Making order out of a multiverse is an extraordinarily difficult task, just ask DC Comics, which has struggled to achieve the success of its rival, Marvel, to create a coherent narrative for its popular superheroes. Regulators in Washington, D.C. and elsewhere must do better if they hope to create a comprehensive regulatory framework for an ever-expanding multiverse of digital coins and digital assets.
While the industry grows and diversifies, regulation has been scattershot at best. But crypto now has the eye of regulators and lawmakers, and over the coming months (and years) they will need to grapple with how to regulate a technology initially created to exist outside of mainstream institutions. Let’s look at some of the efforts that are underway.
The Current Cryptic Crypto Legal Landscape
It’s nearly impossible these days to keep track of what seems like an infinite array of digital coins (i.e., Bitcoin and thousands of other “altcoins”) and digital assets (like non-fungible tokens (NFTs) designed to provide ownership of unique virtual items like art).
Just as there is no single digital coin, there is no single comprehensive legal framework governing the use and/or investment in crypto. The IRS and the Financial Crimes Enforcement Network have some limited digital currency rules. The exchanges on which digital coins are traded, however, are not regulated in the same robust way as equity markets. The popular exchange Coinbase, for example, is registered in most states with a money transmitter license.
National banks are permitted to use some new blockchain technologies and so-called stablecoins — i.e., digital currencies that, unlike Bitcoin, are pegged to a “stable” reserve asset like the U.S. dollar or gold — to carry out bank-permissible functions, such as payment activities. And, as discussed in our prior post, the OCC has granted a handful of digital coin custodians (i.e., digital wallets) national trust charters. In addition, the OCC’s current head has said that he plans to have the OCC review all of their crypto-related guidelines.
Banking on More Regulation and Legislation
Over the last several months the federal government has been working overtime studying crypto, but the efforts to promulgate laws and regulations have only just begun. The preliminary efforts, as of late, included:
- In August, Chairman of the SEC Gary Gensler — who previously taught a course at MIT on crypto — called on Congress to expand the agency’s authority in regulating the cryptocurrency sector, as he believes that many digital coins are offered and sold as securities. Crypto investors are also anxiously awaiting the SEC to approve the first bitcoin ETF.
- U.S. Treasury Secretary Janet Yellen pushed regulators to “act quickly” in drafting stablecoin rules. The Treasury Department announced that Secretary Yellen would convene a meeting of the President’s Working Group to discuss regulators’ work on stablecoins.
- Likewise, Senator Elizabeth Warren said in August that the Consumer Financial Protection Bureau should be part of the regulatory response to emerging cryptocurrency risks.
- In June, the U.S. House of Representatives (but not yet the Senate) passed the bipartisan “Consumer Safety Technology Act,” which included two crypto-related bills introduced by Darren Soto, the Blockchain Innovation Act and the Digital Taxonomy Act. The Blockchain Innovation Act directs the Secretary of Commerce and Federal Trade Commission (FTC) to submit to Congress a report on, inter alia, the state of the blockchain technology and use in consumer protection, as well as “areas in Federal regulation of blockchain technology where greater clarity would encourage domestic innovation.” The Digital Taxonomy Act appropriates $25 million to the FTC to prevent unfair or deceptive acts or practices related to digital coins. The bill also requires the FTC to produce another report looking specifically at unfair and deceptive practices in the crypto sector.
- In May, the Federal Deposit Insurance Corporation (FDIC) published its request for information about how banks are using digital assets. The same month, the Treasury Department published a tax plan that included an entire section on crypto and warned about the “significant detection problem” with using crypto for illegal activities.
- A bipartisan group of seven congressmen led by Rep. Tom Emmer made a request to the Financial Accounting Standards Board in May, asking it to set rules for crypto assets, including rules on the taxes companies and individuals owe on their crypto holdings.
- In April 2021, the house passed a bill that would create a joint SEC-CFTC crypto task force.
At the same time, a partisan divide is growing in Washington D.C. If Republicans were to gain control of Congress during the 2022 midterms, any crypto laws in the works could be stalled, as many Republicans are of the view that regulations impede innovation and hamstring the United States’ ability to compete globally.
Many state governments have already worked out more tangible rules. Wyoming is the first state to legally recognize decentralized autonomous organizations (DAOs) — an organization represented by rules encoded as a computer program — as a new form of LLC. “American CryptoFed DAO” was the first to register. Nebraska has approved a framework for digital asset banks. In fact, 31 states already have pending crypto-related legislation in the 2021 legislative session.
The federal government’s wait-and-see approach and partisan squabbling means we shouldn’t expect comprehensive federal crypto rules anytime soon. State governments will continue to lead the way by legislating particularized crypto rules. In the meantime, owners of crypto products need to determine which of up to 50 state regulatory schemes apply to their nationally, or probably globally, used cryptocurrency.
Yet, comprehensive federal crypto rules will emerge eventually. When that happens, the ultimate test will be whether they successfully navigate the expanding crypto multiverse and mitigate the risks without hamstringing innovation.
Adam Levy and Nicole Serratore, attorneys in the Insolvency, Creditors’ Rights and Financial Products Group, each contributed to this post.