Cryptocurrency Regulation and Laws in 2024

There are many good reasons to centralize data. Storing data in a single location makes it easier for an organization to access, organize, and update said data. The analyses gleaned from highly consolidated databases are more likely to be comprehensive and consistent. Administrators of centralized servers can more readily look for evidence of data quality issues and security breaches. Finally, centralizing data allows applications to operate in a cost-effective and efficient manner.

There are also less desirable outcomes from data centralization. Concentrated power, sacrificed privacy, reduced accountability, and curbed competition are a few. We know this because the internet has become increasingly centralized over the last 25 years. This process began when a handful of companies created user-friendly applications. These apps and websites made the world wide web highly accessible. Now, the vast majority of internet activity ends up recorded in databases owned by Google, Meta, Amazon, and Microsoft, and others.

Blockchain technology is a response to the negative side effects of data centralization. It is an alternative approach to structuring digital information. Blockchain technology allows data to be stored across multiple computers in a network. The nature of blockchain means that individual computers can reliably verify the authenticity of the information received from other “nodes” in the blockchain network. Every time data on a blockchain is shared, the transaction is automatically recorded in a distributed ledger. The distributed ledger cannot be modified.

Helpful explanations of blockchain have been published by government entities like the U.S. Government Accountability Office, the National Institute for of Standards and Technology, and the Department of Homeland Security.

Blockchain’s Most Prominent Application: Cryptocurrency 

Blockchains can store virtually any kind of data, but the initial use cases enabled the creation of cryptocurrencies. Bitcoin, the first cryptocurrency, was launched in 2009. Since then, cryptocurrencies have allowed people to conduct secure financial transactions. Cryptocurrency transactions are completed without the involvement of a national authority, such as a central bank.

Early on, critics argued that only criminal actors would benefit from such a system. Cryptocurrency has potential to fund extremist groups as well as facilitate money laundering and dark web transactions. While threats remain, cryptocurrency has many benefits. These include:

• Increasing participation in the global economy, particularly for people from developing countries
• Reducing the risks associated with conducting business in new markets
• Facilitating more efficient transactions at a lower cost
• Protecting private citizens from corrupt government seizure of their assets
• Reducing security risks of identity theft
• Preserving personal privacy and individual autonomy

For better or worse, policymakers appear to be coming to terms with the fact that cryptocurrencies are “here to stay.” Policymakers have moved beyond attempting to ban the technology or ignoring it altogether. Rather, they’re now focusing on figuring out how to approach responsible crypto-asset regulation.

Crypto and Public Policy: Multiple Dimensions of Financial Regulation

The prospects for Congressional action on cryptocurrency remain murky. This is in part because of the sheer number of pertinent issues that must be addressed. Issues range from ensuring the stability of financial markets to determining the legal implications of smart contracts.

Currently, at least four federal regulatory authorities are involved in managing cryptocurrency risks. This includes the Securities and Exchange Commission (SEC), the Commodity Features Trading Commission (CFTC), the Department of Justice (DoJ) and the Department of the Treasury. Each organization would take a different approach to a comprehensive regulatory framework. Below, we examine the enforcement priorities of each.

SEC: Protecting Investors and Closing Loopholes

The foundation of all SEC regulation is reporting requirements. These requirements are intended to help investors make sound decisions. Companies that sell shares or “securities” are required by the SEC to file a registered public offering statement prior to distributing to investors. Additionally, organizations that facilitate the buying and selling of securities, including stock exchanges and certain types of investment firms, must register as national securities exchanges. 

From the SEC’s perspective, many cryptocurrency offerings are effectively the same as securities sales. This means that cryptocurrency companies must comply with the same investor protection standards that govern publicly-traded companies. This includes regular disclosures related to corporate governance and susceptibility to market risks.

The SEC also seeks to classify certain cryptocurrency companies as securities exchanges. This is because they allow users to trade in their digital assets for traditional currencies. As an example, in its ongoing complaint against Coinbase, Inc., the SEC charges that the organization has been operating as an unregistered national securities exchange since 2019.

CFTC: Deterring Market Manipulators and Stopping Scams

The CFTC is concerned with curbing fraud and other deceptive behaviors in derivatives markets. Derivatives are financial investment contracts. Their value comes from the market price of an underlying asset, such as a currency or a commodity.  Commodities have historically included resources like wheat, gold, and oil, and, since 2015, Bitcoin.

For nearly a decade, the CFTC has sought to regulate Bitcoin and other digital currencies. In that time, the agency has primarily focused on bringing cases against market manipulators. Mitigating the abuses brought by market manipulators is particularly important with cryptocurrency regulation. Once a person falls victim to a scam, transactions function like digital contracts that cannot be reversed or disputed. Blockchains also make it easy for scammers to hide their real identity, acting quickly to withdraw their ill-earned gains as cash before disappearing.

DoJ: Prosecuting Fraud and Curbing Illicit Finance

A key aspect of the DoJ’s approach to cryptocurrency is targeting criminals who use crypto to conduct nefarious activities, like funding terrorist groups and committing cyber crimes. In 2021, the DoJ’s Criminal Division announced the launch of the National Cryptocurrency Enforcement Team (NCET). As a subdivision of the Fraud Section, the NCET’s aim was to combat the use of cryptocurrency as an illicit tool. It focuses on instances of extortion, fraud, and money laundering.

The DoJ goes beyond combatting criminal crypto activity. The Department also targets crypto exchanges that turn a blind eye to such crimes. The prosecution of former Binance CEO Changpeng Zhoa is an example of such efforts. Zhoa’s prosecution centered on his failure to implement an effective anti-money laundering program.

Department of the Treasury: Interpreting and Enforcing Tax Law

The Internal Revenue Service (IRS) sits within the Department of the Treasury. In its capacity to regulate cryptocurrency, the IRS evaluates crypto assets within the context of the tax code. Typically, the money an individual gains or loses from securities and commodities transactions over the course of a given year are reported to the IRS by their broker. This standard reporting practice helps deter tax evasion.

The decentralized and private nature of cryptocurrency presents challenges for the IRS. Since crypto is inherently decentralized, determining who qualifies as a broker is challenging. The privacy-preserving nature of blockchain also complicates compliance logistics for digital asset monitoring.

Looking Ahead: A Push to Fill in Gaps in Federal Cryptocurrency Regulation

Many arms of the federal government are actively involved in cryptocurrency regulation. Despite this, each has also issued calls for Congressional action. No matter how creative or involved enforcement agencies may get, gaps will remain. Regulators are unable to fully mitigate the unique risks associated with blockchain. Comprehensive blockchain regulation is still

Cryptocurrency regulation is multifaceted. It’s important for observers to keep in mind the wide range of legislative proposals. As an example, bills have been introduced to:

• Dictate new CFTC reporting requirements for digital asset trading platforms (HR.5966) 
• Expand the applicability of existing federal anti-money laundering laws to cover digital assets (S.2669)
• Require crypto advertisements to disclose when celebrity spokespeople have been paid for their endorsements (S.1358)
• Direct agencies to study the environmental impacts of cryptocurrency mining (S.661)

Opinions on cryptocurrency regulation don’t fall along clear party lines. In the absence of obvious partisan signals, monitoring the details of competing proposals is especially important.

Plural for Cryptocurrency Regulation

Plural is the policy tracking tool of choice for those engaged in the cryptocurrency regulation space. With Plural, you’ll:

• Access superior public policy data 
• Be the first to know about new bills and changes in bill status
• Streamline your day with seamless organization features
• Harness the power of time-saving AI tools to gain insights into individual bills and the entire legislative landscape
• Keep everyone on the same page with internal collaboration and external reporting all in one place

Create a free account or book a demo today!

More Resources