Source: Coindesk
Author: Partner at Troutman Pepper Law Firm
Translation: LianGuaiBitpushNews Mary Liu
Cryptocurrencies have become “non-compliant,” especially in terms of their “business models,” at least according to Gary Gensler, the Chairman of the U.S. Securities and Exchange Commission (SEC).
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Given that this view is widespread among the U.S. regulatory agencies responsible for securities oversight, it is not surprising that enforcement actions involving cryptocurrencies have reached historic levels.
In just a few years, we have witnessed the so-called unregulated “Wild West” become the target of the SEC. In addition to the SEC, the Commodity Futures Trading Commission (CFTC) and the Department of Justice (DOJ) also frequently join in the enforcement actions.
There is no doubt that these regulatory agencies are not keeping their enforcement interests a secret.
They have taken measures, including pursuing the top participants they believe may have misled investors or illegally promoted cryptocurrencies. These enforcement actions have attracted the attention of mainstream media, with some of them being resolved through multimillion-dollar settlements.
However, the most surprising aspect of these enforcement actions is how they are being carried out. One might expect a new wave of legislation aimed at regulating cryptocurrencies and other digital assets, but you would be wrong. The enforcement actions tell us that they are still relying on outdated laws that have been around for 90 years in some cases.
As regulatory agencies intensify their enforcement efforts by relying on strained interpretations of existing laws, two questions arise: 1. What is the SEC’s next target? 2. Which will be phased out first, outdated securities laws or the cryptocurrency industry?
What is the next target? Cryptocurrency wallets
After closely observing the actions of regulatory agencies, we expect that cryptocurrency wallets and certain digital asset exchanges will be the next targets.
Based on previous federal enforcement actions and signals sent by these agencies, we anticipate that digital asset enforcement will unfold in two ways: the 1934 Securities Exchange Act (“Exchange Act”) may be interpreted to cover the regulation of cryptocurrency wallets, and mixers and other tools will face compliance challenges in the digital asset space as brokers and traditional financial institutions subject to anti-money laundering and know-your-customer (AML/KYC) constraints.
We predict that the next area of regulation for the SEC will involve the regulation of cryptocurrency wallets operating as brokers.
This concept was first raised by the SEC in its Wells notice to Coinbase, which was issued prior to the lawsuit against the cryptocurrency exchange. In the notice and in the charges and allegations repeatedly mentioned in the lawsuit, the SEC accuses Coinbase Wallet (a product that provides users with self-custody services for digital assets) of operating as an unregistered broker, in violation of the Exchange Act.
In response to Wells’ notice, Coinbase argued that its wallet product is just software and does not perform any traditional functions commonly used by brokers. In particular, the “Exchange Act” defines “brokers” as “any platform engaged in securities trading business for others.”
The reason Coinbase gave is that the wallet can only interface with secondary market trading, and from Coinbase’s perspective, these secondary market transactions do not involve investment contracts, so they are not securities. Coinbase further argued that a 1% fee was charged each time the “wallet swap” function was used before (now canceled), but this does not change the SEC’s analysis.
The SEC does not believe this. The agency has sued Coinbase and Binance, accusing both companies of operating wallet services as unregistered broker-dealers.
TradFi Trading
We predict that the second area where the SEC’s enforcement scope will expand is to strengthen regulation of traditional financial institutions engaged in digital asset trading. As people pay increasing attention to new cryptographic tools and services, we expect designing, implementing, and maintaining compliant systems to comply with AML/KYC laws will pose significant challenges for these institutions, making them a target for regulatory authorities.
In particular, enforcing AML/KYC laws in the digital asset field will require these institutions to rely to a large extent on information they cannot control. Take the proposed internal policies for token transactions, where over 10% of the value can be traced back to proceeds from stolen assets.
In practice, compliance programs that can perform such marking will require the cooperation of third parties, which is far beyond the capabilities of most companies inside and outside the cryptocurrency industry.
First, whether it is a government entity or a private investigative agency, it must understand the theft behavior and must track and identify the wallets/tokens involved. Then a repository must be created to maintain this information. To some extent, multiple such repositories are needed to track the currency flow associated with many theft and hacking activities, and this diffusion only increases the cost of solving the problem. Finally, once a company wants to screen illegal and problematic transactions, it must screen the data for each transaction and mark the problematic transactions.
Except for the final step, financial institutions must rely on the work of others to contribute to the compliance program. This decentralization makes compliance costly in terms of both time and money.
Rapid Expansion of Enforcement Scope
The scope of cryptocurrency enforcement is rapidly expanding, which has prompted some participants to consider the next steps.
Coinbase CEO Brian Armstrong said during the London Fintech Week that due to a lack of “regulatory clarity,” “any direction can be considered, including leaving the United States or doing whatever is necessary.” It is not difficult to imagine that most participants in the cryptocurrency market agree with Armstrong’s statement, “We just want a clear rulebook.”
However, the various federal agencies responsible for regulation have not established a clear set of rules to regulate the cryptocurrency field. Instead, they rely on laws and regulations from decades ago, which could not have anticipated the technology upon which digital assets depend.
In some ways, this raises a question: do participants in the crypto market truly set their business models as “non-compliant,” or is the appearance of non-compliance simply a byproduct of regulatory confusion?
While we wait for regulatory compliance handbooks, investors and exchanges should collaborate with legal compliance teams to ensure that their transactions comply with federal securities laws, banking regulations, and the ever-evolving interpretations of their application in the cryptocurrency industry. Each transaction brings unique regulatory obstacles, which are caused by federal agencies insisting on applying decades-old regulations to a rapidly evolving industry.
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