What does mixed message of experts on crypto regulation mean to the investors? The regulations on cryptocurrencies imposed by the Securities and Exchange Commission or SEC seem to be greater than before and more of it appears to be imminent.
Whether it is good or for worse is a subject for debate but it seems that the scope for these regulations, along with its details and timing, all seems to be up in the air.
This has raised concerns among the crypto experts who have different takes on it.
After weighing in the pros and cons, the experts sent mixed messages which surely impacted the investors and the business as well.
Initially, cryptocurrencies were created to allow individuals and businesses to transact money easily and quickly without needing to go through the disadvantageous and hectic federal monetary policies.
However, now it is seen that the same government is more inclined to regulate it for reasons known not only to them.
These regulations, albeit a bit strict, are meant to protect the rights of the investors and consumers.
This regulation drive is initiated and handled by Gary Gensler, the SEC Chairman.
He said that it is good to invest in crypto but as of now there is not enough protection for the investors.
Therefore, it is time to protect the good faith actors and regulate this crypto market to prevent fraud, abuse, and scams that this market is known for and is so vulnerable to, he added.
If you are wondering what these regulations are about and what the experts have to say about them, here is an article that you should surely go through.
- What Does Mixed Message of Experts on Crypto Regulation Mean?
- Expert Comments
- About the Landscape
- Investors’ Appeal
- Operating Atmosphere
- Hype and Risks
- Other Challenges
- Probable Best or Worst Case Scenarios
- Visions and Actions of the Securities and Exchange Commission
- Rundown on the Proposals
What Does Mixed Message of Experts on Crypto Regulation Mean?
The regulations imposed on crypto by the SEC have put it in the center of attention.
Several experts and business school professors have mixed feelings about it and have ventilated their concerns for it as well on different platforms.
They say that these regulations are bound to have a serious impact on the crypto landscape, investors, and traders.
At the same time, they say that it will also pose significant challenges for the entire crypto industry as well as the government.
Even after all the regulations being imposed on crypto right now, one thing is as clear as sunshine.
There is nothing stopping this industry to grow, and grow at quite a rapid pace.
The popularity of crypto was always there but it was not before 2019 that it became mainstream.
Offering mind boggling returns, it has attracted even the most skeptical institutional investors which have in turn helped in enhancing the market value of crypto coins.
However, like it is for all types of successes, in crypto as well it came with a price.
The calls to regulate the industry now became very loud and clear and several governments of different countries started to look into this field as a threat or an opportunity, as the case may be depending on their perspective.
While China outlawed crypto trading since 2019 even being one of the biggest digital currency markets in the world, the US Treasury sanctioned a particular crypto exchange for facilitating ransomware payments for the first time.
New trading and tax rules were also included for the crypto industry in legislation Congress to help the IRS track down transactions that are liable for tax payments.
Seeing such movements, the SEC also thought of imposing some regulations on this industry and pushing them for greater enforcement.
However, here is what the crypto experts forecast regarding these regulations.
A crypto Sheriff and the existing partner at Paul Hastings worked previously at the Enforcement Division of the SEC as a senior trial counsel sees no limits to the jurisdiction of the regulation of the SEC on digital currencies.
He says that the SEC has implemented an age-old legal framework in this context.
For example, when Initial Coin Offerings or ICOs exploded in 2017, the then-Chair of the SEC Jay Clayton issued the DAO Report.
The particular report said all ICOs are securities because people bought them with intent to make profits and therefore these are all subject to securities laws and regulations.
This followed a series of pronouncements and lot of enforcement actions. All ICO token sales and offerings and even the companies brokering such transactions needed to be registered with the SEC if it is not exempted under specific conditions.
Their jurisdiction also included the people manipulating, misrepresenting, or touting impermissibly about the ICO tokens which put them within the crosshairs of the Enforcement Division of the Security and Exchange Commission.
However, during Clayton’s tenure, there were no specific characteristics formulated to determine whether or not a digital asset fell into the jurisdiction of the SEC.
Today, the SEC Chair Gary Gensler seems to be following the same route even more aggressively making it seem like a land-grabbing drive. This has left people scratching their heads and raising eyebrows.
Gensler corroborated with the comments of Clayton wholeheartedly and unsurprisingly agreed that all ICOs are securities.
However, he went a step further and said that Bitcoin and all other cryptocurrencies including stablecoin and other digital currencies should comply with the federal securities laws as well.
With an eye on the expansion of the jurisdiction, Gensler wanted more from the Congress and the Congressional authorities.
This triggered the alarm bell because he did not say anything about the technical aspects involved in crypto that may have helped it to fall outside the description of a security.
Instead, he moved in the opposite direction and claimed that more regulatory measures should be imposed.
All this resulted in a lawsuit between Ripple and the Commission.
The Commission seems to be fighting tooth and nail against the deposition of the head of the Division of Corporation of Finance, William Hinman, who said Bitcoin and Ethereum are not securities.
This means that the court may eventually recognize the limits of SEC jurisdiction soon even if the SEC refutes it.
A partner at Hogan Lovells who has counseled former House Majority Leader Eric Cantor on matters related to policy and outreach, feels that the regulations of the SEC is pushing the crypto industry to a completely new territory.
With the regulators as well as the politicians now involved, a House Committee Chair launched a working group for crypto.
This working group gives the SEC new authority to regulate crypto coins as securities.
Also, the infrastructure bill passed by the Senate includes the requirements for crypto tax and reporting.
There have been a lot of regulatory activities around digital assets which anyone dealing with this specific class of assets needs to pay close attention to.
The Committees of jurisdiction in the Congress seems to be more skeptical of cryptocurrencies and broadly support robust federal regulations that will eventually put up stronger guardrails.
The Cryptocurrency Working Group got engaged with crypto experts and regulators to understand more about this unregulated industry.
They, along with Senator Elizabeth Warren and others showed their concern over it and wanted an increased regulation and supervision on crypto.
They felt that the unregulated market can cause real and irreparable harm to the consumers and this will continue to propagate if there is no effective regulation.
They thought that the SEC can close the existing gaps that leave the investors and consumers vulnerable to perils of this volatile and highly opaque market.
And therefore, they thought that the SEC needs more power and authority to regulate the market, which should be given to them.
Gary Gensler, the current SEC Chair, agreed to them and obtained additional authorities.
He did everything to ensure that the crypto platforms, the products and even the transactions do not fall between or through the regulatory cracks. He also asked for more resources for the same.
Cutler said that the SEC does not only consider all ICOs to be securities and should fall under federal securities laws but also thought that all crypto exchanges should be considered as securities and investment companies.
All investment vehicles along with the Exchange Traded Funds or ETFs should also fall under the Investment Company Act, they said.
However, Aaron expects the SEC to pursue their industry-wide regulation more thoughtfully and not simply promulgates policies and enforces them. Official guidance from the SEC is also expected to define and distinguish securities from pure digital assets.
An AML expert and director for NICE Actimize however has something different to say about the SEC regulations however.
He thinks that such regulations have been in place for some time now and such enforcements have made billions of dollars in fines.
He feels that these regulations are good because these alert the investors and the market about the risks involved in cryptocurrencies.
He also emphasizes the need to take specific precautionary measures to protect the investors and the institutions.
He said that it is quite surprising that the crypto has worked so well and has even been able to find a way to reach astronomical heights in spite of the regulations laid down by FinCEN since 2011 when it included virtual assets in the definition of MSBs or Money Services Businesses.
Further clarifying the definition of MSBs, FinCEN said in 2013 that anyone dealing with CVCs or Convertible Virtual Currencies should be considered as money transmitters and therefore should abide by the rules of BSA or the Bank Secrecy Act.
The same was said in the AML Act of 2020 which included cryptocurrencies within the BSA though there are no specific words like ‘digital currencies,’ ‘digital currencies,’ or even ‘cryptocurrencies’ included in its description.
Instead, it was stated in a broader sense referring to ‘any value that substitutes for currency.’
As a result of these regulations, enforcement actions started. In 2015, Ripple was caught for not registering itself as an MSB, in 2017, FinCEN fined $110 million against BTC-e for conducting criminal activities and operating without a license and in 2019, FinCEN charged a penalty against Eric Powers for violating the BSA registration, reporting, and program requirements willfully.
Also, recently in August 2021, the CFTC and FinCEN settled civil lawsuits against BitMEX crypto exchange for nearly $100 million.
Special focus is also given on AML regulations of late and for that recognized compliance teams and AML experts have been recruited.
Necessary checks are made on the onboard clients to monitor their activities by using advanced technologies.
So, where does the SEC go from here? The answer seems to be simple – additional enforcement actions and tighter controls will be implemented to ensure adherence to the SEC regulations and new regulations will evolve resulting in unprecedented fines.
Though there will be some unregistered service providers existing, due to such regulations the numbers will surely shrink.
Therefore, if the crypto industry does not abide by the regulations and strengthen their compliance programs, it will not only be detrimental for its growth but it will also result in huge monetary as well as non-monetary losses.
The industry may lose its reputation which is the key to unbeaten market adoption.
About the Landscape
The crypto landscape is much, much bigger than what it looks. This is because there are lots of crypto products that are small and are not currencies and therefore are not yet a part of conventional exchanges.
There are several crypto products that are just tokens and sometimes represent the ownership in decentralized and autonomous businesses.
These organizations share governance rights with the participants and reward them with tokens.
Add to that, there are also several tokens that are project specific. For example those tokens that are used in online games or among specific individual communities.
Then there are the NFTs or Non-Fungible tokens that are unique and used to represent ownership over digital artworks.
A huge amount of these tokens are mined every day by millions of users all over the globe which makes the crypto landscape really very large.
Therefore, when considered only in the currency point of view, the crypto market is just a drop in the ocean of several crypto and blockchain technology apps that you find today included in it.
There are lots of other different factors apart from the exceptional and unquestionable returns that the crypto market offers which appeal to the investors.
There are some real technology and infrastructure benefits that also appeal to the investors. Officially recognized crypto can help in making payments quickly and safely as well as used safely and securely to send government aids.
This is because a crypto transaction is frictionless and therefore it is easy to transfer and share value among people in a much more efficient way.
It can even work well in places where there are no effective and established consumer financial systems.
Therefore, it is the ability of crypto to do things that people could have ever imagined or could do in the market before that appeals to the investors, both individuals and institutional, to invest in it for both short term and long term.
Now, with the SEC imposing all types of rules and regulations on crypto you may wonder what type of an atmosphere it is operating in, whether it is operating in a rule-free ‘Wild West’ type environment or any other, as suggested by Gensler.
Well, it is hard to comment on the take of Gensler but it is true that the crypto environment does need some regulation to protect the rights of the consumers. However, the rules and regulations may not need to be as strict as they are now.
This is because the crypto exchanges are themselves trying out newer and better ways to protect them and their clients from stealing of funds by the hackers. Moreover, the advanced wallet technologies are much safer and secure than before.
Though there is a lot to be done to drive more consumers out of the equities trading and banking accounts, the crypto space itself is inclined to create a more protective environment for the consumers.
However, there are some external regulations required, as it is seen in other segments of the financial services industry, to prevent scams and financial crimes.
Hype and Risks
Ideally, the people from all over the world seem to have been caught up in the hype surrounding crypto and they do not really understand the type of risks they are getting into.
Add to that, there is also a lot of confusion among people regarding the idea behind cryptocurrency investing and trading.
All these may result in the loss of value of the crypto assets and the money invested by people may be lost if the market crashes.
In such a situation, some regulatory measures are welcome.
This will make sure that people know that there is a lot of difference between trading crypto and playing a video game because it involves larger and more real risks.
Crypto trading now looks much like equities trading where you need a brokerage account with a crypto exchange.
But, the difference between crypto and equity trading platforms is that the infrastructure of the crypto platforms and apps are very, very new and are not well protected.
Therefore, there needs to be more regulation on communication and messaging.
There are also some structural questions that need to be answered especially regarding stablecoin that are backed by reserves.
Does it have enough reserves in hand to pay to the investors should they all intend to divest. Therefore, some regulations are also needed for the reserve design and allowable assets.
And, if there are open competitions among the crypto platforms and products some regulations are required as well but it should not be more than what is seen in the case of traditional banks.
One basic challenge to overcome is taxation on crypto income and this is not about tax evasion only.
A lot of people want to pay tax on crypto but simply do not know how exactly they should go about it.
Therefore, there should be more awareness created and the categories must be clearly defined.
Another significant challenge is related to the environment. It needs a lot of energy to run crypto technologies and this affects the environment seriously.
Specific regulations are required from the government to ensure more environmentally sustainable technologies are used to reduce the carbon footprint.
Probable Best or Worst Case Scenarios
With the new regulations in place, things can be worse or better but it all depends on how exactly these regulations are designed and imposed.
Crypto industry experts think that there is a very thin line of difference between ‘no regulation’ and ‘some regulation.’ Nothing should make one feel that it is ‘a lot.’
If they treat it like any other historical financial products or tech platforms, it may plummet down with investors and traders pulling out of it in the worst case scenarios and the value of products reaching astronomical heights in the best case scenarios.
Visions and Actions of the Securities and Exchange Commission
The Securities and Exchange Commission or SEC Chair Gary Gensler said that they plan to handle crypto like other financial securities, especially in the case of the ICOs.
Praising the American financial system, the SEC ruminated on the rules followed in the stock markets and implemented some of them on the crypto market albeit in a different way.
The SEC adopts a strong stance on crypto, describing it to be ‘rife with fraud, scams, and abuse’ and blaming its notoriously volatile nature for it.
They substantiated their views by saying that their failure to regulate the market right from the very start of it has resulted in widespread fraud.
Consumers have lost millions and are still losing, and this needs to be eliminated, once and for all, they opined and pointed to the incidents of scams and frauds of October 2020 and March 2021.
Also, the stakes in this market are very high which is why strict regulations are required so that the notion of criminality regarding this specific market is abolished, they said.
The SEC feels that with proper guidance and regulations by them people will know the risks, the difference between securities and tradable assets, along with the laws and regulations related to crypto.
This will help them to draw a line of defense and protect them.
However, the problem with SEC is that their actions do not indicate that they themselves know when and where to draw the line of their jurisdiction. And, crypto experts think that they will not learn it soon either.
What the SEC thinks about crypto in particular can be best understood when you look at the enforcement cases.
This will help you to know what, according to them, is violating the securities laws and regulations.
The SEC has made it very clear however that all ICOs are securities and therefore any company or person related to it in any way whatsoever should have to register with them and follow their rules.
They also made it clear that the crypto exchanges and their activities are also under their radar whether it involves crypto trading or lending.
With all these developments and such unclear standing of the SEC the markets as well as the investors are left guessing about the future.
Rundown on the Proposals
The lawmakers and different government agencies in the United States have proposed legislation on crypto that more regulations will be imposed.
This is the result of the growing concern over cryptocurrencies by the Biden administration, Security and Exchange Commission Chairman Gary Gensler, and the US Federal Reserve Chairman Jerome Powell.
Here is a complete rundown on those proposals and how it would affect the crypto investors.
Crypto Crime and Tax Evasion:
Since the new regulations would include crypto exchanges and any company that deals with digital asset trades, this would result in an amplified tax reporting liability in order to help the Internal Revenue Service to track crypto tax evasion.
Also, crypto crimes due to ransomware attacks will be curbed with these regulations.
According to a recent report of the US Treasury, the same concerns are voiced by them. They say that these regulations would resolve the crypto crime detection issues and tax evasion.
For the crypto investors this means that it is now their responsibility to report and pay crypto taxes, which is however made easier for them by the new regulations.
The proposed new regulations on stablecoin will classify the issuers as banks and therefore will have to work in a similar way to protect the consumers.
This regulation will help in reducing crypto crimes. It will reduce the chances of evading public policy measures that are meant for ensuring tax acquiescence and preventing money laundering.
With the new regulations in place, the right kind of oversight will eliminate the risks on the consumers as well as on the crypto system at large.
For the crypto investors this means that the stablecoin has a good potential to become mainstream digital payment system in the following years and they do not need to make any significant changes in the portfolio right now.
However, if they are thinking of investing in crypto for a long term, experts suggest that it is better to go for the more established coins like BTC and ETH rather than the stablecoin.
You can keep some of these coins in your portfolio to pay for the fees involved in advanced trading.
The SEC has not yet approved Crypto Exchange Traded Funds or ETFs, though a Bitcoin-linked ETF made its debut recently on the stock market.
With several applications lying pending, Gary Gensler, the SEC Chair, hinted that these are coming up.
He said that people may also want these in the crypto space since they are already dealing with ETFs in the equity market and in the bond markets.
However, the new ones will be under the Investment Companies Act and with other federal laws combined with it, there will be adequate protection for the investors in it.
This is because, according to the Investing Companies Act, these will need to disclose all information related to their investments and finances.
This will ensure that the price of a specific crypto will be tracked closely to abide by the rules.
For the crypto investors this means that the crypto ETFs will allow them to get their desired crypto without buying them from a crypto exchange directly in the future.
This will help them to diversify their holdings across different crypto coins without putting in much of an effort.
The SEC regulations on crypto have raised a lot of concerns among people. Crypto experts show their mixed reactions to it. All of these will affect the crypto market and the future moves of the investors. And, thanks to this article, you know why.