Cryptocurrency Regulation – In the United States, cryptocurrency has garnered substantial attention from both federal and state governments. At the federal level, much of this focus has been administrative, involving agencies such as the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Federal Trade Commission (FTC), and the Department of the Treasury through the Internal Revenue Service (IRS), Office of the Comptroller of the Currency (OCC), and Financial Crimes Enforcement Network (FinCEN).
Despite significant involvement from these agencies, formal rule-making has been limited. Many federal agencies and policymakers have praised cryptocurrency technology as a crucial part of America’s future infrastructure, recognizing the need for the U.S. to maintain a leading role in its development.
Starting in 2022, coinciding with the burgeoning presence of cryptocurrencies in the general populace, the U.S. Congress introduced several bills aimed at providing clearer regulations for this evolving sector. The bipartisan Responsible Financial Innovation Act (RFIA) was designed to offer regulatory clarity for entities overseeing digital asset markets, provide a robust framework for stablecoins, integrate digital assets into existing tax and banking laws, and foster innovation in the digital asset space.
Democratic Senator Patrick Toomey introduced a bill to establish a regulatory framework for stablecoins and their issuers, known as the Toomey Stablecoin Bill. This bill authorizes three options for issuing payment stablecoins (nationally chartered payment stablecoin issuers, insured depository institutions, and money services businesses), requires all payment stablecoin issuers to comply with standardized requirements, distinguishes stablecoins from securities by indicating that non-interest-bearing stablecoins are not securities, and implements privacy protections for transactions involving stablecoins and other virtual currencies.
In the latter half of 2022, bipartisan senators introduced the Digital Commodities Consumer Protection Act (DCCPA), granting the CFTC authority to regulate “digital commodity platforms” and trade “digital commodities.” The DCCPA would give the CFTC exclusive jurisdiction over trading “digital commodities,” except in transactions where traders or consumers use digital commodities solely for purchasing or selling goods or services. “Digital commodities” are defined as digital forms of personal property that can be owned and transferred from person to person without relying on intermediaries.
Two months later, Republican Senator Bill Hagerty introduced the Digital Trading Clarity Act, establishing that digital assets not subject to determination by the SEC or a federal court, and listed through intermediaries meeting certain requirements regarding custody, disclosure, and investor protection, would not be deemed securities. In July 2023, a revised version of the RFIA was introduced, aimed at providing greater consumer protections amid cascading bankruptcies among blockchain companies and stakeholders.
Shortly after, Representatives Patrick McHenry and Glenn Thompson introduced the Financial Innovation and Technology for the 21st Century Act (the McHenry-Thompson Bill), which provides a legal framework for regulating digital assets to offer clarity and fill regulatory gaps. Both the House and Senate bills aim to integrate digital asset and derivative regulation into the existing U.S. regulatory framework, primarily involving the SEC and CFTC, rather than creating standalone frameworks.
Many state governments have proposed or enacted legislation affecting cryptocurrency and blockchain technology, primarily through legislative branches. Generally, there are two approaches to state-level regulation. Some states have sought to promote the technology by enacting favorable regulations exempting cryptocurrencies from state securities and/or money transmission laws, hoping to attract investments to stimulate the local economy and enhance public services.
For example, Wyoming has been notable for its efforts to impact its economy by passing laws allowing the creation of new types of banks or special purpose depository institutions. These crypto-focused banks can act as custodians and fiduciaries, enabling businesses to store digital assets securely and legally. Wyoming also passed laws facilitating the formation of decentralized autonomous organizations (DAOs), becoming the first state to regulate and recognize DAOs as a form of limited liability company (LLC). The Wyoming Stable Token Act aims to issue the first government-issued stablecoin backed entirely by U.S. dollar reserves.
Neighboring Utah followed Wyoming’s lead by enacting its own Decentralized Autonomous Organizational Act, allowing DAOs not registered as nonprofit or for-profit entities to be treated as legal equivalents of domestic LLCs. Utah also permitted digital asset payments to government agencies. In contrast, California’s governor vetoed the proposed Digital Financial Assets Law, which would have prohibited exchanges and other entities from engaging in digital financial asset business activities without a license from the state’s Department of Financial Protection and Innovation.
Conversely, more states have made it harder for blockchain companies to operate within their borders by requiring money transmitter licenses and/or strict compliance with state blue sky securities laws. Over the past year, several states, including Florida and the District of Columbia, amended their money transmitter regulations to include virtual currencies/cryptocurrencies, requiring certain intermediaries to obtain state-issued licenses.
The past year also saw the rise of multi-state coalitions defending their state securities laws against major blockchain companies. On June 6, 2023, following investigations by a task force from nine states, including California and New York, and with SEC assistance, each state filed enforcement actions against the cryptocurrency exchange Coinbase and its parent company, alleging that Coinbase’s staking rewards program constituted unregistered securities sales in violation of state securities laws.
Five other state coalitions issued cease-and-desist orders against Nexo Inc., alleging that Nexo violated their state blue sky laws by offering unregistered securities in their states. On January 19, 2023, Nexo settled with the multi-state coalition for $22.5 million. A clear pattern emerged, reflecting other industries, where larger states with bigger economies intend to regulate blockchain technology, while smaller states aim to become regulated havens for blockchain stakeholders.
No uniform definition exists for “cryptocurrency,” often referred to as “virtual currency,” “digital asset,” “digital token,” “crypto asset,” or simply “crypto.” The Uniform Law Commission and the American Law Institute amended the Uniform Commercial Code to include Article 12, which defines and specifically regulates digital assets. The new article includes virtual currency within its definition of “controllable electronic records.” Some states have adopted these amendments. Other jurisdictions have attempted to formulate detailed definitions for this asset class, wisely opting for broader, more technology-agnostic definitions. Those taking the latter approach will be better positioned to regulate as the technology evolves.
The Biden Administration released an Executive Order (EO) outlining its approach to addressing risks arising from the growth of digital assets and blockchain technology while supporting responsible innovation. The EO focuses on six key priorities: (1) consumer and investor protection; (2) financial stability; (3) illicit finance; (4) U.S. leadership in the global financial system and economic competitiveness; (5) financial inclusion; and (6) responsible innovation.
To advance these priorities, the EO calls for numerous reports, studies, and plans, including a Treasury Department report on the future of money and the potential impact of a U.S. central bank digital currency (CBDC) and policy recommendations around consumer protection and financial inclusion. The EO also requests a Financial Stability Oversight Council report on financial stability risks and regulatory gaps.
In response, the White House released a fact sheet providing a comprehensive framework for regulating digital assets based on input from various U.S. government agencies and departments. This framework allows regulators like the SEC and CFTC to continue coordinating efforts to enforce laws in the industry and share data on consumer complaints in the sector. The Treasury Department will actively work with financial institutions to help identify and mitigate cyber risks through data sharing and analysis. The Treasury will also collaborate with regulators to ensure that crypto firms have regulatory guidance. The fact sheet also highlights the potential of a U.S. CBDC, citing numerous potential benefits in technology, economy, security, and individual freedom.
On March 20, 2023, the White House published the 2023 Economic Report of the President, which for the first time included a 35-page chapter on digital assets. The report delivered a sharp critique of cryptocurrencies, a clear departure from the Biden Administration’s earlier approach outlined in the EO.
The report stated that cryptocurrencies currently do not offer broad economic benefits. Additionally, the report claimed that cryptocurrencies are primarily speculative investment vehicles and not effective alternatives to fiat currencies. It acknowledged that some cryptocurrencies will persist and noted that most activities in the crypto space fall under existing regulations.
Cryptocurrency Regulation Sales
Cryptocurrency sales are generally regulated if the sale (i) constitutes a sale of securities under state or federal law, or (ii) is considered money transmission under state law or an action that makes the person a money services business (MSB) under federal law. Futures contracts, options, swaps, and other derivative contracts referencing the price of crypto assets considered commodities are regulated by the CFTC under the Commodity Exchange Act (CEA). Additionally, the CFTC has jurisdiction over attempts to engage in market manipulation concerning crypto assets deemed commodities.
For instance, the CFTC filed a civil enforcement action in the U.S. District Court for the Southern District of New York, charging Avraham Eisenberg with allegedly misappropriating over $110 million in digital assets from Mango Markets, a purported decentralized digital asset exchange, through “oracle manipulation.” This was the CFTC’s first enforcement action involving a fraudulent or manipulative scheme on a decentralized digital asset platform and the first involving “oracle manipulation.”