Ask people around you what they think of crypto, and you’re likely to get one of two diametrically opposed reactions. For many, crypto is a force for good: a way to streamline the flow of money, democratize access to financial instruments, and circumvent oppressive centralized institutions (like governments, central banks, and Big Tech). For others, crypto is pure evil: a Ponzi scheme that preys on vulnerable consumers, an environmental disaster and a tool for savvy criminals to evade sanctions and launder ill-gotten gains.
The tension between those two opposite views is real, and it’s been difficult to find common ground for crypto regulation, particularly in the US. Until now.
Whether you’re a crypto fan or not, there’s a growing consensus that the lack of clarity on the regulatory front is actually what’s hurting the most. Regulators want to close loopholes, enforce rules against illicit activity (like money laundering) and codify protections for consumers and investors. Crypto enthusiasts, on the other hand, want to know the rules of the game. Yes, the Web3 ethos is fiercely independent, and blockchains are supposed to free everyone from centralized oversight, but that doesn’t mean that crypto companies want to operate in an environment that condones criminal activity either.
An interagency path forward
On March 9, 2022, President Biden signed an Executive Order to lay out a cohesive, ‘whole-of-government’ approach for US regulatory and enforcement agencies to address the risks posed by virtual assets, without stifling their potential. The objective of that Order is clearly to find a happy middle ground. The US government is justifiably concerned about the illicit use of crypto and other virtual assets to bypass international sanctions (especially in light of current geo-political tensions), destabilize the international financial system or deceive individual consumers. But the administration doesn’t want to scare away tech innovators and investors in the process, or forgo any of crypto’s economic benefits.
To be clear, individual agencies haven’t exactly been sitting on their hands. Last year, in June 2021, FinCEN issued government-wide AML/CFT directives (Anti-Money Laundering and Countering the Financing of Terrorism), and as administrator of the Bank Secrecy Act, made it very clear that cryptos (more specifically, ‘convertible virtual currencies’) were in the hot seat. Around the same time (in Aug 2021), the CFTC reached a $100M consent order with BitMEX for operating a swap and futures platform without registration, and for failing to implement a proper AML compliance program. And in October 2021, the FATF, the global money laundering and terrorist financing watchdog, expanded its far-reaching recommendations and standards to include new Virtual Asset Service Providers (VASP) like stablecoins, NFTs, and P2P transactions.
But with the new priorities outlined in the Executive Order as guiding posts, we’re going to see a flurry of crypto-related reports and proposals over the next 6-12 months from the DOJ (and its new National Cryptocurrency Enforcement Team), Commerce, Treasury (including FinCEN, OCC, the IRS), the SEC, CFTC, the Federal Reserve and many others. Already, the SEC has announced its intent to double its enforcement division, and require registration for crypto trading and lending platforms “whether they call themselves centralized or decentralized (DeFi).”
It’s going to be interesting to see the extent to which each agency is going to be willing to question the boundaries of its own jurisdiction, and how the whole effort is going to sync up with international bodies like FATF, the Financial Stability Board (FSB) or the upcoming AML Authority for the European Union.
Not a moment too soon
Web3 meetups might still have a flair of Comic-Con (witness the Bufficorn), but crypto is a force to be reckoned with. As of this Memorial Day weekend (May 2022), there are nearly 20,000 different cryptocurrencies on the market, with a total market cap of approximately $1 trillion. According to Pew Research Center, 16% of US adults have invested in, traded or used crypto.
Is crime a big issue? Chainanalysis puts the number at $14 billion, or about 0.15% of overall crypto transaction volume in 2021. Money laundering accounts for a third of that amount, or 0.05% of all crypto transactions. For comparison, the UN Office of Drugs and Crime estimates that 2-5% of global GDP (between $800 billion and $2 trillion) gets laundered every year. So, at least for now, money laundering is 100X less likely in crypto than it is in the world of fiat currencies.
That’s not entirely surprising. After all, the blockchain isn’t anonymous, and the rise in adoption of KYC provisions by crypto companies around the world doesn’t make it very attractive for criminals looking to hide their identity and erase every trace of illegal activity. Marty Byrde uses a funeral home, a motel and a riverboat casino to launder money for a drug cartel in the TV show Ozark. Not Binance.
While any amount of crime is cause for concern, the figures above serve to remind the industry—and regulators—that crypto isn’t the crime haven it’s often portrayed to be, far from it. And that the vast majority of illicit activity in crypto isn’t connected to money laundering or terrorism funding, but rather comes from hacks (like ransomware) and good old-fashioned scams (like this recent phishing example that cost users $1.7 million in stolen NFTs on OpenSea).
But vigilance is paramount. Criminals are often one step ahead, and the whole DeFi movement is offering new ways for them to get creative.
Time to answer the big questions
So it’s time to answer the big questions on everyone’s lips. Are cryptocurrencies actually currencies, securities or commodities? Ripple lawyers would like to know. Who has regulatory jurisdiction and enforcement authority for various new types of crypto companies (in particular in the DeFi markets)? What minimum set of requirements (like AML and KYC compliance) do crypto companies need to abide by? Can the process of registering and licensing a crypto business in multiple states be streamlined?
It’s not really the prospect of regulation that’s got the crypto world on edge, but the lack of clarity on what exactly is regulated, where, how and by whom. In a recent survey of compliance leaders in crypto and financial services conducted by the Harris Poll and commissioned by Fyllo, 48% thought that the current policy, regulatory and compliance environment was too unpredictable. And most were more worried about uncertain policies (72%) or violating regulations (69%) than growing revenue.
As the US regulatory and enforcement bodies embark on a new journey of self-examination and interagency cooperation, and state legislatures develop their own bills to define and regulate digital assets and money service businesses, the compliance picture is about to get very pixelated. But you can stay ahead of the game with access to the Fyllo Regulatory Database for cryptocurrency.