularly when companies are hit after attempting something as simple as a fundraising activity.
At the heart of the matter is the lack of clear definitions as to whether a digital or crypto asset is a security or a commodity for US regulatory purposes. Securities come under the SEC’s watch, whereas commodities are the purview of the Commodity Futures Trading Commission (CFTC). Also, the industry is struggling to understand exactly what the SEC considers non-compliant with enforcement actions, with repercussions sometimes emerging out of the blue years after the event.
Such is the fear of falling victim to regulatory enforcement actions and fines that many entrepreneurs are decamping from the US — even Silicon Valley — to relocate overseas. Germany, Switzerland, Liechtenstein and Singapore, for example, all have more tolerant regulators and clearer regulatory frameworks for crypto. The EU crypto rules are not yet implemented, but their substance has been laid out and therefore provide some certainty within the bloc.
Why is it happening?
As a result of so many traditional financial firms getting involved in crypto, and no doubt because of lobbying, US policy-makers have woken up to the fact that there is potentially a lot of money to be made from in this space.
For instance, the $1tn infrastructure bill passed in early August contains reporting requirements for crypto firms to make it easier for the Internal Revenue Service to collect taxes from crypto-related activities. Such bills contain measures describing how they will be paid for — taxing crypto, for example, is expected to raise $28bn.
Though many in the industry, including banks, welcomed the reporting measures as they confer a certain legitimacy to crypto, they remain troubled over the coverage of the requirements. These are mainly aimed at exchanges and platforms, but in their current guise will also ensnare transaction validators and even software firms, which could be damaging to the industry. There is an ongoing battle to narrow those reporting requirements.
A better piece of news comes from Democratic Party congressman Don Beyer and his ‘Digital Asset Market Structure and Investor Protection Act’. The bill attempts to create a regulatory framework for cryptoassets, stable coins and decentralised finance. It would for instance, formalise digital asset definitions and the respective roles of the SEC and CFTC in overseeing them. It even has measures to deal with the transformation of a token from security to currency (or commodity for US regulatory purposes).
However, Mr Beyer’s bill has only just begun its legislative journey so could be changed.
What do the bankers say?
Bankers are happy to see crypto activities regulated. It means that they can safely participate in that market without fear of regulatory retribution. Regulation also makes it harder for decentralised finance, which is directly related to digital assets, to disintermediate banks. Indeed, regulators appear to have little appetite to see traditional financial firms replaced by algorithms, smart contracts, blockchain protocols and decentralised exchanges.
Will it provide the incentives?
These legislative measures could conceivably turbocharge the US crypto sector, especially if digital assets are clearly defined and clear boundaries are set.
However, there is scepticism among some policy-makers around crypto, which could slow its widespread use in the US. They see dollar-backed stablecoins, even cryptocurrencies to an extent, and blockchain payment solutions as potentially undermining the power of the US authorities to sanction countries they see as undesirable, for example. Many in the US Treasury and the Federal Reserve like it just the way it is — it suits them as the US-centric financial system is globally dominant. Conversely that is a good reason for other, often much smaller jurisdictions to take a deep interest in crypto, be it tiny El Salvador or wealthy Switzerland.
Meanwhile, the rest of the world is pushing ahead regardless, which will force the US to either fully engage with these developments — and have an opportunity to influence them — or be left behind and possibly end up less relevant in global financial markets.
In-depth insight into global regulation can be found in The Banker’s sister publication Global Risk Regulator.
