Financial services institutions are intimately familiar with the challenges the industry faces in order to efficiently and effectively maintain compliance with laws, rules, and regulations, including those related to investor protection, market surveillance, anti-money laundering (AML), financial crime prevention, and fraud. But how does crypto adoption impact regulatory compliance?
The explosion of consumer interest and investment in cryptoassets, in addition to increased participation of traditional financial institutions in this asset class, has U.S.federal and state regulators keenly focusing on the regulatory obligations of the crypto businesses. When cryptoassets become institutionalized, they will likely also be traded in other markets similar to assets like commodities. In many cases, cryptoassets may have different regulators (e.g., SEC,FINRA, CFTC, etc.) depending on what type of specific asset they are considered.
Regulatory authorities have not been shyabout enforcing regulations related to cryptoassets. A crypto exchange was fined $110 million for failure to detect suspicious transactions and file suspicious activity reports (SARs).
The current patchwork of U.S. federal and state regulations governing the crypto industry has created a challenging regulatory climate for crypto businesses. Here, we review some current regulations that apply to crypto businesses:
Cryptoassets deemed securities (also referred to by many as "security tokens" or "crypto securities") are becoming an important part of the emerging tokenized economy. Before listing and offering trading of a cryptoasset, an exchange should evaluate whether the asset is a security. Those deemed as securities may require trading to be conducted through a registered broker-dealer and elicit an array of securities laws, rules, and regulatory requirements. If crypto businesses want to offer these products, they will need to address requirements of this new asset class and will likely need to establish a broker-dealer business. Below are some of the key requirements and challenges that the industry is facing related to security tokens:
Regulators are working to keep pace with crypto innovation while seeking to protect the investing public. Crypto businesses will need to clearly define their product offerings in order to navigate the evolving state and federal regulatory landscape. It is in a crypto organization's best interest to get ahead of the evolving regulatory landscape, and we are already seeing organizations take this proactive approach.