janet yellen

As US cryptocurrency markets continue to grow, so too does regulatory interest. But there is also an increasing acceptance of the central role that crypto will play in the financial system of the future. Kiara Taylor and Marie Kemplay report.

The fact that cryptocurrencies exist outside of the official financial system lies at the heart of their founding ethos, as well as their appeal for many users and investors.

Yet, their surging usage and a litany of concerns around financial crime, investor protection, tax evasion and even the financial stability of the broader monetary system have pushed the world of crypto firmly into the spotlight of US lawmakers and regulators.

How to bring order without stifling a market and area of innovation where many feel the US could be a world leader — and reap the associated financial benefits of that mantle — is now the complex question facing policy-makers.

Patchwork regulation

Cryptocurrency is already regulated to a certain degree in the US; however, a lack of agreed definitions and a single regulator with primary oversight have created a climate of significant uncertainty for market participants.

There is no official definition for cryptocurrency in the US. Often also referred to as ‘digital currency’, ‘digital tokens’, ‘crypto assets’ or just plain ‘crypto’, most US jurisdictions have so far only opted for broad definitions.

Although not recognised as legal tender, cryptocurrency (or crypto-linked assets) can be regarded as money, a security, a commodity or property in certain contexts, potentially bringing it under the purview of multiple agencies.

For instance, under the Bank Secrecy Act any money service business (any business engaged in money transmission) — which includes cryptocurrency exchanges, as well as more traditional financial institutions engaged in cryptocurrency transmission — must register with the Financial Crimes Enforcement Network and have plans in place to prevent money laundering.

Where a digital asset is deemed to be a security — i.e. it involves investment with “a reasonable expectation of profit based on the effort of others” — the issuance or sale of that asset is covered by the Securities and Exchange Commission (SEC), although there is not 100% clarity on when this applies.

The Commodity Futures Trading Commission (CFTC) is implicated when crytocurrencies are involved in derivatives contracts.

For individuals, the Internal Revenue Service taxes cryptocurrency as if it were property; this means they should pay tax on any gains made upon sale, as well as on the fair value of any mined cryptocurrency on the day it is received.

Increasing scrutiny

Until recently, US regulators had been taking a light-touch approach to cryptocurrencies, but that is quickly changing.

For instance, since becoming chair of the SEC in April 2021, Gary Gensler has made clear his desire for greater scrutiny of these markets and to exercise the SEC’s powers in this area to its maximum. Speaking at the Aspen Security Forum in August 2021, he compared cryptocurrency markets to the Wild West, saying: “We have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight … rife with fraud, scams and abuse in certain applications … right now, we just don’t have enough investor protection in crypto.” He also noted that the SEC will pursue more authority from Congress to “prevent transactions, products and platforms from falling between regulatory cracks”. 

During his tenure, several notable SEC cases against cryptocurrency platforms have reached settlement, with platforms being sanctioned due to various securities law breaches, including inadequate investor disclosure and failing to register as securities exchanges. It is important to note that the SEC also engaged in some high-profile actions before this, including against cryptocurrency issuers in 2019 and 2020.

There needs to be less regulatory competition and more co-operation, less parochialism and more teamwork

Michael Hsu, acting head of the Office of the Comptroller of the Currency

The CFTC acting chairman, Rostin Behnam, is also reported to have made comments to the Senate’s Agriculture Committee, indicating its willingness to take on a broader remit in regulating cryptocurrency. For his part, Michael Hsu, acting head of the Office of the Comptroller of the Currency (the lead US regulator of national banks), has called for a more consolidated approach to cryptocurrency regulation, commenting: “There needs to be less regulatory competition and more co-operation, less parochialism and more teamwork.”

A big role for stablecoins

US president Joe Biden’s administration has also indicated an interest in this area, particularly in relation to so-called ‘stablecoins’ — cryptocurrency tokens with a value pegged to an existing, real-world currency. The President’s Working Group on Financial Markets’ recent report on stablecoins lays clear some of the conflicting impulses at play in efforts to regulate this area. On one hand, the report highlights the significant risks that stablecoins (without appropriate regulatory oversight) pose for individual investors in facilitating financial crime and to the stability of the monetary system. On the other hand, the report highlights the potential, with the right framework, for stablecoins to become a mainstream payment method for US- consumers and businesses.

The report includes recommendations for regulating stablecoin issuers in a similar manner to deposit-taking banks and introducing additional federal oversight for custodial wallet providers. Commenting at the time of the report’s launch, Treasury secretary Janet Yellen said: “Stablecoins that are well-designed and subject to appropriate oversight have the potential to support beneficial payments options. But the absence of appropriate oversight presents risks to users and the broader system.”

Interventions

Adding to the patchwork of federal level regulation, several US states have also instituted their own laws, in many cases to encourage more cryptocurrency activity in order to boost the local economy. This includes states exempting cryptocurrencies from state securities laws, such as Colorado and Wyoming — the latter has even passed legislation permitting a new type of crypto-focused bank to operate. Kraken Bank is the first operator to gain a charter under this new category of institution.

However, a groundswell appears to be emerging for a more unified regulatory approach, with several cryptocurrency business themselves indicating they would welcome broader regulation, provided it is clear and proportionate.

Congress appears to be engaged in earnest on this issue, with an expectation of regulatory outcomes. In early December, the House Financial Services Committee hosted six senior cryptocurrency business executives at its ‘Digital Assets and the Future of Finance: Understanding the challenges and benefits of financial innovation in the US’ hearing. Although this had been billed beforehand, in some parts of the media, as a standoff between lawmakers and industry, the hearing appears to have been good-natured, with several industry voices praising the level of engagement, understanding and quality of questioning from committee members.

Jeremy Allaire, chairman and CEO of digital currency and payments business, Circle, and one of the six industry representatives at the hearing, tweeted: “The level of engagement was high, and members were taking this very seriously. Very thoughtful questions on so many issues from so many members, across the aisle. There was a real commitment to engaging and understanding.”

At time of publication, the Senate Banking Committee was due to hold its own hearing on cryptocurrency issues, which will include participation from non-industry witnesses. The full shape of any incoming regulation remains unclear. 

A taxing issue

One area of pressing consideration, however, is the implementation of aspects of the $1tn infrastructure bill that includes provisions introducing tax reporting requirements for cryptocurrency brokers. Although certain cryptocurrency transactions are already tax-liable, brokers do not have to track or report transactions details to the Inland Revenue Service. This will change in 2023, with the measure expected to raise an additional $28bn in tax revenue in the coming decade.

Substantive questions remain about precisely how it will be implemented and there is still room for lawmakers to changes the scope of the rules. Either way, this shift will effectively lead to many cryptocurrency holders having their activities tracked by a government agency and is likely to bring wider tensions to a head. Cryptocurrency advocacy body Coin Center has labelled the plans as “unworkable and arguably unconstitutional”.

Banks get involved

Despite the uncertain and changing regulatory backdrop, banks are increasingly deciding this is not a market where they can afford to sit on the sidelines. For instance in 2019, JPMorgan became the first global bank to introduce its own digital currency.

In October 2021, US Bank launched a cryptocurrency custody service, following announcements from major players such as BNY Mellon, State Street and Northern Trust about introducing custody services for digital assets.

And, in another significant step, in August 2021, Oklahoma-based Vast Bank became the first US national bank to offer customers the ability to buy or sell crypto in a traditional chequing account. Many other banks are expected to follow suit.

Vast Bank CEO Brad Scrivner says the decision to offer crypto banking services to customers came as a result of the bank needing to remain relevant in a rapidly changing financial industry. “We had to remain relevant to compete, and we realised the best place to compete was to put customers in charge of their entire financial experience, not just pieces,” he says. “For retail platforms and business platforms alike, customers need to access the underlying technology.”

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter