Crypto regulation has been a major topic of discussion over the past two years, with different jurisdictions moving quickly to formulate oversight structures. Recently, this nascent industry has come under heavy pressure due to a serious clampdown by the U.S. authorities, which some crypto natives have branded as Operation Choke Point 2.0.
So, what exactly has been happening in the crypto regulation landscape? As far as events go, there appears to be a coordinated effort by regulators, especially in the U.S., to implement more stringent crypto-related policies:
- U.S. banks that serve crypto clients are being pressured to cut back or exit the business, with Signature Bank (NASDAQ:SBNY) halving deposits attributed to crypto clients, and Metropolitan Commercial Bank shutting down its crypto-asset-related vertical.
- Kraken, a leading crypto exchange, had to agree to a $30 million settlement with the SEC for offering its crypto asset staking-as-a-service program.
- Paxos, a regulated blockchain infrastructure provider, is currently being scrutinized for its BUSD stablecoin for violation of investor protection laws.
- Recent regulatory statements from the SEC have also strongly discouraged banks from holding crypto assets or issuing stablecoins.
2022: The Year Crypto Insolvencies Tipped the Scales
Looking back at the events that unfolded in 2022, it was almost obvious that regulators would take a serious stance on crypto activities sooner rather than later. The year was marked by many unprecedented events, starting with the collapse of Terra's algorithmic stablecoin UST, which led to the implosion of a $60 billion DeFi ecosystem.
But it was the contagion aftermath that caught the attention of regulators; several established crypto firms that had close ties to Terra went down during this fiasco.
Three Arrows Capital, which managed over $10 billion before Luna’s collapse, was one of the first casualties. The now insolvent hedge fund tagged along some of its biggest creditors at the time, including Genesis Asia Pacific Pte (a subsidiary of the Digital Currency Group) and crypto lender Voyager Digital.
The biggest blow, however, came toward the end of the year following the collapse of FTX. Even as of writing, the effects are still being felt across the industry, particularly on the regulatory front.
U.S. and European Regulators Take a Firm Stance
After having a successful run in 2020 and 2021, regulators in the U.S. and Europe seem to have found the opportune moment to strike back against the crypto industry. This time, it is not just the typical crypto market FUD; there are some serious contemplations on how to efficiently regulate the digital asset ecosystem.
In the U.S., house lawmakers led by Rep. Patrick McHenry, the top Republican of the House Financial Services Committee, called the collapse of FTX a ‘dumpster fire, users were left out to dry’. Treasury secretary Janet Yellen also urged for ‘more effective oversight of crypto markets’ to avoid a situation where broader financial markets would be affected by such events.
Meanwhile, European Commission’s deputy director general Alexandra Jour-Schroeder, said that the upcoming Markets in Crypto Assets (MiCA) regulation would have protected consumers to some extent.
“No companies providing crypto assets in the EU would have been allowed to be organized, [or] perhaps it’s better to say, disorganized, in the way FTX reportedly was.”
That said, let’s deep dive into some of the regulatory developments that are taking place in these two jurisdictions.
MiCA Bill and Other Historical Bills in Europe
MiCA (Markets in Crypto-Assets) is a proposed regulatory framework for the EU (European Union) that aims to establish a uniform set of rules for the supervision and oversight of crypto assets and their underlying infrastructure. The framework is being developed by the European Securities and Markets Authority (ESMA), the EU’s financial regulatory agency.
The purpose of MiCA is to provide a clear and consistent regulatory framework for the European crypto-asset industry, which has grown rapidly in recent years but remains fragmented in terms of regulation. The framework is intended to ensure the safety and integrity of crypto-asset markets, protect consumers, and promote market efficiency and innovation.
It defines different types of crypto-assets and sets out the requirements for firms wishing to engage in activities such as trading, custody, and issuance. MiCA also includes the conduct of business rules to ensure transparency and fair treatment of customers, and market infrastructure rules for exchanges, clearing houses, and trading platforms. For investor protection, MiCA provides disclosure requirements and investor education.
After years of back and forth, the MiCA framework is now in its final stages and is set for a final vote in April.
Apart from MiCA, there have been other regulatory actions related to crypto in Europe:
- The Fifth Anti-Money Laundering Directive (5AMLD), which was adopted in May 2018 and came into effect in January 2020, requires cryptocurrency exchanges and custodian wallet providers to register with national competent authorities and to apply customer due diligence controls.
- The EU’s Digital Finance Strategy, which was published in March 2020, aims to foster the development of digital finance in the EU and includes a focus on crypto assets and distributed ledger technology.
- In France, the PACTE Act, which came into effect in 2019, introduced a framework for initial coin offerings (ICOs) and created a new legal category for “digital assets,” which includes cryptocurrencies.
- In Germany, the German Financial Supervisory Authority (BaFin) has issued guidelines on the regulatory treatment of cryptocurrencies, including for the purpose of anti-money laundering and terrorist financing.
- In the UK, the Financial Conduct Authority (FCA) has issued guidance on the regulatory treatment of cryptocurrencies and has taken enforcement action against firms that have engaged in unauthorized activities related to cryptocurrencies.
The SEC Classification Debate: Are Most Crypto Assets Securities?
Despite being a trendsetter in the global financial markets scene, the U.S. continues to lag in its approach to formulating a regulatory framework for crypto. Currently, there is no federal law that governs the digital asset ecosystem; instead, the SEC uses three laws to govern cryptocurrency activities in the U.S.: The Securities Act of 1933, The Securities Exchange Act of 1934, and The Investment Company Act and Investment Advisers Act of 1940.
Under these Acts, most crypto assets, except for BTC, are considered as securities which means that stakeholders have to abide by the same laws that govern U.S. securities.
As of writing, the SEC is currently involved in a case against Ripple, where they are suing the latter for raising over $1 billion through the sale of XRP tokens since 2013. According to the regulator, Ripple’s XRP token was sold to the public as an unregistered security. The ruling on this case will likely have far-reaching effects on how crypto assets will be classified in the U.S.
President Biden’s White House also recently released its first-ever proposed crypto regulatory framework following an executive order issued back in March 2022. U.S. government agencies were tasked to explore the opportunities and risks posed by the crypto ecosystem. Here are a few highlights from this framework:
- Cryptocurrency’s Role in Illegal Finance
The White House’s new framework on crypto regulation has a section dedicated to eliminating illegal activity within the industry, with proposed measures deemed to be effective.
“The President will evaluate whether to call upon Congress to amend the Bank Secrecy Act, anti-tip-off statutes and laws against unlicensed money transmitting to apply explicitly to digital asset service providers — including digital asset exchanges and nonfungible token (NFT) platforms,” reads a White House fact sheet.
- Potential in a U.S. CBDC
The potential for “significant benefits” from a U.S. Central Bank Digital Currency (CBDC) was also outlined in the framework. As per the report, a digital form of the U.S. dollar could create a more efficient payment system, facilitate faster cross-border transactions, and provide a platform for technological innovation. Additionally, it could promote financial inclusion and equity by making it accessible to a wide range of consumers and be more environmentally sustainable.
- Striking a Balance With Traditional Markets
The White House fact sheet highlights the increasing interconnectedness between digital assets and mainstream financial systems, noting the potential for the turmoil to have spillover effects. It warns that stablecoins could cause disruptive runs if not regulated and suggests that the Treasury should work with financial institutions to identify and mitigate cyber vulnerabilities, and with other agencies to identify and track strategic risks.