The U.S. Crypto Framework Begins to Change: A Special Report Update

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In June, the Thomson Reuters Institute and Thomson Reuters Regulatory Intelligence released a special report: Cryptos on the Rise, which examined the state of crypto assets, their risk and regulation, and how their impact and acceptance is evolving around the world. . The report included a compendium of crypto regulations country by country.

Since publication, a lot has happened in the world regarding crypto regulation, warranting a special recap of the report that focuses on U.S. regulation, ahead of a global update next year.

While the United States Securities and Exchange Commission (SEC) certainly plays a central role in regulating digital assets, the rules, guidance and enforcement actions taken by other authorities are already starting to take shape. For example, federal regulators have begun to stake out their territory to regulate digital assets while several states have moved ahead with their own laws. Like most US financial services regulations, there is significant jurisdictional overlap and the well-established concept of a “regulatory patchwork” is beginning to unfold for cryptos.

Several states and other federal regulators such as the Commodity Futures Trading Commission (CFTC) and the Financial Crimes Enforcement Network (FinCEN) of the US Treasury, the Office of Foreign Assets Control (OFAC) and the Office of the Comptroller of the Currency (OCC) are all moving forward to regulate cryptos in their respective areas of authority.

The White House is also considering extensive surveillance of the cryptocurrency market to combat ransomware and other cybercrimes. This push includes a planned international security meeting on the issue, and could result in an executive order. Capitol Hill lawmakers have also called for regulatory coordination.

Federal regulators call for crypto oversight

Indeed, the SEC went from not mentioning cryptos in its annual regulatory program in June to asking Congress for more resources and authority, while also announcing several enforcement actions. SEC Chairman Gary Gensler said the agency would work with Congress, the Biden administration and other regulators to close regulatory loopholes, saying the SEC has “taken and will continue to bring our authorities as well. far they would go “.

The SEC has brought several cases related to the offering and sale of unregistered securities offerings and other suspected fraudulent activities involving crypto assets. Unregistered securities assaults were brought against Blockchain Credit Partners and Poloniex, while a public dispute with the country’s largest crypto trading platform, Coinbase, grabbed the headlines after the company said the the SEC had warned her against launching its new loan product, which Coinbase then scrapped. Another noteworthy case involved UK-based Biotics Ltd., formerly Coinschedule Ltd., for failing to disclose the “anti-whistleblower” provisions of securities laws.

The CFTC intervened quickly several years ago to clarify its position on cryptos. In 2018, he defined cryptocurrencies, including bitcoin, as a merchandise subject to its jurisdiction. The CFTC, under the previous leadership of President Christopher Giancarlo, was considered perhaps the most crypto-friendly regulator for its approval of bitcoin futures trading in December 2018. Trading bitcoin futures on the Chicago Mercantile Exchange (CME) was considered a success. However, the CFTC has made it clear that its regulation only extends to derivative contracts and their trading activity on regulated exchanges, rather than the underlying digital assets.

An August execution settlement involving BitMEX, a cryptocurrency exchange and derivatives trading platform, resulted in a fine of $ 100 million. The case involved the cooperation of the CFTC and FinCEN to resolve civil charges that BitMEX was illegally operating a cryptocurrency trading platform to which participants in the US market had access, as well as related violations of the fight. against Money Laundering (AML) and other suspected compliance violations.

In January, the OCC issued an interpretive letter clarifying the power of national banks and federal savings associations to participate in Independent Node Verification Networks (INVNs) and to use stablecoins to conduct payment activities and other functions authorized by banks. The interpretive letter confirms the power of banks to connect to blockchains as validator nodes and thus make stable payments on behalf of customers.

Acting Comptroller of the Currency Michael Hsu told the Senate Banking Committee in August that the OCC is reviewing its crypto-related National Charter of Trust program, which he says has not been coordinated with all the “stakeholders”. Hsu raised the issue of establishing a “regulatory perimeter” and cited a lack of understanding and strategy to achieve it. He also said the agency updated the licensing framework for domestic banks and trust companies and interpreted crypto custody as part of banking.

OFAC published an updated notice in September on the risks of sanctions associated with facilitating ransomware payments using cryptocurrencies. On the same day, OFAC announced its very first sanctions involving a crypto exchange, designating SUEX OTC, SRO as a malicious cyber actor. More than 40% of SUEX transactions were associated with illicit actors, said OFAC. Consequently, any financial institution or entity that engages in transactions with SUEX may be subject to an execution measure.

US states take action

Several US states have been pioneers in the regulation and enforcement of crypto. Laws in several states are being enacted to require a license for money services or transmission companies.

States have also amended securities and banking laws to include crypto-related activities. For example, on June 10, the Texas Department of Banking authorized state chartered banks to provide virtual currency custody services to customers.

Other states have changed regulations for Money Service Businesses (MSBs) or money transmitters to include cryptocurrency transactions such as bitcoin. The Florida Office of Financial Regulation issued a notice in August citing a court interpretation that a state MSB license is required to sell virtual currencies in Florida. Since January 1, 2022, all sellers of virtual currencies must have applied for an MSB license with the State.

On the enforcement front, since July 2021, securities regulators in five states – Alabama, Kentucky, New Jersey, Texas and Vermont – have filed lawsuits against BlockFi, Inc. and its affiliates for loan and borrowing from interest-bearing cryptocurrency accounts. the accounts are unregistered securities violating state securities laws.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the principles of trust, is committed to respecting integrity, independence and freedom from bias. Thomson Reuters Institute is owned by Thomson Reuters and operates independently of Reuters News.

Todd Ehret

Todd Ehret is a Senior Regulatory Intelligence Expert for Thomson Reuters Regulatory Intelligence. He has over 25 years of experience in the financial industry where he has held key positions in trading, operations, accounting, auditing and compliance for brokers, asset managers. , private equity and hedge funds. Prior to joining Thomson Reuters, he was Director of Compliance and COO of a Registered Investment Advisor / Hedge Fund for nearly a decade.

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