Cryptocurrencies are often viewed as the Wild West, with very little in the way of laws or regulations. If there was one thing the Thursday FIA panel on crypto wanted everyone to know, that is far from the current reality. Significant regulatory obligations exist for those trading cryptocurrencies.
That said, the regulatory landscape today is an uncertain one. Kyle Glenn, director of government relations for the FIA, noted that SEC Chairman Gary Gensler has opined that most cryptocurrencies fall under the SEC’s jurisdiction, whereas CFTC Acting Chairman Rostin Behnam said just last week that 60% of the digital asset marketplace is under CFTC jurisdiction.
Kari Larsen, partner and co-lead of the blockchain, digital asset and custody group Perkins Coie LLP, said, “What is a cryptocurrency? Is it a commodity? Is it a security? Is it a currency? The answer is yes, it could be any one of those. It could be multiple. It’s all facts and circumstances-based. It all depends on what the digital asset is used for, what its characteristics are, how it was marketed, how it was sold.” Larsen also noted that, currently, there are few actual regulations on the books. The SEC and CFTC are regulating more by enforcement, she said.
It is difficult to know when or if or which regulatory agency might come knocking, Larsen added. Nevertheless, trading firms are getting better at understanding where the lines are drawn.
Chris Zuehlke, partner and global head of Cumberland, DRW, noted that “innovations that we’re seeing in the crypto asset space could not have possibly been contemplated in the 1930s or 1940s. … The regulators [are now] able to engage with participants in a full and collaborative way to make positive change.” Algorithmic trading is a similar area where regulators were able to handle innovation in the markets.
The challenge for the government is the pace at which innovation is happening and that this is a global issue. Kristin Boggiano, co-founder and president of CrossTower, said, “The problem with crypto is it moves so incredibly fast because crypto is based on open source code where there are people all over the world that have access.”
“I have hope that the United States recognizes that if you do create a regulatory regime, that we are a global crypto world. If we create a system that’s hostile to innovation we won’t get the next Google,” Boggiano said.
Despite the pace of innovation, the government does seem to be looking into issues involving cryptocurrency with some urgency. Zuehlke said, “I’m optimistic. …The thing that was most fascinating to me about the [U.S.] infrastructure bill was that in a short period of time, 24 hours, 48 hours, a topic that would be incredibly esoteric by anyone’s measurement in the infrastructure bill is the concept of taxation of crypto assets. They’re [members of Congress] genuinely taking an interest in and to understand this transformative technology.” It also has been encouraging that, at least so far, Congress has approached this in a bipartisan manner with little disagreement along policy lines, panelists said.
A common misconception the panel tackled was the notion that cryptocurrencies are there for criminal activity. If you want to engage in criminal activity, Larsen said, “You know what’s really easy? A suitcase of cash. You know what’s hard? Blockchain. I’ve had numerous discussions with FBI and DOJ [Department of Justice] employees who have said they love it when crypto is involved.”
She related an anecdote that someone in Paris helped fund the January 6 riots in Washington, D.C. using bitcoin, and within three days the Wall Street Journal had tracked that person down.
The crypto regulatory landscape is still in formation, but it is getting a bit more clear every day and, so far, everyone seems to be working together on it.