U.S. Cryptocurrency Regulations Are Ramping Up in 2020

Regulation 6 min, 48 sec READ

by Chris Madill

While the SEC and FinCEN promise changes to current crypto-regulations, presidential candidate Michael Bloomberg doubles down on crypto-reform.

Bitcoin and other crypto-tokens have long lived inside of a regulatory grey-area. Unable to fit into the traditional definitions set forth by financial, banking, and securities focused regulatory bodies, digital assets are in a constant state of regulatory uncertainty. There are many reasons why digital assets continue to confuse regulators in the U.S. and abroad, but the problem boils down to one issue - crypto/blockchain technology and its applications are still not fully understood.

As authorities continue to examine the complexities of digital asset technologies, U.S. regulators are showing that their understanding of the blockchain space is improving, announcing the potential for many new changes in 2020. While these changes are still yet to come to fruition, the announcements coming out of U.S. regulatory offices such as the SEC and FinCEN imply that 2020 will be a pivotal year for the regulation of all things crypto. 

The Regulation of Digital Tokens as Securities

Because of the nascent nature of blockchain technology, regulators are unable to succinctly define what the technology is used for now, or what it could be used for in the future. At present, many blockchain projects who hope to utilize “utility tokens” on their networks to fuel decentralization face strict securities laws imposed by regulators like the US Securities and Exchange Commission (SEC). Despite the fact that many tokens being developed today are not, nor ever will be, intended to be used as securities, securities laws are imposed on any token “sale” or “offering” until a token is proven to be used only for utility purposes. This makes the process for would-be decentralized network developers painstakingly complex, and in many cases, virtually impossible from a compliance standpoint - especially at the beginning of a project, when the decentralization of these newly-created networks is low. 

Whether it is issuing tokens to be used in a network, launching an exchange-traded product based on bitcoin, providing custody for crypto assets, operating a broker-dealer that handles crypto transactions, or setting up an alternative trading system where people can trade crypto assets, our securities laws stand in the way of innovation. / SEC Commissioner Hester Peirce

Luckily, blockchain firms might be seeing a change forming on the horizon. SEC Commissioner Hester Peirce, or “CryptoMom” as she is affectionately referred to in the inner-circles of the cryptosphere, has formally proposed (Feb 6/2020) a change to the draconian rules currently used to govern digital tokens. In her proposal, Peirce suggested a “safe harbor” is needed to protect well-intentioned crypto projects during their development phase. 

It is important to write rules that well-intentioned people can follow.  When we see people struggling to find a way both to comply with the law and accomplish their laudable objectives, we need to ask ourselves whether the law should change to enable them to pursue their efforts in confidence that they are doing so legally.  / SEC Commissioner Hester Peirce

This safe harbor would give crypto-projects a 3-year timeframe in which to develop their platforms before a decision is made upon the nature of their native tokens. During this time, projects would be free to push forward on their development efforts, and refine their platforms through R&D, enabling projects to reach maturity without the burden of dealing with complex securities laws. 

There are circumstances in which the security label fits, but, in other cases, promises made about tokens increasing in value are nothing more than expressions of the hope that a network will succeed and be used by lots of people. I would argue that the analysis should focus on the objective nature of the thing offered to the purchasers. If the token seller is simply discussing the potential for an increase in the value of a token in the same manner that a seller of any number of other consumer products might appeal to purchasers’ desire to buy a product of lasting or even increasing value, is there an investment contract?  / SEC Commissioner Hester Peirce

Combating Money Laundering and the Financing of Terrorism

Because of the anonymous, easily concealable nature of crypto transactions, the technology is the perfect tool for the black-market transactions associated with terrorism and illegal practices. While the regulations needed to curb this illegal activity are still forming, many laws to date surrounding crypto-regulation have been focused on preventing illegal transactions. While many of the Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) rules used to govern cryptocurrency exchanges have slowed adoption in the U.S., these laws have not had a massively negative effect on the market. Still, there persists a worry within the crypto community that any newly enacted crypto-laws will damage crypto-valuations on the open market. 

In breaking news this month, The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has announced it is preparing to implement new regulations for cryptocurrencies. These new laws will be designed to curb the potential for use of crypto technologies by terrorists and criminal networks. U.S. Treasury Secretary Steven Mnuchin told Congress that FinCEN has been, "spending a lot of time on this," and many in the space are expecting significant changes to current crypto regulation. In defining why FinCEN is looking at implementing these changes, Mnuchin said:

 We want to make sure that technology moves forward but, on the other hand, we want to make sure that cryptocurrencies aren't used for the equivalent of old Swiss secret number bank accounts. 

It is impossible to say at this point if these new laws will include caveats to help foster a healthy and legitimate crypto-ecosystem, or if FinCEN will once again try to fit cryptocurrencies into a “one-size-fits-all” type framework. Undoubtedly, these new laws will likely put some amount of pressure on crypto-markets, as much of the space operates outside the realm of “visible” finance, and it is in FinCEN’s best interest to bring all crypto transactions into a more legitimate environment.

More Clarity Is Needed

It is obvious that the SEC and FinCEN are taking decidedly different approaches toward crypto-regulations, with the SEC aiming to relieve regulatory pressure on the space while FinCEN is looking to impose more. This is not a new state of affairs for crypto-regulation in the U.S., and traditionally, the left-hand of the law does not talk to the right when deciding “what to do about crypto”, but 2020 could yet prove to be a pivotal year for clarity amongst regulators.

Cryptocurrencies have become an asset class worth hundreds of billions of dollars, yet regulatory oversight remains fragmented and undeveloped. For all the promise of the blockchain, Bitcoin and initial coin offerings, there’s also plenty of hype, fraud and criminal activity. / Michael Bloomberg, FInancial Reform Plan

On February 18th, US presidential candidate Michael Bloomberg promised to create a new, cohesive legal framework to govern cryptocurrencies as part of his new financial reform plan. The proposal hints that Bloomberg’s administration would require financial institutions to record all crypto-transactions in a centralized database and to monitor risk exposure for consumers. In addition to greater oversight from financial institutions, Bloomberg also recommends creating a regulatory sandbox where startups can test their concepts, and regulators can examine the nuances of the technology. Finally, Bloomberg aims to provide “a clear regulatory framework for cryptocurrencies”, promising to clarify which regulatory bodies will be ultimately responsible for overseeing cryptocurrencies, and how the U.S. will tax cryptocurrency investments.

Bloomberg’s stance on cryptocurrencies is clear - he aims to bring the industry out of regulatory grey areas. Bloomberg is just one of many politicians (see Andrew Yang and Warren Davidson platforming on crypto reform ahead of this year’s elections, a sign that cryptocurrency regulation is becoming a hot topic for U.S. politicians in 2020. With politicians and regulators buzzing about upcoming crypto reforms, 2020 is shaping up to be the most definitive year in U.S. crypto regulations we’ve seen yet.