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To date, conscientious traders of digital assets and cryptocurrencies have mostly sought regulatory refuge under the quilt of state money transmission laws. In the not-too-distant past, business was primarily limited to exchanging fiat currencies for virtual currencies, such as bitcoin and ether. Driven by law enforcement and consumer protection concerns, numerous state regulators decided that only licensed money transmitters could engage in those activities.
Concluding that virtual currencies presented a unique set of regulatory considerations, New York state hatched the BitLicense. Thus, in order to operate on a national scale, crypto exchanges and trading businesses have had to secure dozens of separate state permits — a complicated and expensive process that hardly promotes regulatory efficiency. Times have changed quickly, though, and digital asset markets have witnessed the rapid rise of the initial coin offering, or ICO. Because the sale of unregistered securities is a serious violation of federal law, the SEC has recently launched numerous ICO investigations and enforcement actions.
This aggressive campaign seems like an effort by the SEC to corral digital asset traders into its jurisdiction. In fact, there is an emerging turf battle, which can lead to no good. Virgin Islands, Vermont and Washington, expressly exempts SEC registered broker-dealers and clearing agencies from money transmitter license requirements. Many other state statutes, however, provide no such exception.
And despite the apparent lack of any state law precedent for requiring SEC registered broker-dealers to register as money transmitters, it is entirely unclear whether state regulators will deal with the trade of digital assets differently. In the spirit of incremental reform, though, this suggestion applies only to digital assets that qualify as securities under federal law.
Other virtual currency businesses — more akin to traditional money transmission — may be better regulated as money transmitters. Time will tell, and there is presently no compelling reason to disrupt the regulatory framework that has evolved to govern these businesses. Importantly, there is little downside to this measured approach. Under SEC supervision, broker-dealers and other registered entities already must meet strict anti-money laundering and consumer protection requirements.
These are the primary concerns addressed by state money transmission regulators, so substituting the SEC as the watchdog would keep these important safeguards in place. Finally, such preemptive intervention could also create several significant benefits. First, it could provide regulatory clarity, assurance and stability to a young and rapidly growing sector of the financial services industry. In the meantime, conscientious traders of digital assets and cryptocurrencies — those who want nothing more than to comply fully with applicable regulatory requirements — are left to navigate ambiguous rules.
Some categorical guidance from the SEC soon would be greatly appreciated and constructively utilized. Those currently involved in cryptocurrency trading must rely on ambiguous and overlapping guidelines. Video Making smarter small business lending decisions Learn about the new datasets and capture methods we are exploring to enhance the predictive scoring of small business.
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