HTLJ
With the rise in trade of cryptocurrencies since 2020, the United States Government has introduced multiple bills to place guardrails on the emerging cryptocurrency sector as a security asset. The Responsible Financial Innovation Act (RFIA) provided regulatory clarity for supervising agencies and a basic tax structure as a bipartisan effort to outline the rise of digital asset trading anticipated in the next decade.[1]
While this allowed a blanket system of regulation, the bill falls short in addressing the discrepancies between various kinds of cryptocurrencies and other digital assets. A notable distinction addressed in bills proposed in the latter part of 2022 includes recognizing the difference between stable coins and digital currencies that gain interest.[2] Stable coins seek to tie their market value to the value of a non-digital asset. One of the largest stable coins on the market is Tether (USDT) which is considered a digital version of the US Dollar and is backed by gold reserves.[3] The stable coin market has captured global attention since its massive growth to $130 billion by the end of 2021, which is a 20-fold expansion within only 20 months.[4] Interest in stablecoins from both a consumer and legislator perspective are anticipated to remain heightened throughout 2024.[5] The European Union has already taken strides to tackle stablecoin issuer requirements in their markets in crypto-asset (MiCA) regulation, taking effect in mid-2024 with Hong Kong, Singapore, and the UK following suit.[6] Dubai’s strength as starting the world’s first crypto-specific supervisor, the Virtual Assets Regulatory Authority (VARA), has enabled the country to develop a comprehensive regulatory framework that continues to instill confidence in investors seeking to house and protect their digital assets.[7] While the United States has taken strides in approving cryptocurrency ETFs for financial giants such as Grayscale and Fidelity, further efforts towards legal infrastructure are needed to bring more support to the US investor.[8] Yet more national cryptocurrency investment opportunities arise; BlackRock has indicated its advancement towards an Ethereum ETF, hoping for SEC approval within the year.[9]
With more hands joining the effort in accruing profit from the waves of the digital market, the diversification and intricacies of each digital asset require an established legal definition of terms and classification requirements to ensure compliance and proper taxation. End-to-end coverage is necessary for the legal protection of financial intuitions and any involved in the end-to-end creation and trade of the asset to protect against fraud and tax evasion.[10]
Over 35 states have pending legislation regarding cryptocurrency for the 2024 legislative session which includes already enacted items preventing a central bank digital currency in South Dakota and preventing the application of the Uniform Commercial Code to digital assets in Nebraska.[11] California had five bills on their 2024 docket relating to digital financial asset regulation, nonfungible token (NFT) marketplace disclosures, decentralized nonprofit association provisions, and money laundering in blockchain technology, with three bills still pending.[12] The SEC has taken a strong stance on aggressively pursuing security violations, regardless of the recent Bitcoin ETF approvals but will remain stifled by the jurisdictional entanglement between their organization, the Commodities Futures Trading Commission, and other federal regulators.[13]
The main challenge is establishing an enforceable regulation system in this digital space that seemingly counteracts the inherent purpose of decentralized finance itself and bleeds into all areas of the global market. Decentralized finance creates a market for anonymity that can become a breeding ground for tax violations and financial market misconduct unless national and state regulations are coordinated in order to close loopholes and maintain pace with financial innovations. In Spring 2023, the United Sates Treasury cracked down on North Korea for allegedly attempting to evade sanctions through a DeFi (decentralized finance) mixer.[14] Policymakers should look to experts in the field when adapting to these uncharted waters and maintain their fortification of our cybersecurity efforts to identify and prevent these incidents.
Cryptocurrency is an economic disrupter that will only further garner support and use, and it is necessary that lawmakers work towards a unified, bi-partisan effort in establishing a more intricate legal network. 2024 is slated to bring more change and support for safe and compliant digital asset trade that will strengthen our foundation in navigating the decentralized world of Web3.
[1] Josias N. Dewey & Samir Patel, Blockchain & Cryptocurrency Laws and regulations: USA: GLI GLI – Global Legal Insights – International legal business solutions (2023), https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/usa#:~:text=The%20sale%20of%20cryptocurrency%20is,MSB%E2%80%9D)%20under%20federal%20law (last visited Mar 23, 2024).
[2] What is a stablecoin?, Coinbase, https://www.coinbase.com/learn/crypto-basics/what-is-a-stablecoin (last visited Mar 23, 2024).
[3] Adam Hayes, Stablecoins: Definition, how they work, and types, Investopedia, https://www.investopedia.com/terms/s/stablecoin.asp (last visited Mar 23, 2024); Top stablecoin tokens by market capitalization, CoinMarketCap, https://coinmarketcap.com/view/stablecoin/ (last visited Mar 23, 2024).
[4] President’s Working Group Report on Stablecoins, SEC (Nov. 1, 2021), https://www.sec.gov/news/statement/gensler-statement-presidents-working-group-report-stablecoins-110121.
[5] David Carlisle, Top five crypto regulatory and policy trends for 2024, Elliptic (Jan. 16, 2024), https://www.elliptic.co/blog/top-five-crypto-regulatory-and-policy-trends-for-2024.
[6] Id.
[7] Id.
[8] Tony Dong, 7 best cryptocurrency etfs to buy, U.S. news (Mar. 8, 2024, 3:26 PM), https://money.usnews.com/investing/articles/best-cryptocurrency-etfs-to-buy (last visited Mar 23, 2024); Billy Bambrough, Coinbase revealed to be backing Blackrock’s “$5 trillion by 2030” crypto game-changer after Bitcoin, Ethereum and XRP Price Pump,Forbes (Mar. 22, 2024, 8:22 AM), https://www.forbes.com/sites/digital-assets/2024/03/20/fed-triggers-a-huge-bitcoin-price-pump-as-blackrock-quietly-launches-5-trillion-by-2030-game-changer-that-could-boost-ethereum-xrp-and-crypto/?sh=1b643b3e6c3e.
[9] David Carlisle, Top five crypto regulatory and policy trends for 2024, Elliptic (Jan. 16, 2024), https://www.elliptic.co/blog/top-five-crypto-regulatory-and-policy-trends-for-2024.
[10] Id.
[11] Cryptocurrency, Digital or Virtual Currency and Digital Assets 2024 Legislation, National Conference of State Legislatures, https://www.ncsl.org/financial-services/cryptocurrency-digital-or-virtual-currency-and-digital-assets-2024-legislation (last updated Feb. 21, 2024).
[12] Id.
[13] David Carlisle, Top five crypto regulatory and policy trends for 2024, Elliptic (Jan. 16, 2024), https://www.elliptic.co/blog/top-five-crypto-regulatory-and-policy-trends-for-2024.
[14] Id.
