What is the Role of Regulation? Financial Watchdogs Couldn’t Be Clearer

The co-founder of the crypto platform was able to settle a lawsuit with the U.S Securities and Exchange Commission (SEC) in January. Nexo He said that he believes that the United States will soon have a clearer regulatory environment and that Nexo will be able offer value-creating products in compliance to this standard.

Nexo’s desire to “regulatory transparency” is not a rare one: In the past year, executives from Binance, Coinbase And Circle Similar statements have been issued by other crypto panel members, and “regulatory clarification” is the buzzword at happy hours and discussions about crypto panels.

Gareth Rhodes, a managing director at Pacific StreetFormerly, served as the deputy superintendent and special counsel at New York State Department of Financial Services. This article is part CoinDesk’s Policy Week.

These statements implicitly assume that there is no regulatory clarity currently, and suggest that it is crucial to resolve this issue for the industry’s future. The recent rush of regulatory actions, including the U.S. Department of Justice (DOJ), case Sam Bankman-Fried (ex-CEO FTX) vs. the SEC Lawsuits The Gemini crypto exchange and crypto lender Genesis are not supported Sanctions by the U.S. Treasury Department Mixer Tornado Cash and the state-level Taking actions The Celsius Network is being criticized – indicates that the people in charge of enforcing laws think the existing regulatory framework is adequate for their purposes.

What does regulatory clarity mean? The U.S. Congress can draft and pass laws to direct government agencies like the SEC or DOJ to issue rules, supervise entities, and enforce the law. A picture of the actions of those responsible for enforcing and regulating the industry can be seen through court decisions, the rulemaking process, agency guidance, and precedent from enforcement actions.

Also see Gareth Rhodes The Future of Crypto: Avraham Eisenberg’s Case and its Impact on Future Futures | Opinion

Examples include whether the Commodity Futures Trading Commission may approve an application or whether facts discovered in an investigation could lead to a prosecution pursuing criminal charges. Nexo’s and other calls for “regulatory transparency” in their simplest form refer to the desire to have more transparency about how law enforcement and regulatory agencies will handle crypto-related products or services.

There are many things that can be done to improve the quality of enforcement actions or other regulatory decisions. Compendiums There are many persuasive writings about how crypto should be evaluated within the existing regulatory framework. This topic is beyond the scope this column. However, there is plenty of evidence to show that those who approve and enforce law have little need for additional regulatory clarity. It is already there.

What does this all mean? And what implications will this have for 2023 and beyond. A few possibilities:

1. Crypto entities will need to adapt their strategy, as regulators have demonstrated that they are comfortable with existing laws being applied to crypto.

Gary Gensler, SEC Chair, was asked November whether existing laws could be applied to crypto. “[i]It’s simple… [t]He rules are in place already.”

Although it may seem odd that laws that were written before bitcoin are still applicable to crypto, This is a common practice in all industries. Despite repeated requests from both sides, consumers advocates and the Companies themselvesCongress has failed to pass substantive legislation of large scale that focuses on Big Tech for decades. Regulators rely on these laws. These laws were in place before the internet existed.

The SEC regulates modern securities offerings based upon a 1933 law and the U.S. Supreme Court. 1946 Howey ruling. Allegations against Mail fraudProsecutors have used the laws, which were enacted in 1872 in order to fight counterfeit money, repeatedly against a variety of crimes. They include Charles Ponzi’s 1920 prosecution, to the most recent. College admission scandal.

In summary, regulators, prosecutors, and the courts are well-versed in the application of Gilded Age-era laws and technologies to 2023 technologies. Their recent actions indicate that they plan to continue this practice with crypto.

There are strong arguments why a unique set of rules for crypto is preferable to Big Tech and other industries. Many crypto entities are now faced with a difficult decision. Whether to find out how to comply You can either rely on the government’s interpretation of the existing rules or you can proceed knowing the potential consequences of noncompliance.

2. Courts will likely provide any additional clarity.

In 2023, Congress and regulatory agencies may not provide additional clarity. The most likely source is the courts. In SEC v. Ripple LabsA federal court could soon issue a definitive ruling regarding the application of securities laws and crypto tokens. Similar questions may be raised in SEC v. WahiThis article focuses on insider trading allegations by a former Coinbase employee. CFTC v. Eisenberg It is likely to raise questions about how market manipulation rules are applied to decentralized exchanges.

There’s also the lawsuit brought by crypto lobbying groups Coin Center against Janet Yellen, Treasury SecretaryFollowing the criminalization Tornado Cash, a court may have the opportunity to examine the application of various illicit finance laws and decentralized protocols using open-source software. While there are many other issues in the cases against Sam Bankman-Fried’s, a federal court might examine when sloppy risk management or poorly designed collateralized lending practices can become criminal violations.

Also see: Mark Lurie Is Crypto Regulation being held back by the Bank Secrecy Act? | Opinion

Each case has the potential of strengthening the government’s crypto policy or providing new legal frameworks for industry participants.

3. Expect more crypto activity to be offshore and less US-focused

Recognizing the fact that regulators plan to apply existing laws to cryptocurrency (often based upon interpretations with industry participants) We disagreeIt is possible that existing and new crypto entities will limit services offered in the United States. However, the complexity and cost of compliance could outweigh the market benefits of serving American customers.

A Recent statement Federal banking regulators issued statements stating that crypto-related banking activities were “highly probable to be inconsistent with safe, sound banking practices.” This will create additional challenges for crypto entities trying to serve U.S. customers.

It is possible to drive crypto activity offshore exchanges. Keep in mind that the recently collapsed FTX was an offshore exchange based in Bahamas and available only to non-U.S. users.

Without tighter supervision, the industry could proliferate in countries with minimal or no regulatory infrastructure. This outcome would reflect real realities as well: Crypto’s popularity abroad is driven by real-use cases with less U.S. application, such as serving as a financial option. Autoritarian regimes Bank accounts can be taken, giving off-ramps to economies suffering from runaway inflation or where foreign-exchange restrictions are in place limit access To the U.S. Dollar.

4. Tenants who choose to build in the USA

Entities that are able to successfully navigate the U.S. regulatory maze will have the opportunity to capture significant market share and provide a seal of compliance in order for investors and customers. If Congress does adopt substantive crypto-focused legislation, it is likely that this will further cement these incumbents. Additional rules and complexity are likely to be added. Can act as a barrier to entry for new, smaller competitors.

Unfortunately, the current regulatory framework does not provide protection against noncrypto-financial risks to consumers (just ask). Iowa farmer loses $900,000. Texas’s medical facilities are worth investing in. Some policymakers might decide to invest in Texas medical facilities. legitimizing effects The risks of a new crypto law are outweighed by the benefits that can be gained from stronger regulatory supervision. Instead, wait until the industry has developed.

Clarity or Changes?

Nexo might wish for a clearer regulatory landscape, but regulators are able to provide it. Have made it clear This is how they see Nexo’s services and products. Nexo appears to be seeking regulatory clarity, not regulatory changes.

Nexo, after comparing itself with Uber and Airbnb, actually announced its settlement with the SEC in a press release. Because “innovators don’t quite fit into existing regulations,” constructive dialogue is crucial for improving the regulatory frameworks.

Also see: Matt Homer Crypto gets the regulation it deserves | Opinion

It is certainly worthwhile to work with others and improve laws and regulations. But, law enforcement and regulatory agencies have made it clear that they believe that crypto innovators “fit into existing clauses.” Nexo is a prime example of this. It shows how the government will continue to enforce and interpret laws regarding crypto.

Without new legislation or court decisions, the regulatory “enhancements” and changes Nexo and other entities seek are unlikely to be made. It is up to crypto entities, until then, to decide whether or not they wish to operate in the U.S. within the existing framework. There are long-term benefits to those who make the leap. (Nexo decided that it didn’tThe company was fined $45 million and shut down its U.S. operations.

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By David Warsh

David Warsh is a leading expert in the field of cryptocurrency and blockchain technology. With over a decade of experience in the industry, he has a deep understanding of the intricacies of digital currencies and the potential they hold for revolutionizing various industries.