Key Developments in US Crypto Regulatory Landscape
Is crypto regulatory confusion in the US finally coming to an end?
The regulatory landscape toward digital assets (including cryptoassets) in the US has long been fraught with uncertainty, confusion and fragmentation, with the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) at loggerheads over what the formal definition of what a cryptoasset should be.
On the one hand, the SEC has largely maintained the stance of a cryptoasset being a security (aside from Bitcoin), and should thus come under existing legislation such as the Securities Act of 1933 in the way that equities are, for example. If a cryptocurrency is a security, cryptocurrency issuers and exchanges must seek the necessary licenses from regulators. This is typically difficult to do, so the crypto industry spends a great deal of effort trying to ensure that cryptoasset sales and developments avoid securities laws. The majority of cryptoasset market activity in the US is regulated by the SEC, including exchange trading, fraud and money laundering.
On the other hand, the CFTC argues that cryptoassets are commodities and can be regulated under the Commodity Exchange Act. This underpinning argument of the CTFC is that because Bitcoin, for example, is interchangeable on exchanges, each Bitcoin is of identical worth, just like how a sack of corn is of equal worth to another sack of corn of the same grade. In particular, crypto derivatives come under the jurisdiction of the CFTC, but it generally has less regulatory power than the SEC in the current environment.
The blurred lines between what classifies a cryptoasset and what does not has left cryptoasset firms in the US scratching their heads and walking on eggshells. One such example was when the SEC charged Coinbase for operating an unregistered national securities exchange in June 2023, with Coinbase unaware that they were breaking any rules due to the lack of clarity. As a consequence, cryptoasset firms in the US have sought refuge in other more crypto friendly locations, leaving the US crypto economy lagging behind other jurisdictions, such as the EU in terms of competitiveness and growth.
However, in response, it appears that US regulators have now made some long-awaited progress in establishing a coherent regulatory environment for crypto and more broadly, digital assets.
In May 2024, the US House of Representatives passed the Financial Innovation and Technology for the 21st Century Act, providing a regulatory framework for digital assets that allocates jurisdiction over digital assets between the Commodity Futures Trading Commission and the Securities and the SEC. The bill passed by a vote of 279 to 136, with 208 Republicans and even 71 Democrats voting to approve it, highlighting the desire for a clear regulatory crypto framework.
While it is still uncertain as to whether the bill will be enacted into law by the Senate, a victory for crypto advocate Donald Trump in the upcoming Presidential election could heap pressure on the Senate to sign it into law.
Specifically:
The CFTC would regulate a digital asset as a commodity “if the blockchain, or digital ledger, on which it runs is functional and decentralised”.
The SEC would regulate a digital asset as a security “if its associated blockchain is functional but not decentralised.”
Stablecoins, a type of cryptoasset that is designed to maintain an algorithmic peg to fiat currencies, will be subject to either SEC or CFTC jurisdiction, depending on the nature of the intermediary involved in a transaction.
The bill defines decentralisation as, “if, among other requirements, no person has unilateral authority to control the blockchain or its usage, and no issuer or affiliated person has control of 20% or more of the digital asset or the voting power of the digital asset.” On top of this, the method of acquisition of the digital asset by an end user and the party holding the digital asset will also be factored in. A certification process will be in place whereby users seek to establish their blockchain system against the criteria for decentralised/centralised systems, and will face the appropriate protocols from the SEC or CFTC based on the verdict. There may also be instances where the participant needs to register with the SEC and CFTC.
If enacted, the bill would curtail some of the SEC’s current oversight of the digital assets ecosystem, ending what many have described as its current approach of “regulation by enforcement.” At the SEC’s expense, the CFTC would be granted with expanded authority over digital assets. For example, secondary market trading of certain digital commodities would be permitted, with consumer protection requirements imposed on entities registered with CTFC and/or the SEC. Unsurprisingly, the SEC has reacted badly to the developments, citing the possibility of regulatory gaps under the new framework.
Nevertheless, the US is still at the dawn of its regulatory journey with digital and more specifically, cryptoassets. Although it remains uncertain as to whether this new cryptoasset bill will be enacted into law, it became the first crypto-related legislation to pass one of the chambers of Congress. Undoubtedly, that is a step in the right direction for the US in its quest for cryptoasset regulatory clarity.