Today, cryptocurrencies feature prominently in world economies due to unique attractions, such as borderless financial connectivity, low fees, and blazing-fast transactions.
These attractive offerings fuel its widespread adoption, forcing governments to rethink rules on assets, money, and related financial concepts. However, many countries struggle with situating the nascent blockchain use case in their broader financial framework or how to regulate it effectively.
In the United States, the regulatory framework is murky due to the unavailability of crypto-focused statutory instruments to guide the space.
Consequently, government agencies strive to outcompete one another to control key areas of the evolving market while federating states take different policy directions. The U.S. is not alone in this dilemma – other countries, such as China and the European Union, suffer the same fate.
The pressing need for focused regulation cannot be overemphasized in light of unique crypto use cases. Examples include DeFi lending, which allows users to lend money as they would on traditional financial platforms.
Online gaming is another common use of crypto, as gamers can access their favorite games, including live dealer options and jackpot slots, without sharing too much personal information.
When enjoying a live casino with Litecoin payment options, players can enjoy Litecoin’s affordability and speed. Also growing in popularity is the crypto marketplace, where goods and services can trade hands using only crypto.
Putting rules in place helps forestall chaos, manipulation, and rife unfair practices.
Efforts of Regulatory Agencies on Cryptocurrencies
Regulatory agencies such as SEC, CFTC, and FinCEN have taken center stage in crypto regulation in the U.S., with clashing activities due to an absence of statutory guidance on who should regulate what aspect of the industry. Here’s an outlook on policy directions by these bodies in the crypto space.
Securities and Exchange Commission (SEC)
The SEC has the loudest voice regarding crypto-currencies in the U.S. as it is empowered to release rules that regulate fair and orderly practices from participants in the securities market, including executing court pronouncements.
The SEC has left crypto regulation open, with no specific policies tailored toward it. Instead, it applies existing rules to the crypto market to ensure no chaos, fraud, or manipulation occurs.
One critical debate that keeps coming up is whether crypto assets qualify as security, commodity, or currency.
The SEC insists that they are security—except for Bitcoin, Ethereum, and a handful of others—and mandates their registration. However, this is being resisted as it removes crypto’s appeal of decentralization, which fuels its widespread adoption.
Commodity Futures Trading Commission (CFTC)
Since there’s no clear-cut authority regulating cryptocurrency, the CFTC struggles with the SEC in the regulation of the market, resulting in positions that leave project backers needing clarification about which agency to knock on its door.
Generally, the CFTC is empowered to regulate derivatives and futures trading of specialized tokens such as Bitcoin and Ethereum.
However, with the unsettled debate on whether crypto assets are commodities, currencies, or securities—a debate the securities side is winning—the CFTC currently has little to do with regulating space.
Financial Crimes Enforcement Network (FinCEN)
Per U.S. law, FinCEN is responsible for protecting the financial system by policing businesses and individuals linked to grave financial misconducts such as terrorism funding and money laundering.
In the crypto market, it regulates cryptocurrency assets to prevent terrorism financing by ensuring compliance with Anti-Money Laundering rules. This is essential due to the anonymous/pseudonymous nature of cryptocurrencies and the substantial losses incurred by enthusiasts over the years.
In 2023 alone, losses from crypto investment scams in the U.S. totaled $3.94 billion, evidencing the call for proactive crypto regulation from pro-regulation commentators.
Similar to the SEC, this agency also applies existing AML policy mandates to crypto projects such as risk assessment, Know-Your-Customer, suspicious activity reportage, and many more as a form of regulating activities in the crypto space.
Unsuccessful Crypto Lawmaking Attempts at the Federal Level
Over the years, U.S. politicians have made weak attempts to regulate aspects of cryptocurrency. Due to the lack of interest at the time of introduction, these bills do not meet the lawmaking hurdle.
In 2022, the Responsible Financial Innovation Act (“RFIA”) was introduced to clarify federal agencies’ supervisory roles in integrating digital assets and stablecoins into existing banking frameworks. Similarly, the Toomey Stablecoin Bill sought to regulate the payment of stablecoins and their issuance in the U.S.
Halfway into 2022, the Digital Commodities Consumer Protection Act (the “DCCPA”) was introduced to give the C.F.T.C. sole authority over digital commodity trading and platform regulation.
In July 2023, an updated version of the Digital Trading Clarity Act was floated to redefine securities and establish consumer protections in light of widespread blockchain company bankruptcies.
That same month, the Financial Innovation and Technology for the 21st Century Act (the “McHenry-Thompson Bill”) was introduced to fill gaps in digital assets and derivatives regulations.
States’ Approach to Crypto Regulation
The US federal government’s failure to institute cohesive crypto laws has forced several of the 50 states to go on a spree of their own by passing laws aimed at sanitizing stakeholders’ activities in the crypto and blockchain market as they deem best.
At this level of the federating structure, two approaches are commonplace. The likes of Wyoming, for instance, pass favorable crypto laws that exempt crypto projects from stringent state securities law and money transmission statutes, hoping to attract more investment and stimulate their local economies.
Wyoming became the first to recognize Decentralized Autonomous Organizations (DAOs) as an incorporated company. It also issued the first government-backed stablecoin propped by U.S. Dollar reserves. Neighboring Utah was also the first to allow payment to government agencies through digital assets.
On the other end of the spectrum are states like Florida, the District of Colombia, California, and New York, making it harder for blockchain companies to operate within their borders, requiring state-issued licenses for some players.
Bigger states with booming economies appear to clamp down harder on blockchain companies, while smaller states are positioning themselves as shelters for crypto projects.
Overall, the uncoordinated regulatory approach favors cryptocurrency use cases like sports betting, NFT trading, and offshore casinos, as project backers can experiment with little to no restrictions. At the same time, users pick whatever catches their fancy.