US and Global Crypto Regulation: SEC in Pursuit of Compliance, as Industry Seeks Regulatory Clarity

In the United States, cryptocurrency entities like Bitcoin, Coinbase, Binance, and more are on the brink of significant changes as the United States Securities and Exchange Commission (SEC) intensifies its efforts to revamp the existing cryptocurrency framework. The SEC aims to make it more “fair” to the American public and mitigate what it views as systemic risks inherent in the current digital currency ecosystem. Introduced in 2009, cryptocurrencies have gained significant global attention, with millions of investors keen to digitize their assets. Despite its convenience and widespread adoption, SEC chairman Gary Gensler argues that the system’s flaws make it risky for investors. It is not just about the public’s ability to comprehend and invest wisely but more about the limited control investors have over crypto exchange platforms.

Issues with Current Crypto Infrastructure

The SEC has identified the following issues with large crypto entities: Non-compliance with conventional investment regulations that protect investors. Misuse of investor funds and commingling investors’ funds. Allowing high-risk reinvestments by digital currency services, which exceed the risk levels that individual investors were willing to accept. The SEC contends that without changes to these platforms’ very infrastructure, there can be no successful and fair digital currency world.

Global Regulatory Perspectives

Regulatory bodies around the globe display divergent approaches toward cryptocurrencies, which could potentially impact the future of the industry. Crypto exchanges are exploring jurisdictions that offer greater regulatory clarity. While the European Union (EU) considers digital assets a new class of assets under its MiCA (Markets in Crypto assets) framework, the US ‘traditional’ financial institutions classify digital assets within existing regulatory structures such as securities or commodities. The MiCA, scheduled to be implemented between mid-2024 and early 2025, is expected to offer crypto exchanges regulatory certainty and less scrutiny of past behavior.

SEC Lawsuits: Case of Binance and Coinbase

Recent lawsuits filed by the SEC against Binance and Coinbase, two leading crypto exchanges, exemplify this diverging approach. Binance is accused of running “multiple unregistered offerings” and commingling functions and funds. On the other hand, the SEC alleges that the crypto tokens traded through Coinbase are effectively securities and thus fall under strict US regulations. Both cases are examples of the SEC’s attempt to control the industry through enforcement actions, even though the crypto regulatory position is still in its nascent stage.

Implications and Repercussions

These lawsuits could disrupt the crypto market. After the SEC filed charges against Binance, the Bitcoin price dropped to its lowest point in almost three months. Similar regulatory action against FTX also led to a significant drop in the Bitcoin price.

Future of Crypto Regulation

These developments underscore the need for a robust, consistent, and reliable regulatory regime for the crypto industry. As regulatory certainty becomes increasingly crucial for the digital asset industry, the sector may witness a shift from the US to markets with a more accommodating regulatory environment, such as the EU, Gibraltar, the UAE, or Switzerland. In the United Kingdom, the government’s stance on cryptocurrency regulation is not clear. The UK Treasury launched a consultation in February 2023 on a series of proposals for the future financial services regulatory regime for crypto assets, with the goal of treating all crypto assets as specified investments under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”).

Conclusion

As the regulatory landscape evolves, companies operating in the crypto space must adapt their practices to comply with emerging rules and regulations. They should be proactive in reviewing their governance and client and asset protection mechanisms to be well-prepared when new regulations are implemented. With this proactive approach, they will be better prepared for the results of the UK Treasury’s consultation and the anticipated launch of the EU’s MiCA in 2024. It is an essential step towards establishing a safer, fairer, and more robust global cryptocurrency industry.