A look at the current state of the crypto regulatory landscape and why compliance-focused infrastructure makes it faster and easier to launch and scale your business
Cryptocurrency regulation has come a long way since the “wild west” era of the mid-to-late 2010s. For crypto businesses to be successful in the U.S. today, complying with the evolving regulatory environment is critical.
Over the last couple of years we’ve seen many regulatory developments unfold. Key regulatory themes have included stablecoins, guidance for national banks integrating crypto, amendments to the Anti-Money Laundering (AML) Act of 2020, cryptocurrency crime and tax evasion, and crypto exchange-traded funds (ETFs).
Here’s a look at the latest U.S. crypto regulation developments.
On July 15, 2021 during “The Semiannual Monetary Report to the Congress,” Federal Reserve Chair Jerome Powell pointed to the fast growth of stablecoins, the lack of rules and guidelines, and the need for regulatory clarity.
A July 19, 2021 press release issued from the treasury department announced U.S. Treasury Secretary Janet L. Yellen’s meeting with the President’s Working Group on Financial Markets (PWG), the OCC, and the Federal Deposit Insurance Corporation to discuss stablecoins. The meeting focused on establishing rules for the rapidly growing stablecoin economy. Secretary Yellen emphasized the need for a U.S. regulatory framework to protect users and national interests from bad actors. No proposed rules have been shared as a result of this meeting.
Stablecoins have proven themselves to be more than an answer to the volatility of crypto markets. They have evolved beyond their initial purpose, and in the global DeFi market stablecoins can be used for micropayments, escrow, settlement lending, forex, and utility for decentralized apps. Flow USD (FUSD), issued by Prime Trust, is an example of a stablecoin that provides a non-volatile way to pay for digital products on the Flow blockchain by Dapper Labs.
The future of stablecoins (pegged to fiat and digital assets like Bitcoin) in the U.S. is likely to be subject to future regulatory actions.
OCC guidance on stablecoins for national banks and federal savings associations
On July 22, 2020, the Office of the Comptroller of the Currency (OCC) published Interpretive Letter #1170, granting national banks the authority to provide cryptocurrency custody services.
In January of 2021, the OCC’s Interpretive Letter #1174 gave national banks permission to use independent node verification networks and stablecoins to carry out payment activities and other banking functions. On January 13, 2021, the OCC approved the first federally chartered digital asset bank in the U.S.
On April 23, the OCC granted preliminary conditional approval of a limited purpose national trust bank charter for a bank that will provide services only associated with digital assets.
The OCC's future decisions could lay the groundwork for greater bank engagement in cryptocurrency activities, which have been subject to regulatory uncertainty. The OCC is the oldest regulator of banks in the U.S., and the agency’s actions in 2021 have been groundbreaking for crypto banking and businesses. However, the OCC’s position on the assets could sway as they experience leadership changes.
Crypto transactions would be subject to anti-money laundering reporting
On January 1, 2021, the U.S. Congress enacted the Anti-Money Laundering Act of 2020. This gave the Treasury Department the power to define cryptocurrency as a monetary instrument, requiring certain crypto transactions to be reported to federal regulators by law. The AML Act of 2020 treats crypto transactions similarly to traditional currency transactions, and businesses must regularly report them as part of their anti-money laundering program.
According to the Agency Rule List for Spring 2021, FinCEN, part of the Treasury Department, is scheduled to complete two sets of rules requiring anti-money laundering reporting for cryptocurrencies by fall 2021. This proposed regulation is based on the Treasury's claim that convertible virtual currencies pose a danger to national security and U.S. financial institutions.
FinCEN’s proposed rules include an amendment to the Bank Secrecy Act, requiring cryptocurrency exchanges and trading platforms to report customers who move at least $10,000 into a wallet off the exchange. The new regulations will also require recordkeeping for unhosted wallet transactions over $3,000.
Cryptocurrency crime and tax evasion: Congress’ infrastructure bill
Buried within 2,702 pages of a tremendous $1.2 trillion U.S. infrastructure bill was a massive tax authority provision regarding cryptocurrencies. Crypto was included as a means to raise $28 billion over the next 10 years. According to the proposed Infrastructure bill, companies that facilitate crypto trades will be required to report tax information to the IRS starting in the 2024 tax season (but why wait until then? Prime Trust’s partnership with Sovos makes managing your crypto taxes simple.) Currently, the IRS defines cryptocurrency as a property and requires U.S. citizens to pay capital gains tax when selling digital assets.
But it was the bill’s definition of a “crypto broker” that created controversy within the crypto community. The bill defined a crypto broker as “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” This language casts a net that could easily cover miners, developers, stakers and others. Miners, devs, and stakers do not have the customers or access to the AML and know your client (KYC) information necessary to comply.
After a week of debate in the senate (and over 40,000 calls to senators courtesy of the #DontKillCrypto movement) the amendment was shut down after failing to reach consensus on military spending. With the infrastructure bill moving forward to the House of Representatives, the community is still rallying to effect a change in language. On August 10, Republican Representative Tom Emmer of Minnesota spearheaded the latest effort to change the definition of crypto “broker” as it exists in the bill. Emmer and the bipartisan Blockchain Caucus aim to exclude software developers and validators from the regulatory scope.
Additionally, the Senate has just requested proposals with feedback for future crypto and blockchain regulation.
Amidst the new regulatory announcements in the U.S. regarding crypto, there has been no regulatory clarity provided surrounding cryptocurrency ETFs. In June 2021, the SEC postponed a decision to approve the VanEck Bitcoin Trust for the second time.
The delay was announced by SEC chairman Gary Gensler, who has been calling for more regulation of crypto exchanges. This is an appropriate response in light of the Colonial Pipeline attack last May, where the hackers were paid a ransom of $4.4 million in Bitcoin.
With regulatory agencies moving to enact frameworks for crypto trading, lending and DeFi platforms, it is only a matter of time that ETFs join the U.S. crypto markets and become accessible to investors.
Bonus: Will there be a government digital currency?
On May 20, 2021, Federal Reserve Chair Jerome Powell released a press release on future developments in the U.S. payments system. He discussed the development and issuance of central bank digital currencies, or CBDCs: "We think it is important that any potential CBDC could serve as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar, such as deposits at commercial banks.”
In May, an Economist article on the rise of e-money says that CBDCs like the "Fedcoin" have the potential to upend finance by shifting power from individuals to the state, bypassing lenders entirely. This is because a government digital currency could “let people deposit funds directly with a central bank, bypassing conventional lenders.”
Paying the price for crypto non-compliance
When it comes to efficiently running your business, it pays to comply. In the digital asset space, the costs of non-compliance can be unrecoverable. The consequences of non-compliance can range from monetary penalties to legal settlements, as well as a loss of reputation, credibility, and productivity.
August has been an active month for U.S. regulatory agencies, as companies like Poloniex and BitMEX have been ordered to pay fines, settle with agencies, and allow third-parties to conduct investigations.
On August 09, 2021, Poloniex agreed to pay $10.4 M to settle SEC charges. The SEC found Poloniex in violation of Section 5 of the Exchange Act between July 2017 and November 2019. During this time they offered trading crypto on its platform without registering as a securities broker.
On August 10, 2021, on behalf of the Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN) announced a $100 million enforcement action against BitMEX for violating the Bank Secrecy Act. BitMEX was also alleged to have conducted business with U.S. citizens, violating the Commodity Exchange Act by facilitating trades or process swaps without approval or registration from the CFTC.
As one of the leading cryptocurrency and derivative trading platforms, BitMEX operated for more than six years without the implementation of compliant anti-money laundering and customer identification procedures.
Prime Trust takes the complexity out of crypto regulatory compliance
Understanding which regulations are required for your business to safely and compliantly offer crypto can be complex. Prime Trust’s industry leading compliance program gives companies the ability to verify and onboard new users safely, reliably, and quickly. But for companies who want to integrate crypto assets into their offerings, compliance is just one important piece of the infrastructure puzzle. Together with Plaid, we’ve put together a checklist that explains what you need in order to offer crypto easily and compliantly.
Prime Trust specializes in offering the best-in-class Compliance API, which is used by industry-leading institutions and crypto companies. Prime Trust’s partners and customers trust us to help them smoothly integrate with broader financial ecosystems, align their businesses with the marketplace, and provide infrastructural stability via payment rails.
Backed by cutting-edge tech and global databases including criminal watchlists and transaction monitoring systems, Prime Trust’s compliance solution tracks changes made in the regulatory landscape and updates its automated reporting for your business accordingly. Prime Trust’s KYC programs run checks on US and international customers while abiding by country-specific laws and regulations to onboard and maintain multi-jurisdictional clients for your business. We also hold our ISO/EDC 27001:2013 certification.
Compliance without the hassle is risk management, and a robust compliance procedure is an effective way to reduce fraud and protect your business and your customers. By implementing Prime Trust’s APIs and widgets into your platform, you can focus on innovating.
The information on this site is for general information purposes only and is not intended to serve as legal advice. Laws governing the subject matter may change quickly, you should consult with a licensed legal professional in your area for additional questions.