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The State of Cryptocurrency Regulation: Navigating the SEC, DeFi, and Future Implications
Cryptocurrency Regulation Landscape: Understanding the SEC's Stance, DeFi Dynamics, and the Path Forward photo
By: Natali
29.09.2023
DeFi

Cryptocurrency Regulation Landscape: Understanding the SEC's Stance, DeFi Dynamics, and the Path Forward

Table of Contents

Understanding the laws behind crypto can be complicated. Eventually, you will have many questions, including “Does the SEC regulate crypto?” or “What happens if cryptocurrency is regulated? Will I lose my money?”. I understand all these concerns because I was in your place too.

That’s why I gather all you need to know about blockchain laws and how regulation will affect cryptocurrency. Spoiler alert: positively, you have nothing to worry about. The only thing that you should realize is that you influence regulations with your actions.

If you proactively collaborate with government institutions, you help them build crypto laws that suit the blockchain community. Keep reading to find out vital details!

A Brief History of Cryptocurrency Regulation

The crypto industry slowly but surely wins people’s hearts. Regulatory bodies see its growing popularity, so they have decided to develop new laws. Some crypto enthusiasts hate it, but I support regulations as the process.

In the early crypto days, there were no regulations. The government didn’t know about tokens and how to classify them. There were no SEC cryptocurrency regulations, so early crypto investors get scammed pretty often. They can’t even go to the police because there is no protection for law-abiding people. It was the “Wild West” days of the blockchain industry.

However, in 2013 we began to see the first laws in Asia. China and Japan have started to implement the first crypto laws. Unfortunately, later China banned blockchain. On the other hand, Japan legalized crypto in 2017.

In recent years, the EU has emerged as a blockchain regulation leader. In 2020, they passed the Anti-Money Laundering Directive (5AMLD), which demands crypto exchanges obey KYC/AML. They are working on a new crypto regulation called MiCA, which should provide a comprehensive rule set for most common interactions.

The USA is also known for its crypto regulations. At the country level, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have taken the lead in regulating cryptocurrencies.

Some people wonder with questions like “Does the SEC regulate cryptocurrency?”. I’m here to tell you they are just a part of the bigger picture. Even in the USA, they don’t control everything crypto-related. The SEC has classified crypto as valuable papers, while the CFTC has classified them as product (item).

The SEC's Perspective on Cryptocurrencies

The SEC crypto laws are strict. They said tokens act as valuable papers as they pass the Howey Test. Unfortunately, SEC crypto securities are not so smooth. They are battling with multiple blockchain-based businesses to implement laws.

One of the infamous confrontations is the SEC vs. Ripple case. It started in 2020 and is still going. The regulator claims the crypto business raised over $1 B via an off-book securities offering.

The SEC crypto regulations representatives say Ripple spread billions of XRP in exchange for labor services. Which is still illegal as it acts like an investment payment method.

Ripple has denied the SEC's charges and has argued that XRP is not a valuable paper but more like a currency. There is still no end to this crypto SEC argument, as both parties are sure they are in the right sight of history.

Moreover, SEC Chair Gary Gensler has repeatedly stated that the SEC believes that most cryptocurrencies are securities. So, they as regulatory bodies need to treat crypto tokens not like currency but more like valuable papers.

It is safe to say that the SEC and crypto regulations will become synonyms. So we all should be prepared for stricter laws. It is still unclear how the SEC crypto security position will evolve. However, it is safe to say that they are taking their responsibilities seriously.

DeFi and the Regulatory Conundrum

Companies use DeFi apps to allow users to lend, borrow, trade, and invest assets without intermediaries such as banks or brokers.

This industry is still in its infant stages, but it can revolutionize the finances. DeFi is transparent and accessible, unlocking users' new ways to earn money. Financial dApps and bridges are open to anyone with an internet connection and a basic smartphone, regardless of location or banking status.

However, the DeFi industry still has a lot of challenges to overcome. One of them is coming crypto regulation. DeFi protocols are still not controlled by any central authority, making it difficult for regulators to enforce laws and regulations.

Also, many DeFi applications often operate across multiple jurisdictions. Sometimes, those jurisdictions have different crypto laws. So, projects need to adjust to all regulations. Generally speaking, they need to implement the latest SEC regulation crypto order, MiCA recommendations, the AML service, and everything that becomes common in the biggest jurisdictions.

DeFi applications are often too complex for the general audience. Users may not comprehend all the risks that they are taking. Regulatory bodies need to write laws that protect users without limiting blockchain-based businesses.

DeFi markets are manipulation-prone due to crypto volatility. Regulators should develop frameworks protecting investors from possible market manipulation. They will also make KYC/AML regulations even more comprehensive.

Key Regulatory Concerns

As I said, crypto is a volatile industry, and regulators are concerned about it. They want to protect users from scammish projects with new crypto regulations. At the same time, businesses should keep in mind that governments are unaware of crypto market details, so they will keep the same approaches as with traditional finances.

In most cases, it won’t fit the needs of the business. It includes even verifiable sources like an SEC-approved crypto list. You should double-check everything.

Market integrity is another industry concern. There are still plenty of manipulative projects, scamming people for their hard-earned money. The decentralized blockchain nature makes it difficult to investigate manipulations and other illicit activities.

Many people or businesses use crypto as a money laundering or tax evasion method. Thus, most modern regulations are aimed at preventing illicit activities. SEC cryptocurrency regulation is no exception.

Taxation is the third concern. As Benjamin Franklin said, “There are 2 things you can’t escape in this life: death and taxes”. Skipping to modern times, even crypto can’t help you avoid taxes. We all will see more tax regulations.

Regulators are already implementing laws to protect general users from major crypto concerns. The SEC has issued guidance on crypto custody, requiring exchanges and other custodians to register in their database.

On the other hand, the Financial Crimes Enforcement Network (FinCEN) has already issued guidance on crypto regulation, requiring cryptocurrency exchanges to register as money service businesses and obey KYC/AML regulations.

Landmark Cases and Decisions

I recently told you about the SEC VS Ripple beef. Here I want to provide you with other infamous cases worthy of mention, such as CFTC VS Munchee back in 2021.

CFTC said Munchee ran an unregistered cryptocurrency exchange, violating the Commodity Exchange Act (CEA). Munchee representatives responded that CTFC doesn’t even have enough rights to sue them.

There were multiple court sessions, but eventually, it all ended up with an outcome that the CFTC had the power to regulate cryptocurrency exchanges. This case also cemented the statement that cryptocurrencies are considered commodities under US law, making SEC crypto regulation fully legal.

The third major recent case was FinCEN VS PaySafe. The regulator said that the crypto service violated the Bank Secrecy Act because it failed to implement AML measures. The court found that PaySafe was a money service business (MSB) under the BSA. So, they need to stick with AML regulations, as well as other similar blockchain-based services.

The court ordered PaySafe to pay a civil penalty of $10 million and to implement a compliance program that meets FinCEN's latest AML requirements. As you see, U.S. cryptocurrency regulation allows crypto, but only in strictly regulated conditions.

Global Perspectives on Crypto Regulation

The global crypto laws landscape is still in its infant stage. Each country has its approach, and they just start to make collaborative meanings and regulations that support them. So, answering questions like “Is crypto regulated by the SEC?” I can say that only in the US. Other countries may consider US regulations or develop their own set of laws.

The USA has a complex crypto regulatory landscape. The SEC cryptocurrency laws are strict since they accept crypto as securities, while the Commodity CFTC reads them as commodities. However, each regulator asks crypto services for full AML and KYC compliance.

United Kingdom regulatory bodies decided in 2016 that they want to see their country as the fintech hub. Thus, they are still drawing up a smooth law framework, promoting innovation while protecting consumers and investors.

The EU regulatory bodies are also soft on blockchain-based projects since they want to gently control industries that may substitute Euro currency. The EU's Markets in Crypto-Assets (MiCA) regulation pack was expected to be finalized in 2023. But in reality, it may be done in 2024-2025.

The Road Ahead: Predictions and Considerations

It’s pretty clear that government bodies will focus on the regulations even more. So, it’s only a question of time when crypto will be regulated.

First of all, regulators launch laws aimed at the most popular services like exchanges, wallets, and issuers. We will see more international collaboration to develop a worldwide set of crypto-related laws. That way everyone will know that they can legally use crypto, as all services are regulated in a consistent and coordinated manner.

I also think that governments will focus more on blockchain-specific services, rather than more traditional options. They will adopt different regulatory approaches for decentralized exchanges than for centralized exchanges.

Businesses should be prepared for situations where they will demand their rights for all costs. Sometimes the government will hear more from traditional institutions that want to eliminate crypto from the regulatory landscape. So, you should step up for your rights now and then, collaborating with regulatory bodies.

Tips for Navigating Regulatory Waters

I am addressing you to keep informed about the latest regulatory shifts, including SEC and cryptocurrency local laws. It is one of the fastest-changing industries. What was relevant yesterday may be outdated today. If you want to stay a law-abiding investor or business, you should keep up with the latest regulatory updates.

If you are an investor, use only reputable services and custodians that care about their reputation. Keep detailed records of all your transactions, even if they are 7-10 years old. That way you can prove to the services and police that you are not a part of a money-laundering scheme.

If you are accused of illicit activity, and you don’t have enough documentation to prove your law abidance, you may get stuck in legal battles. Be aware of tax implications in your region and region native to your chosen crypto service. As of 2023, crypto investments are taxation subjects in many jurisdictions.

If you are a crypto business, register with the appropriate regulators and implement the latest KYC/AML and CFT procedures into your workflow. In some cases you may need to register with a financial services authority, a money services business (MSB) regulator, or a securities regulator. That way you will show the government that you are a law-abiding business and open to the collaboration that boosts the crypto industry in your region.

I also recommend you have a robust compliance program in place. That way you can be sure that your business adheres to the latest innovations.

Wrapping Up: Will Crypto be Regulated and How It Shifts the Industry

The state of cryptocurrency regulation is evolving rapidly. Obviously, governments and regulatory bodies worldwide struggle to keep up with the latest innovations.

It’s important to find a middle ground between regulators, businesses, investors, and general users’ needs. That’s why each party involved needs to collaborate to create a regulatory environment that would be comfortable for everyone.

Another crucial aspect of a prosperous future is international collaboration. Crypto is known for its borderless approach. Users like blockchain-based apps for their ability to send and exchange assets within seconds. Future regulations should keep this efficiency or even boost it.

However, to maintain these results, businesses should collaborate with regulatory bodies, not argue. Each party involved should focus on their part of the industry and don’t disturb others.