Greyscale scored a coup in its quest to get its spot Bitcoin ETF approved; on August 29, 2023, the crypto asset manager won an appeal against the Security and Exchange Commission’s blocking the process.
Indeed, the speed at which cryptocurrencies have proliferated has far outstripped the ability of governments and bureaucracies to assess and regulate them, and regulators are only now beginning to catch up.
It has only been in the last couple of years that legislators in the U.S., Europe, and elsewhere in the world have started to wrestle with the many complicated questions related to cryptocurrency regulation. In part, this may be because government agencies and lawmaking procedures tend to move slowly. But it is also difficult to properly assess cryptocurrencies through the lenses of traditional finance—it is even challenging to determine which agencies may be responsible for their oversight. Below, we take a closer look at some of the major players to emerge in recent years in worldwide cryptocurrency regulation.
U.S.: Securities and Exchange Commission
The Securities and Exchange Commission (SEC) is a federal agency of the U.S. government aiming to enforce securities law, prevent market manipulation, and protect consumers. Whether the SEC has the jurisdiction to oversee cryptocurrencies at all—whether they should be classified as securities, or if they are more accurately labeled as commodities, currencies, or something else—is a major and ongoing question. SEC Chair Gary Gensler has voiced the opinion that most cryptocurrencies should be classified as securities based on the Howey Test.
A lack of clarity on classification has not prevented the SEC from intervening in ongoing cryptocurrency issues in the meantime, when possible, often by regulating cryptocurrency platforms rather than tokens themselves. In particular, the SEC has recently set its sights on major crypto exchange Coinbase, issuing a notice in March 2023 that it had identified possible U.S. securities laws violations. It has also targeted Kraken, Genesis, Gemini, and FTX, among other companies in the crypto space.
U.S.: Commodity Futures Trading Commission
Another federal agency in the U.S. that may have a stake in crypto regulation is the Commodity Futures Trading Commission (CFTC). The CFTC has a similar role as the SEC, but its focus is derivatives markets. According to the agency itself, the CFTC oversees crypto regulation ”when a virtual currency is used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce.” As derivatives trading related to crypto continues to gain in popularity, this means the CFTC’s jurisdiction may be implicated more frequently. More broadly, if cryptocurrencies are considered to be commodities rather than securities, they would generally fall under the scope of the CFTC. Since 2015, the CFTC has asserted that most virtual currencies are, in fact, “properly defined as commodities.”
U.S.: Internal Revenue Service
The Internal Revenue Service (IRS), the federal agency tasked with collecting taxes, also has a stake in the cryptocurrency classification conversation. The IRS considers crypto tokens to be neither securities nor commodities, but rather “property.” Under this classification, the IRS argues that cryptocurrencies are assets subject to capital gains taxes when investors hold them for more than a year and gains are realized. Under this classification, the burden on even casual crypto investors to maintain extensive records for tax-keeping purposes is significant.
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U.S.: Other Agencies
The SEC, CFTC, and IRS are the major federal agencies jockeying for cryptocurrency regulation authority in the U.S., but there are others as well. These include the Office of the Comptroller of the Currency (OCC), which oversees federal banking and, in the process, fintechs and other startups related to crypto. The Federal Trade Commission (FTC) has jurisdiction over fraud and misrepresentation in other financial matters that may overlap with crypto. And the Financial Crimes Enforcement Network (FinCEN), responsible for regulating money service businesses, has anti-money laundering requirements for exchanges and digital wallet providers.
U.S.: Senators Lummis and Gillibrand
In June 2022, U.S. Senators Cynthia Lummis and Kirsten Gillibrand introduced a legislative proposal aiming to create a full regulatory framework governing cryptocurrencies, among other things. The Lummis-Gillibrand Responsible Financial Innovation Act, the draft of which was recently updated in 2023, aims to “step in to protect consumers and root out bad actors, while also creating a transparent and accountable market,” according to Sen. Gillibrand. The Act would specify a classification called “ancillary assets,” for assets not representing debt or equity but which are stewarded by a company or management team. These assets would be commodities but would also have obligations to make disclosures to the SEC.
Lummis and Gillibrand’s framework, if adopted, would provide clarification around the regulation of stablecoin providers, accounting for customer assets, and taxes for crypto firms. It would also establish certain consumer protection measures.
U.S.: Senators Stabenow and Boozman
Also in 2022, Senators Debbie Stabenow and John Boozman introduced an alternate bipartisan bill aiming to establish oversight for cryptocurrencies. The Digital Commodities Consumer Protection Act would authorize the CFTC to “regulate the trading of digital commodities” through “consistent, rigorous rules for all market participants.” All digital commodity platforms would be required to register with the CFTC, to prohibit certain abusive trading practices, to offer transparency about conflicts of interest, to maintain robust cybersecurity, and more
Europe: EU Parliament
In Europe, the single biggest player in the crypto regulation space is the European Parliament. This body was responsible, in April 2023, for approving the first comprehensive regulatory package worldwide for the cryptocurrency industry. The legislation, known as Markets in Crypto Act, or MiCA, aims to reduce consumer risk and hold providers liable in case of the loss of investor assets. Under MiCA, the European Parliament requires exchanges, token issuers, and other crypto participants to maintain transparency, disclosure, and security measures.
Specifically, MiCA authorizes the European Securities and Markets Authority (ESMA) to ban or restrict cryptocurrency platforms and exchanges that are in violation of the rules to protect consumers. MiCA’s regulations will come into effect over the coming months and aim to consolidate and streamline patchwork regulations which had previously existed across different member states of the European Union.
Europe: Financial Conduct Authority
In the U.K., the primary body overseeing crypto is the Financial Conduct Authority (FCA). The FCA announced in February 2023 plans to provide “robust” regulation of crypto activities in an effort to protect consumers and in a way “consistent with its approach to traditional finance.”
The FCA aims to make crypto trading platforms responsible for maintaining fair and robust standards, to provide rules for financial intermediaries and custodians in the crypto sphere, and will introduce a time limited exemption for authorized crypto asset firms when it comes to promotions of tokens.
Regulation of crypto in the U.K. is in a transitional phase, as Rishi Sunak, prime minister since late 2022, was a strong advocate of making the U.K. a worldwide crypto technology and AI hub prior to his election to that position.
Asia: People’s Bank of China
In China, the People’s Bank of China has adopted one of the toughest stances globally on cryptocurrencies. In 2017, the government bank shut down local Bitcoin exchanges. In 2021, it banned all financial and payment companies in the country from participating in the crypto ecosystem in any way, effectively banning cryptocurrencies themselves in the process, despite the fact that it is legal for individuals to hold crypto in the country.
Asia: Financial Services Agency (Japan)
The Japanese Financial Services Agency (FSA) oversees cryptocurrency in the country as a result of the Japanese Payment Services Act. Exchange providers are required to meet anti-money laundering and terrorism funding obligations. However, otherwise Japanese regulators have been quite open to cryptocurrencies, especially compared with some other Asian countries. Cryptocurrencies are classified as a type of money and legal property in Japan.
Asia: Financial Services Commission (South Korea)
The primary regulator of cryptocurrencies in South Korea is the Financial Services Commission (FSC). Since the election of president Yoon Suk-yeol in 2022, the FSC has endeavored to create a sweeping Digital Asset Basic Act, expected to be revealed later this year. Part of the reason for the urgency of the Act may be related to the collapse of Terra, the Korean firm which imploded in 2022 and created the failed Luna and TerraUSD tokens.
Worldwide: National Banks
In many other parts of the world, central or national banks have taken a role in regulating or even issuing crypto. In Brazil, for example, the central bank launched a pilot project to create a digital version of the real to be made available to the public by the end of 2024. In India, the Reserve Bank of India made a move in 2018 to prohibit banks from offering services to any crypto firms, but this was later overturned.
