If you have a business that trades in crypto either located in or with business interests in the USA, you’ll probably have some questions about how crypto is regulated. The cryptocurrency space in the USA is currently locked in a power struggle between different regulatory bodies that understand crypto differently. No matter the definition, though, all institutions that attempt to regulate crypto have been known to be tough on big players in the crypto space. However, it is nothing that can’t be handled by the right team of lawyers. Read on to find out more.
One of the most important facts about cryptocurrency regulation in the US is that there is no single legal definition of what constitutes cryptocurrency. This is important because the power struggle between bodies such as the SEC, the CFTC and the US Department of the Treasury stems from the fact that crypto can be defined in multiple ways.
The SEC is the Securities Exchange Commission. They regulate traditional securities, which include equities, debt instruments, and investment contracts. This institution defines cryptocurrency as securities. To prove this in court, they apply the Howey Test. This test is applied by legal experts on businesses if needed.
The CFTC or Commodity Futures Trading Commission, on the other hand, defines crypto as a commodity like wheat or gold. In this way, cryptocurrency exchanges would fall into their domain.
Finally, the US Department of the Treasury, through which the IRS is involved, acts mostly through the FinCEN (Financial Crimes Enforcement Network). The FinCEN defines cryptocurrency as belonging to the umbrella term CVC (convertible virtual currency). Anything that has an equivalent value in “real” currency or acts as a substitute for it falls under this umbrella term. This regulatory body is mostly concerned about money laundering and may require your business to have AML (anti money laundering) documents. They also observe movements in crypto spaces to prevent financial aid to terrorism and other potential abuses of cryptocurrency exchange.
As we have previously learned, different official definitions of cryptocurrency give way to different institutions claiming to have the right to oversee crypto exchanges and movements. It is important to note that the SEC does not make the law. The lawyers in the SEC make enforcement strategies when taking a case to court, but they can lose.
When it comes to the FinCEN, deciding whether your business falls under the legal definition of MSB (Money Services Business) is key. It is the owners and stakeholders that must reach this conclusion, a business is not automatically filed as an MSB.
However, legal trouble can emerge if the FinCEN believes your business is an MSB and isn’t fulfilling the requirements that come with it. Even if your company isn’t an MSB, there are still important documents required by the FinCEN if your business deals with virtual assets. There is more information about whether to identify as an MSB and what is required of one later on in this post.
In the context of a lawsuit, the nature and the circumstances around the asset, as well as the asset itself, can be crucial. This is so because this can guide the Court to determine whether a regulatory body has grounds to impose its regulations on it or not. Having experts look at the context in which your virtual assets and exchanges take place as well as the assets themselves can give you a strong backbone if one of these regulatory bodies decides to start some sort of legal action. Talk to the experts at Digital Lawyers for more information.
During the Initial Coin Offering (ICO) boom in 2017, the SEC reached the conclusion that DAO Tokens were investment securities. Ever since then, it has prosecuted big players in the crypto field, such as Ripple, for not treating new tokens as securities. They got in trouble for not following the regulations that come when an asset is considered as such.
Ripple Labs wasn’t the only one to pay a price for not treating crypto as securities. ICOs have recently been under careful observation by the SEC. Many users of ICOs have had to pay lofty fines. The SEC isn’t only targeting ICOs, DeFi tokens as well as NFTs have also come under the scrutiny of the organization recently.
Stablecoins are also facing greater scrutiny by this organization. In 2021, backers of Tether had to pay 18.5 million dollars in a settlement to the New York Attorney General. Not only that, they went on to incur another debt in the millions the same year due to allegations of misrepresenting their reserves. Stablecoins are seen by these regulatory bodies as particularly risky investments in the crypto world. The SEC considers them de facto security brokers.
Correctly identifying your business as an MSB (Money Services Business) can save you a lot of trouble in the future. An MSB has to complete more paperwork and submit more documents to the FinCEN. However, filing these correctly and on time can save you from getting sued.
An MSB is any legal entity that does business, no matter how frequently or whether it is licensed to do so, in USA territory. Money transmitters are included in the definition of “doing business.” Submitting the paperwork identifying as one, as well as other documents required by the FinCEN, is one key measure you must take to prevent legal trouble in the US when dealing with crypto.
Failure to register as an MSB could lead to both fines and even criminal prosecution. We discussed the case of Ripple Labs earlier on in this article. This company ended up being sued for 700,000 dollars in penalties for multiple violations related to their MSB status, and the FinCEN also reported them to other authorities so they would be inspected for criminal activity.
A few things to bear in mind with registering as an MSB are the following: This registration has to be renewed biannually. You will be required by FinCEN to have a quality AML plan in place. Your business will be required to comply with certain recordkeeping and reporting requirements. Your business will need to comply with both the Funds Transfer Rule and the Customer Due Diligence Rule.
In conclusion, navigating US territory in the crypto space can be tricky due to the varying definitions of a cryptocurrency and thus, which governmental bodies and institutions are involved. It is always best when ensuring the success of your tech business to prevent rather than cure. Talk to legal experts in the field today so you can cover all your bases with the SEC, the CFTC and the FinCEN.