Explaining Regulatory Progress and Trends in the U.S. Cryptocurrency Industry

U.S. regulators are tightening cryptocurrency regulations and will require more documentation and information from cryptocurrency industry participants under the constraints of anti-crime and anti-money laundering laws.

Written by Chen Cui, working at HashKey Capital Research

Reviewed by Chuanwei Zou, Chief Economist, Wanxiang Blockchain

Source: HashKey Research

The importance of regulation in the nascent industry of cryptocurrencies cannot be overstated, especially after the industry has been growing wildly for several years and cryptocurrencies have become a part of the market that cannot be ignored. The scope and intensity of regulation of cryptocurrencies needs to be very careful, as cryptocurrencies have always emerged alongside blockchain technology, which has been touted as the next generation of Internet technology. Too much regulation can inhibit technological innovation, while lax regulation can affect the financial stability of the country or even the world. Influenced by the origins of Bitcoin and the development of Internet technology, many cryptocurrency projects were born in the United States or Europe, and the regulatory strategies in these two places are often discussed and have become the guideposts of the industry’s development. This article focuses on the progress and outlook of U.S. regulatory policies, and analyzes the possible regulatory policies faced by participants in the U.S. cryptocurrency industry based on the past measures of U.S. regulators on cryptocurrency regulation, as well as their recent statements to the public.


The cryptocurrency industry has only been around for a decade or so, and is still in a phase of rapid development, with innovative technologies and concepts constantly being updated, such as smart contracts, PoS, ICOs, forks, IEOs, DeFi, and so on. Cryptocurrencies are issued in decentralized blockchain networks, which does not mean that they can grow without borders and free from regulation. The industry is changing rapidly and there is an equal need for regulation to keep pace with them, but the reality is that regulatory policy has been lagging behind technological advances, and even many cryptocurrency-related businesses are still in a state of non-regulation.

Regulation is likewise an important part of the cryptocurrency industry, with each policy enacted both limiting the boundaries of business development and expanding the size of compliant projects, in many cases even deciding their fate. This simultaneously requires careful decisions on regulatory solutions; too much restriction can stifle innovation and too much leniency can lead to chaos in the industry, so the balance between encouraging innovation and maintaining financial stability is the main issue that regulation has to face. One of the solutions to this problem is to determine the regulatory strategy by project size. The regulator will determine the size and impact of the project in advance and adopt different regulatory strategies for projects of different sizes. Tighter regulation is used for projects with larger operations, while smaller projects are relaxed. This is also evident in the actions taken by the latter regulators, which prioritize the regulation and punishment of projects with large volumes.

In the U.S. legal system, there are no specific regulations that can be followed for most cryptocurrency-related businesses to refer to. In general, U.S. regulators recommend to refer to the “three same” principle to regulate them, i.e. “same business, same risk, same rules”. That is, if there is no cryptocurrency-specific regulation, the regulatory solution is to find an existing bill for the combined business and regulate it by applying the requirements of the existing bill. For example, when cryptocurrencies are issued, if the tokens are classified as securities, they are regulated by the Securities and Exchange Commission, and there are disclosure requirements for the issuer.

The U.S. regulatory agencies are independent of each other and have their own regulatory areas based on their functions, and the different businesses involved in the cryptocurrency industry fall under the regulatory scope of different agencies. Some of these agencies have issued specific bills or guidance for cryptocurrencies, while others are still referring to previous legal requirements. One of the more vocal about cryptocurrencies is the U.S. Securities and Exchange Commission (SEC), which is responsible for the supervision and regulation of the securities industry and is an independent agency directly under the U.S. federal government. The process of issuing cryptocurrencies is similar to issuing securities, so the SEC is very concerned about the cryptocurrency space. The U.S. Commodity Futures Trading Commission (CFTC), also an independent agency, is responsible for the regulation of the U.S. commodity futures and options markets. For example, once Bitcoin and Ether were classified as commodity properties, the futures trading platforms involving them fell under the CFTC’s jurisdiction. The U.S. Internal Revenue Service (IRS) is part of the U.S. Treasury Department and provides tax-related services and addresses tax evasion issues. The IRS will advise on the taxation of cryptocurrencies, given that the purchase and sale of cryptocurrencies involves the growth of personal income. The Office of the Comptroller of the Currency (OCC), also part of the U.S. Department of the Treasury, provides advice on bank-related cryptocurrency operations, including the use of blockchain and stablecoins as settlement facilities in the financial system. The U.S. Financial Crimes Enforcement Network (FinCEN), also part of the U.S. Treasury Department, monitors the possible use of cryptocurrencies for criminal purposes and often makes requests to businesses involved in cryptocurrency operations. The U.S. Department of Justice (DOJ) enforces the law in cases of violations involving cryptocurrencies. In addition, various state government agencies are involved in the regulation related to cryptocurrencies, such as the New York Department of Financial Services (NYDFS).

Explaining Regulatory Progress and Trends in the U.S. Cryptocurrency Industry

Current Measures Taken by U.S. Regulators on Cryptocurrencies

With the exception of joint actions against certain criminal acts, in general U.S. regulators are still acting individually on the cryptocurrency industry in their respective areas, and in some respects, there are competing regulators. Below is a summary of the measures that have been taken by each regulator, which helps us to analyze the actions that regulation may take in the future.

U.S. Securities and Exchange Commission (SEC)

The SEC’s regulatory authority is in the area of securities, and cryptocurrencies are subject to SEC oversight if they have securities attributes, or if they trade in tokens that have securities attributes. the SEC issued regulatory guidelines for blockchain tokens in April 2019, using the Howey test to classify cryptocurrencies to determine if they have securities attributes. Currently, all tokens are judged to be potential securities, except for Bitcoin and Ether and stablecoins, which are clearly non-securities based tokens.

More than a dozen projects have been prosecuted and punished by the SEC for illegally issuing securities, especially those with large financing and high market capitalization, such as EOS, Tezos, Ripple, etc. Ripple is still in the process of dealing with the SEC, and the token issued by Gram, also known as Telegram, was directly suspended after being regulated by the SEC. STO (Security Token Offering) is a scheme for issuing security-based tokens, mainly through the securities offering exemptions to omit the IPO process, such as Reg A+, Reg D, Reg S. These exemptions include the size of the offering, qualified investors or the requirement not to sell to US investors for one year. These exemptions include the size of the offering, the requirement for qualified investors or the requirement not to sell to U.S. investors for one year. For reference, Reg D and Reg S offerings are not subject to SEC review and approval, but are required to be reported to the SEC.

The SEC is also responsible for reviewing applications for cryptocurrency ETFs, and to date, more than a dozen ETF applications have been unsuccessful. Less risky cryptocurrency trusts have been approved by the SEC, such as Grayscale’s GBTC and ETHE, both of which are SEC-reported products, and GBTC’s redemption feature, which was shut down after being sanctioned by the SEC. In addition to this, the SEC is also looking at the regulation of cryptocurrency trading, with the Digital Commodities Trading Act of 2020 referring to compliance with securities laws when trading digital commodities. Compliant cryptocurrency exchanges also make careful choices when selecting the types of tokens to trade, avoiding possible securities-based tokens.

U.S. Commodity Futures Trading Commission (CFTC)

Cryptocurrencies that are classified as commodity properties fall under the regulation of the CTFC, particularly as it relates to the regulation of cryptocurrency derivatives exchanges. Cryptocurrency derivatives exchanges in the U.S. require CFTC approval and a Derivatives Clearing Organization license (DCO) and a Designated Contract Marketplace license (DCN).The CFTC approved cash-settled bitcoin futures for the Chicago Board of Trade (CME) to go live in December 2017 and ethereum futures in February 2021. Bakkt was approved in September 2019 for physical delivery of bitcoin futures contracts.

In September 2020, members of the U.S. House of Representatives introduced the Digital Commodities Trading Act, which expands the scope of the Commodities Trading Act to become the CFTC’s reference regulatory framework. Exchanges registered with the CFTC are subject to requirements including exchange information reporting, conflicts of interest, minimum capital requirements, cybersecurity, and segregation of user assets. Exchange registration with the CFTC takes precedence over registration with states and territories, which can save compliance costs. Exchange registration is voluntary, although registration is highly recommended.
The CFTC takes action against exchanges that conduct business illegally in the U.S. BitMEX was investigated and shown to have been providing services to U.S. residents. in October 2020 the CFTC filed a lawsuit against BitMEX for failure to register as a Futures Commission dealer, failure to register as a designated contract and offer illegal futures, failure to KYC users, etc.

Internal Revenue Service (IRS)

The IRS focuses on cryptocurrency-related tax matters and issued cryptocurrency tax guidance back in 2014 to explain how income related to cryptocurrencies is taxable, where income from cryptocurrency-related transactions, mining, etc. is taxable. 2019 IRS updated the guidance issued in 2014 to add new requirements regarding forks and short sales The IRS will also use interviews, searches, social media, and transaction records such as bank, credit card, and Paypal records to investigate whether users appear to be evading taxes.

The IRS has added a new question to the 2020 tax return asking whether the taxpayer traded in or purchased “virtual currency” including digital currency and cryptocurrency during the year, but this question is not tax related. The IRS is still updating its guidance on the taxation of cryptocurrencies and in April 2021 added the case of how bitcoin forked coins are taxed, where the taxpayer is subject to tax under Part 61 of the Internal Revenue Code, and in calculating the taxpayer’s income from the forked coins, if the bitcoin was initially placed in escrow on a centralized exchange and the taxpayer did not receive the forked coin airdrop at the moment of the fork, then the tax is calculated as if the exchange distributed it to the taxpayer The tax is calculated the moment the forked coins are distributed to the taxpayer.

Office of the Comptroller of the Currency (OCC)

The OCC is the largest banking regulator in the United States, and Michael J. Hsu was appointed as the new head on May 10 of this year. In his inaugural address on May 19, he stated that he would review unresolved matters, including issues related to cryptocurrencies, so there could be a policy turnaround.

The policy direction of the OCC in 2020 under Brian Brooks has been positive for cryptocurrencies, including allowing U.S. banks to host crypto assets and reserves of stablecoins and allowing U.S. banks to run blockchain nodes and use stablecoins for payments. However, the blockchain nodes here do not refer to common chains that do not require a license, but to licensed chains that require certification, and stablecoins refer to stablecoins that meet regulatory scrutiny. In addition to this, the OCC is committed to promoting regulatory harmonization at the federal level and the expansion of banking by cryptocurrency companies in 2020. Cryptocurrency payment companies can apply for a national trust bank license, after which they do not need to apply for separate licenses in each state. Once licensed, cryptocurrency banks can offer cryptocurrency-related businesses, such as payments, providing a regulatory framework as well as convenience for fintech startups.

U.S. Financial Crimes Enforcement Network (FinCEN)

FinCEN focuses on aspects of preventing terrorist financing and anti-money laundering related to cryptocurrencies, first issuing guidance on managing, using or trading cryptocurrencies in 2013. Cryptocurrencies are referred to here as convertible virtual currencies (CVCs) because they can be exchanged for real money. When engaging in CVC-related business, one needs to register under FinCEN for a Money Services Business (MSB license) and keep and report records to comply with anti-money laundering and counter-terrorist financing regulations. Ripple Labs was sued for not registering with FinCEN when it launched XRP in 2015. And these MSBs are required to comply with FinCEN regulations regardless of where they are based. As a result of this regulation, FinCEN suspended access for U.S. users and reopened the FinCEN U.S. exchange.

In 2019 FinCEN issued a guidance on CVCs, reminding some businesses engaged in related businesses that they need to register MSBs or they will violate the Bank Secrecy Act (BSA). If an exchange sends more than $3,000 in cryptocurrency to an individual wallet, it would need to verify the name and address of the non-custodial wallet user. FinCEN’s initiative brings cryptocurrencies closer to the regulation of bank accounts, and FinCEN has also proposed changes to the BSA that would make cryptocurrency accounts a reportable type of account.

U.S. Department of Justice (DOJ)

DOJ is responsible for law enforcement and crime fighting in the United States and is active in cases of cryptocurrency-related violations. For example, the infamous Dark Web Silk Road, where DOJ seized $1 billion worth of bitcoin, was the largest single case involving cryptocurrencies. In the case of BitMEX’s violation of anti-money laundering laws, DOJ brought criminal charges against its founder. in October 2020 DOJ released its enforcement framework for cryptocurrencies, which is divided into scenarios for the illegal use of cryptocurrencies, the current enforcement framework in place, and a look at the future. It is clear that law enforcement agencies can prosecute any illegal conduct related to cryptocurrencies, including various fraud and other criminal charges. Regulations that can be referenced include the Bank Secrecy Act for anti-money laundering and anti-terrorist financing, and the Securities Act for securities fraud. The approach concludes with a call for global agencies to work together to ensure that cryptocurrencies are not used in illegal platforms, and encourages jurisdictions to adopt a consistent regulatory approach.


The U.S. financial regulatory system is divided into federal and state levels, and in addition to the aforementioned federal regulators, state regulators also have the power to regulate the cryptocurrency industry at the state level, which can have an impact on the industry. BitLicense, the regulatory framework related to cryptocurrencies, is one of the most stringent regulations for cryptocurrency regulation in the U.S. states, and NYDFS was the first state to officially launch a Bitcoin regulatory document.

Regulatory Approach to Cryptocurrency Industry Participation Pro

Cryptocurrency Issuers

There are currently two options for issuing tokens in the U.S. in compliance, one is to issue tokens that will not be deemed securities by the SEC, and the other is to register as an STO under the SEC and issue security-based tokens. In the first scenario, the cryptocurrency would have to pass the Howey test, which is a very strict requirement for cryptocurrency projects, and if the crowd has invested in the same project and expects to make a profit that does not require the investor to operate, the cryptocurrency issued in this case would be regulated by the SEC. STOs allow for the issuance of security-based tokens through an exemption, but the same requirements under this exemption already meet the criteria for issuing securities, and STO applications are also subject to regulatory constraints and costs, so the STO format is not widely accepted.

This has ultimately led to many cryptocurrency issuers choosing to operate outside the U.S. or prohibiting U.S. persons from participating in the project, as the SEC has found. It was important not only to protect investors, but also to ensure that they were able to make investments. So SEC officials have come up with other alternative regulatory approaches, such as the Safe Harbor program proposed by Hester Peirce.

The key to the Safe Harbor 2.0 program is to encourage innovation while protecting users by giving preferential policy treatment to cryptocurrency projects in their infancy. peirce proposes that cryptocurrency issuance teams have three years to determine if the tokens they issue are securities, and if within that time the team builds a distributed network that can operate without the help of the team, then It can be judged to be a distributed project. After three years there will be a review by outside counsel and if the project does not meet the scale of being sufficiently distributed, it will need to register with the SEC. During this time the project would need to have a block browser to facilitate public viewing of transactions. If the Safe Harbor Act is passed, it will not only be helpful for emerging cryptocurrency projects, but it clarifies the regulation of already existing cryptocurrency projects. Already existing cryptocurrency projects that have reached a sufficient distributed scale would be exempt from securities regulation. The PoS transition for Ether 2.0 under the Safe Harbor Act would not affect the way ETH is regulated.

Stablecoin issuers

The Federal Reserve does not officially issue a unified U.S. dollar stablecoin, which is overseen by financial regulators. Gemini and Paxos, for example, are licensed by NYDFS as trustees and are allowed to issue stablecoins and reserve fiat and cryptocurrency assets. Or apply for registration as an MSB to issue stablecoins, with fiat assets held in trust in a qualified institution.

The OCC has also recently been focusing on this part of stablecoin issuance in an attempt to achieve regulatory harmonization at the federal level, allowing banks not only to provide custody services for stablecoin issuers, but also to become operational nodes for stablecoins and use the associated stablecoins for payments. And it supports cryptocurrency service providers to apply for a national trust bank license, which simplifies the process of issuing stablecoins.

Cryptocurrency Exchanges

Under current regulations, the operation of a cryptocurrency exchange requires registration for an MSB license under FinCEN and application for a Money Transmitter Licensing (MTL) license in each state, which allows for cryptocurrency coin trading as well as fiat currency trading. A BitLicense license from NYDFS is required prior to operating in New York State, and CFTC approval is required for contract trading services for Bitcoin or Ether. If an exchange goes live with tokens that have securities properties, they will also be regulated by the SEC. Cryptocurrency exchanges in the U.S. will also need to work with the IRS to provide them with user information to verify tax status.

In April 2021, the U.S. Congress introduced the Removing Barriers to Innovation Act of 2021, which focuses on SEC and CFTC jurisdiction over digital assets. If the bill passes, the SEC and CFTC will work together to establish a working group to more efficiently regulate cryptocurrency-related businesses in the U.S., including with respect to cryptocurrency exchanges. in May 2021, new SEC Chairman Gary Gensler stated at a hearing that bitcoin is a commodity and not within the SEC’s strictest jurisdiction. hinting at the need for increased regulation against cryptocurrency exchanges to avoid fraudulent or manipulative practices.

You can see that exchanges have been under fire from various regulators, for example Abra was fined by the SEC and CFTC in 2019, BitMEX was prosecuted by the CFTC and DOJ in October 2020, Cryptocurrency was investigated by the CFTC in March 2021, and Cryptocurrency was also investigated by DOJ and IRS in May. IRS in May. Meanwhile, Coinbase, the exchange registered in the U.S. with the most compliance licenses, is listed directly on NASDAQ, meaning that exchanges do not exist entirely in the dark in the U.S., but need to fully embrace regulation in order to list with integrity.

The recent attitude of regulators towards cryptocurrency exchanges can be judged by the fact that the regulation of exchanges will be further increased in the future, and the increasingly strict tax requirements for residents by the IRS and DOJ’s stance on fighting cryptocurrency crime means that exchanges will also have to work closely with regulators. Following the SEC Chairman’s statement, more targeted and strict requirements may be introduced for cryptocurrency exchanges in the future.

DeFi Business

The DeFi business is growing and updating at an extremely fast pace, which poses a significant regulatory challenge and is currently in a regulatory gap, involving not only coin offerings but also financial businesses that should be regulated. However, DeFi is different from traditional financial businesses in that it removes third-party intermediaries, which is the main focus of current regulatory policy. On top of that, the lack of an operator for DeFi regulation and the fact that DeFi does not control the accounts of its participants make it difficult to apply existing regulations to DeFi, which is now focused on the enforcement of the Anti-Money Laundering Act.

Brian Brooks, former head of the OCC, compared DeFi to autonomous driving, and traffic laws do not apply to autonomous driving, nor do current regulations apply to DeFi, a self-driving bank. Therefore a reasonable regulation needs to be developed specifically for DeFi.

Personal involvement

The Biden administration’s newly appointed Treasury Secretary Janet Yellen has said that cryptocurrencies have the potential to improve the efficiency of the financial system, but they can also be used to finance terrorism and facilitate money laundering, so it is important to look at ways to encourage their use for legitimate activities and reduce illicit ones. cyber threats from cryptocurrencies and ransomware.

Overall, there is a broad consensus among U.S. regulators regarding the use of cryptocurrencies for criminal violations, and scenarios where cryptocurrencies are used for money laundering, terrorist financing, and hacker extortion are areas of concern and areas that regulators are cracking down on. With this in mind, individuals are subject to strict regulatory constraints when trading and storing cryptocurrencies, such as the requirement to use a custodial wallet and KYC, and the reporting of personal information when large transactions are involved.

SEC Chairman Gensler discussed the issue of social media and market manipulation at the May 6 hearing, and the IRS raised the issue of social media monitoring to verify that users are not committing tax evasion. finCEN also highlighted the regulation of user wallets and transfers, in an environment where personal privacy may be violated.

Reflections and Summary

Overall, U.S. regulators are tightening cryptocurrency regulation and will require more documentation and information from cryptocurrency industry participants, including cryptocurrency exchanges and individual participants, under the constraints of anti-crime and anti-money laundering laws. Of these regulators, the OCC was the most aggressive under former head Brian Brooks, but policies on stablecoins and cryptocurrency payments may be tightened after the change of command to Michael J. Hsu.

The SEC is already working to address this issue, such as the Safe Harbor program, which exempts cryptocurrency issuers from securities law oversight for the first three years, with the requirement that they reach sufficient distribution after three years. For the cryptocurrency market as a whole, SEC Chairman Gary Gensler continues to express concerns about market manipulation, so cryptocurrency ETFs will remain difficult to pass in the short term.

There is a clear division of responsibilities and labor among U.S. regulators, with little coordination and cooperation, and even a competing relationship over regulatory authority, such as the characterization of cryptocurrencies as securities and commodities, meaning that they fall under the SEC and CFTC, respectively. There are also competing regulatory relationships at the state and federal levels, such as the OCC’s desire to issue a federal payment license for cryptocurrencies, which has been hindered by the NYDFS. The U.S. Congress has been working to break down this barrier by introducing the Removing Barriers to Innovation Act of 2021, which focuses on SEC and CFTC jurisdiction over digital assets, and the two parties will jointly establish a Digital Asset Working Group to move regulatory progress forward more quickly.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/explaining-regulatory-progress-and-trends-in-the-u-s-cryptocurrency-industry/
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