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Risk Fraud & Compliance

US crypto framework begins to evolve: A Special Report update

Todd Ehret  Senior Regulatory Intelligence Expert

Todd Ehret  Senior Regulatory Intelligence Expert

As the US regulatory landscape for cryptocurrencies and digital assets rapidly evolves, industry participants are keenly focused on every action, comment, or policy coming from regulatory agencies and lawmakers on Capitol Hill

In June, the Thomson Reuters Institute and Thomson Reuters Regulatory Intelligence published a Special Report: Cryptos on the Rise, which looked at the state of crypto assets, their risk and regulation, and how their impact and acceptance is evolving around the world. The report included a Compendium of Country-by-Country Crypto Regulations.

Since publication, much has transpired globally in crypto regulation, warranting a special recap of the report that focuses on U.S. regulation, ahead of a global update next year.

Although the U.S. Securities and Exchange Commission (SEC) is sure to play a central role in the regulation of digital assets, rules, guidance and enforcement actions brought by other authorities are already beginning to take shape. For example, federal regulators have begun staking out their territory for regulating digital assets while several states have raced ahead with their own laws. Like much U.S. financial services regulation, there is significant jurisdictional overlap, and the well-established concept of a “regulatory patchwork” is beginning to unfold for cryptos.

Several states and other federal regulators such as the Commodity Futures Trading Commission (CFTC) and the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), Office of Foreign Assets Control (OFAC), and Office of the Comptroller of the Currency (OCC) are all moving forward to regulate cryptos in their respective areas of authority.

The White House is also considering broad oversight of the cryptocurrency market to combat ransomware and other cybercrimes. This push includes a planned international security gathering on the issue, and reportedly may result in an executive order. Lawmakers on Capitol Hill have also called for coordination of regulations.

Federal regulators seek crypto oversight

Indeed, the SEC went from no mention of cryptos in its annual regulatory agenda in June, to requesting more resources and authority from Congress, while also announcing several enforcement actions. SEC Chair Gary Gensler said the agency would work with Congress, the Biden administration, and fellow regulators to close regulatory gaps, saying the SEC has “taken and will continue to take our authorities as far as they go.”

The SEC has brought several cases related to the offer and sale of unregistered securities offerings and other alleged fraudulent activity involving crypto-assets. Unregistered-securities ases were brought against Blockchain Credit Partners, and Poloniex, while a public spat with the largest crypto trading platform in the country, Coinbase, captured headlines after the company said the SEC warned it against launching its new lending product, which Coinbase then scrapped. Another noteworthy case involved U.K.-based Biotics Ltd., formerly, Coinschedule Ltd., for failing to disclose “anti-touting” provisions of securities laws.

The CFTC moved quickly several years ago to clarify its stance on cryptos. In 2018, it defined cryptocurrencies, including bitcoin, as a commodity subject to its jurisdiction. The CFTC, under the prior leadership of Chair Christopher Giancarlo was viewed as perhaps the most crypto-friendly regulator for its approval of bitcoin futures trading in December 2018. Trading of bitcoin futures contracts on the Chicago Mercantile Exchange (CME) has been considered successful. However, the CFTC has been clear that its regulation only extends to the derivatives contracts and their trading activity on regulated exchanges, rather than the underlying digital assets.

An enforcement settlement in August involving BitMEX, a cryptocurrency exchange and derivatives trading platform, resulted in a $100 million fine. The case involved cooperation of the CFTC and FinCEN in resolving civil charges that BitMEX illegally operated a cryptocurrency trading platform that was accessed by U.S. market participants, as well as related anti-money laundering (AML) violations and other alleged compliance violations.

In January, the OCC issued an Interpretive Letter clarifying the authority of national banks and federal savings associations to participate in independent node verification networks (INVN) and use stablecoins to conduct payment activities and other bank-permissible functions. The Interpretive Letter confirms the authority of banks to connect to blockchains as validator nodes and thereby transact stablecoin payments on behalf of customers.

Acting Comptroller of the Currency Michael Hsu told the Senate Banking Committee in August that the OCC was reviewing its crypto-related national trust charter program, which he says has not been coordinated with all “stakeholders.” Hsu raised the question of establishing a “regulatory perimeter” and cited a lack of understanding and strategy to achieve it. He also said the agency has updated the framework for chartering national banks and trust companies and interpreted crypto custody services as part of the business of banking.

OFAC in September issued an updated advisory about the sanctions risks of facilitating ransomware payments using cryptocurrencies. On the same day, OFAC announced its first-ever sanctions involving a crypto exchange, designating SUEX OTC, S.R.O. as a malicious cyber-actor. More than 40 % of SUEX’s transactions were associated with illicit actors, OFAC stated. As a result, any financial institutions or entities that engage in transactions with SUEX may be subject to an enforcement action.

US states get into the act

Several individual U.S. states have been trailblazers in crypto regulation and enforcement. Statutes in several states are being enacted to require licensing for money-services or transmitter businesses.

States also have amended securities and banking laws to include crypto-related activities. For example, on June 10, the Texas Department of Banking authorized state-chartered banks to provide virtual currency custody services to customers.

Other states have amended money service business (MSB) or money transmitter regulations to include cryptocurrency transactions such as bitcoin. Florida’s Office of Financial Regulation in August issued a notification that cited a court interpretation to hold that a state MSB license is required to sell virtual currencies in Florida. As of January 1, 2022, all sellers of virtual currencies must have submitted an application to the state for an MSB license.

On the enforcement front, since July 2021, securities regulators in five states — Alabama, Kentucky, New Jersey, Texas, and Vermont — have brought cases against BlockFi, Inc. and its affiliates related to lending and borrowing in interest-bearing cryptocurrency accounts claiming the accounts are unregistered securities violating state securities laws.


You can see the full Special Report: Cryptos on the Rise, from the Thomson Reuters Institute and Thomson Reuters Regulatory Intelligence here, along with the Compendium of Country-by-Country Crypto Regulations.

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