Crypto’s audacious defiance of conventional regulatory frameworks has stood out quite strikingly. This astoundingly daring nature has not been lost upon the likes of chairman Gary Gensler of the U.S. Securities and Exchange Commission (SEC). His agency and other regulatory bodies including the Commodities and Futures Trading Commission (CFTC) and the Department of Justice (DOJ) have harmonized efforts to frame policies for the now less unregulated, more central crypto domain.
Widespread enforcement activities are being seen directed at the leading crypto players and irrespective of the public standing these players boast. Such steps have often culminated in multi-million-dollar settlements. The strategies for these enforcement actions owe their existence to laws that are up to 90 years old. An unexpected aspect, given the natural anticipation of a fresh legislative wave focused on crypto and other digital assets.
As the regulators continue their quest for enforcement, interpreting existing laws ingeniously, two significant questions surface: What lies ahead and what will crumble first between our dated securities laws and the crypto industry?
Noting the regulators’ actions, an expansion of regulatory scope to include crypto wallets and digital asset transactions are likely the next targets. The increasing influence of this industry has driven traditional financial institutions into a conundrum as adhering to Anti-Money Laundering and Know Your Customer laws (AML/KYC) in the digital space presents a considerable challenge.
Coinbase, the crypto exchange, found itself at the receiving end of a Wells Notice by the SEC with the agency asserting that Coinbase’s Wallet service was operating as an unregistered broker, contrary to the Exchange Act. Coinbase contested that its wallet only provides software services and engaged in secondary market transactions solely, which did not comprise investment contracts, hence could not be securities.
Simultaneously, heightened scrutiny is expected to impact traditional financial institutions participating in digital asset transactions. Fulfilling AML/KYC obligations could be complex, cost-intensive, and time-consuming as they would have to rely significantly on third-party information. For instance, for flagging problematic transactions involving asset theft, external inputs such as cognizance of the theft, tracing of wallets/coins, repository maintenance for such information become critical and their decentralization complicates and escalates the cost of compliance.
The growing spectrum of crypto enforcement risks bamboozling institutions. Criticizing the lack of “regulatory clarity”, Brian Armstrong, CEO of Coinbase, conceded the possibility of relocation, if necessary, to cater to these regulatory demands. Is crypto thriving on ‘non-compliance’ or is it merely an unintended consequence of regulatory confusion?
As we wait for the rules of the game, investors and exchanges should ensure that their transactions align with the distinct interpretations of the federal securities laws and banking regulations as they apply to the crypto industry. Each transaction comes with unique regulatory hurdles birthed from the insistence of federal agencies on imposing laws, that were oblivious to the revolutionary technology of digital assets at their inception, on this rapidly evolving industry.
Source: Coindesk
