The Cryptocurrency Regulatory System in the US

It was back on 16 September 2022 that the White House first released a concept of what the regulation of virtual assets in the United States should look like. The new directives use the existing work of the Securities and Exchange Commission and the Commodity Futures Trading Commission.

They address how the financial services industry should evolve to facilitate borderless transactions and how to combat fraud.

The concept also points to the potential for “significant benefits” from the US Central Bank’s digital currency.

The concept is about protecting consumers, investors, and businesses, maintaining financial stability, supporting innovation, the digital dollar, and fighting financial crimes.

One of the sections of the concept concerns the fight against financial crimes. In this section, the Administration does not offer clear solutions but indicates that the President evaluates the practicality of turning to Congress to make the necessary changes to the laws. In addition, the President is expected to draw attention to the Bank Secrecy Act and some rules regarding unlicensed money transfers.

It is also stated that the Treasury Department will assess the risks of illegally financing virtual assets by February 2023. Finally, in the same section, special attention is paid to NFTs.

Attention is drawn to the increased crime related to virtual assets – more than 1 billion dollars were lost by users due to fraud in 2021.

The concept describes the “significant benefits” of using the Fed Reserve’s virtual currency for the payment system and users.

US dollars are in virtual space in several manifestations:

  1. in the form of electronic dollars that circulate in the banking system;
  2. in the form of stablecoins – virtual currencies tied to the US dollar exchange rate;
  3. in the form of a so far ephemeral digital dollar, which is fully regulated by the central regulator and completely repeats the properties of the ordinary dollar.

High-ranking officials confidently and ambitiously claim that the need for cryptocurrencies will disappear with the introduction of the digital dollar. Such a statement is quite bold, but it is far from reality and so far merely reflects wishful thinking.

It is noted that the diversity of cryptocurrencies and their unsettled nature may affect the financial system in the future and generally make central banks nervous. We are talking about stablecoins. Stablecoins are digital assets with a fixed value relative to an underlying asset or currency. The most common stablecoins track the rate of the US dollar. However, there are stablecoins for other international currencies, including the euro, and stablecoins track the value of gold, stocks, and securities.

In turn, it is worth noting that gathering information on regulation is taking place gradually. In late 2021, a US Senate Committee asked stablecoin issuers to provide information on how they do business after the Biden Administration asked Congress to regulate this fast-growing market in the cryptocurrency space. The chairman of the Senate Banking Committee asked stablecoin issuers and crypto exchanges to explain how they protect consumers and investors in the USD 150 billion-plus market. The Senate Committee also sent letters requesting information to stablecoin issuers Tether, Circle, Paxos, TrustToken, and the Center, a stablecoin standardization organization created by Circle and crypto exchange Coinbase, which oversees the USDC. In connection with the US Congress, hearings were held with the participation of top managers of the crypto industry, CEO Circle, CEO FTX, CEO Bitfury, CEO Paxos, CEO Stellar, and CFO Coinbase spoke. In general terms, members of the Democratic Party praised the potential of cryptocurrencies, calling them a cheaper alternative to the existing banking system. At the same time, concerns were expressed about the impact of mining on the environment, as well as insufficient ethnic and gender diversity in companies in the industry.

According to public information, issues related specifically to Tether were not raised despite the fact that a class-action lawsuit was filed in December 2021, which accused the issuer of Tether of misleading about the provision of a “stablecoin”. The plaintiffs cited proceedings involving the firm and its affiliate Bitfinex. Furthermore, in September 2022, a court in New York ordered Tether Limited to provide financial documents to evaluate the reserves of the stablecoin USDT as part of a process about possible manipulation of the markets.

Each stablecoin works differently and is managed by a different group or organization. The case of Terra USD, a stablecoin that mercilessly collapsed in May 2022 and cost investors hundreds of millions of dollars, adds to  concerns. In the case of TerraUSD, the currency is part of the Terra ecosystem, which also operates Terra (LUNA).

The TerraUSD currency is not backed by assets denominated in US dollars. Instead, a computer algorithm creates (mints) and destroys (burns) both UST and LUNA to bring the price back into balance. It worked well in practice from the creation of Terra and Luna until the recent market crash, when the pressure on TerraUSD was too much for the algorithm to keep up. The concept states that virtual assets and the financial system are becoming increasingly connected, which may cause adverse consequences in the future. In this regard, the document emphasizes that stablecoins should be regulated.

The Administration assures that the Treasury Department will work with financial institutions to analyze and mitigate the risks associated with virtual assets.

This concept does not yet give grounds for asserting the full settlement of cryptocurrencies and virtual assets in general in the US. However, it can be said for sure that the US is seeking to support the development of the industry and attract innovations, despite the slow and somewhat favorable approach of federal regulators. Moreover, the concept serves as a guiding vector of state policy in this aspect.

Therefore, it should be expected that there will be more and more adherents of this approach to regulating crypto assets on the world map.

  • Peter Bilyk

    СIO, Head of Technologies and Investments, Juscutum

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