The growth of digital assets presents a challenge for global regulators, but also an opportunity to facilitate development of revolutionary access to the modern financial system. A successful way forward will require international collaboration and alignment of regulatory goals. Part 1 of this article series examined the regulatory landscape in the wake of several high-profile crypto bankruptcies. In Part 2 of this series, this article reviews the US federal and state approach to digital asset regulation in comparison to the regulatory approach in the United Kingdom and European Union.
A Patchwork of Federal Agencies with Jurisdiction
In place of a comprehensive federal legislation, a patchwork of primary US federal agencies have oversight of crypto market participants in the United States, including the US Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FiCEN), the Office of Foreign Assets Control, the US Federal Prudential Bank Regulators (including the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency), the US Treasury, the US Internal Revenue Service and the US Department of Justice.
Most, if not all, legislative initiatives introduced by Congress have had consumer protection goals front and center. The House Committee on Financial Services and House Committee on Agriculture issued a Digital Asset Structure Discussion Draft, which would establish a new regulatory framework for digital commodity exchanges, supervised by the CFTC. The new proposed legislation would give the CFTC jurisdiction over spot crypto exchanges, providing bankruptcy protection similar to that afforded to futures customers.
Another discussion draft on the table has been introduced by the US House Financial Services Committee for a potential bipartisan stablecoin legislation that proposes that the primary federal payment stablecoin regulator would be the US Federal Reserve, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, or the National Credit Union Administration, but also aims to offer state regulators power to oversee stablecoin issuers. The draft also identifies who is authorized to issue stablecoins and the requirements of a payment stablecoin.
States Join the Conversation
State agencies have been fairly active in determining how to regulate or whether to take enforcement action against digital asset market participants.
Applicable state statutes and regulations include the following:
Regulation by Enforcement
Policy making by enforcement, or “regulation by enforcement” occurs when a specific framework is not in place and requires market participants to monitor the enforcement space for guidance on their business activities. Regulation by enforcement proves very challenging, and while the majority of enforcement action seems to be concentrated in the areas of unregistered securities offerings, enforcement activity has recently expanded to include insider trading, market manipulation, and unregistered exchanges and clearing houses.
Other Regulatory Developments
Earlier this year, the SEC proposed amendments to its Custody Rule under the Investment Advisers Act of 1940. Among other changes, the proposal would expand the types of client assets covered by the rule beyond “funds and securities” to digital assets. Comments were due in May, with a final rule anticipated in the fall.
In contrast to the “regulation by enforcement” theme to which those in the digital assets community have become accustomed, the CFTC has been active in issuing guidance to the industry.
Effective May 31, 2023, National Futures Association (NFA) members and associates that engage in digital asset commodity activities must comply with the NFA Compliance Rule 2-51. Pursuant to this rule, the NFA now imposes antifraud, just and equitable principles of trade, and supervisions requirements with respect to trading in spot bitcoin and ether.
Despite taking a technology-neutral approach to regulation, the UK government has announced plans to become a “global hub” for cryptoasset technology and investments. Up until now, the UK Financial Conduct Authority (FCA) has applied existing legislation to cryptoassets as it does to other financial products and services, and currently divides cryptoassets into three categories:
The UK government is working with the FCA to develop a cryptoasset regime that supports innovation and competition and published a consultation paper in February on its proposed next steps for the regulation of cryptoassets. The consultation follows its previous consultation last year on the regulation of fiat-linked stablecoins, as well as proposals to regulate certain other categories of cryptoassets and the trading and investment activities related to them.
In the meantime, the new Financial Services and Markets Act 2023 introduces legislative changes that will regulate the use of stablecoins by amending existing electronic money and payments legislation.
Like the United States, there had been no uniform legal framework for crypto services in the European Union until now (and certain individual countries, such as Germany, Malta, and Estonia, have enacted national crypto laws).
However, the European Union’s Market in Crypto-Assets Regulation (MiCA) (which has recently been published in the Official Journal of the European Union and will generally start applying at the end of 2024) will introduce a harmonized European legal framework for cryptoassets and crypto services.
MiCA is intended to protect investors by increasing transparency and putting guardrails for issuers and service providers in place. MiCA regulates the issuance and public offering of cryptoassets, the admission of cryptoassets to trading platforms, and the provision of certain crypto-related services (including services such as the custody and administration of cryptoassets and the operation of a trading platform). It introduces three categories of cryptoassets (i.e., asset-referenced tokens, electronic money tokens, and all other cyryptoassets), which are each subject to different requirements.
Following the collapse of FTX and other cryptocurrency platforms, there has been a shift away from the piecemeal approach to regulation to a desire for a more holistic approach to regulating the digital assets industry. In the United States, various federal regulators currently oversee the digital asset industry, primarily through enforcement of existing authority, including the SEC, CFTC, and FinCEN. Over in the UK, while digital assets fall within an existing regime, new regulation is being introduced and the UK government is consulting on bringing further activities relating to digital assets into play. And with the recent publication of the MiCA, a landmark framework for cryptoassets and service providers is to come into force in the European Union next year.
Learn More
If you are interested in Post-FTX: How US and UK Regulators Propose to Regulate Digital Assets (Part 2), as part of Technology Marathon 2023, we invite you to subscribe to Morgan Lewis publications to receive updates on trends, legal developments, and other relevant areas.