Are crypto assets commodities, securities, or currencies? Are crypto providers money service businesses (MSBs) who should be regulated like other financial services organizations?
On one level, these are existential questions about the role and future of crypto itself. On another, they’re practical regulatory dilemmas that have been at the heart of debates in the US Congress and the Biden administration over the last few weeks.
That’s because the issue of crypto regulation has been brought to the fore by the proposed $1trn infrastructure bill. To help fund the provisions of the bill, the US government is aiming to raise $28bn through tougher crypto reporting requirements.
One of the key issues debated in Congress this week was whether cryptocurrency providers can be regarded as brokers. The bill defines a broker as “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person,”. Under this provision, crypto gains would need to be reported in the equivalent of a 1099 form, used by the Internal Revenue Service (IRS) to report on income other than wages, salaries, and tips.
Some industry leaders and legislators felt this was too broad, and risked targeting miners, developers, and others who do not have access to the customer information needed to comply. A bipartisan amendment, supported by Treasury Secretary Janet Yellen, which would have excluded validators like miners and stakers was rejected by the Senate. Commenting on the failure to pass the amendment, Senator Pat Toomey argued: “There is nobody that disputes that there is a problem here. We’re going to ask these people to provide information that they don’t have”.
Although the bill has cleared the Senate, it must still pass the House of Representatives, meaning there are still opportunities for the provisions on crypto regulation to be amended. It’s also likely that Biden will only sign the bipartisan bill when Congress has also acted on a larger package being processed through budget reconciliation, meaning it could be months before any of the new regulations become law.
The debates over how to regulate crypto in the infrastructure bill reflect wider fragmentation across the US financial system. Much depends on how crypto assets are defined. The Securities and Exchange Commission (SEC) has oversight of crypto assets that it considers securities. Its chief, Gary Gensler, has already asked Congress for more resources to police many of the 1,600 tokens with a market capitalization of over $1m that his team believe count as securities, but don’t follow the rules.
In other areas, such as bitcoin exchange-traded funds (ETFs), the SEC has yet to decide the conditions under which it would approve their use. For platforms engaged in crypto trading, lending, and areas of decentralized finance (DeFi), Gensler has indicated his team will need additional powers from Congress.
While these debates are ongoing, crypto firms are still being fined for a lack of transparency with regulators on the services they offer. On August 9th Poloniex LLC, an unregulated cryptocurrency exchange was fined $10m for not registering its operations with federal regulators.
It’s critical for companies operating in the crypto space to deploy compliance tools and technologies that are both comprehensive and transparent. With regulatory scrutiny of crypto assets only set to get tighter, to avoid fines stronger relationships with regulators and detailed reporting will be essential.
We have guides available on crypto regulations in 12 countries/regions around the world, which you can read here.