The crypto market has grown tremendously since its inception in 2009, and by 2030, it’s expected to maintain a 12.5% compound annual growth rate.
As the popularity of cryptocurrency increases, so will regulations in countries such as the United States and countries comprising the European Union (EU). Ultimately, regulations will support or restrict the crypto market.
Understanding the context of crypto regulations in your country can help you navigate the market, whether you’re a new or experienced investor. In this guide, we’ll discuss the regulations in the U.S. and EU and how you can adapt.
How Crypto Regulations Benefit Investors
Crypto regulations aren’t always negative. Here are some reasons why crypto regulations can benefit investors:
Security and Fraud Prevention
Crypto regulations encourage businesses to implement stringent security measures to protect against fraud, hacking, and scams. In doing so, businesses can protect their customers throughout the crypto market. When investors know they’re protected against fraud, they’re more likely to buy cryptocurrencies.
Market Stability
By providing a sound regulatory framework, regulations can be promulgated in seeking to reduce volatility and speculative trading, potentially leading to a more stable cryptocurrency market.
Market instability can prevent investors from investing in crypto. As such, governments can enact measures in an effort to stabilize crypto financial markets. For example, governments will be able to punish individuals responsible for market manipulation.
Investor Protection
Regulatory oversight seeks to ensure that there are measures in place to protect investors from fraudulent schemes and to provide accurate information for investors to make informed decisions.
For example, many crypto exchanges are required to publish up-to-date investor information for investors and provide timely alerts. This is what it takes to launch a crypto exchange, so investors can confidently use these platforms.
Market Growth and Innovation
A regulated crypto market can attract more investors and businesses, encouraging innovation and growth in the crypto space. When investors feel confident making transactions, the entire market stands to benefit.
For example, crypto regulations can help to weed out fraudulent activities and provide the regulatory framework for legitimate crypto businesses to grow and offer services that include crypto lending, staking, and liquidity pools.
What Are the Implications of Not Regulating Crypto?
Failing to regulate the crypto market could result in disastrous consequences for investors, including:
Higher Risk of Fraud and Scams
Crypto regulations are intended to help save investors from unforeseen scams designed to steal their hard-earned money.
Without regulatory oversight, the crypto market becomes more susceptible to fraudulent schemes and scams, leading to potential financial losses for uninformed investors.
Enforcement of regulations holds criminals responsible for their actions and encourages companies to stay compliant when interacting with investors.
Greater Market Volatility
Market volatility happens when prices fluctuate with big pricing swings in either direction. While some traders thrive on high volatility, this phenomenon may prevent other traders from making confident investments in digital assets.
Without oversight or guidelines, market manipulation and speculative trading can be more rampant, leading to unpredictable price swings.
Lack of Investor Protection
Without regulations, investors are potentially more exposed to fraud and other criminal schemes in the crypto space.
For example, investors in an unregulated crypto market lack safeguards against malpractices, and there are no established channels for regulatory enforcement or similar recourse in case of disputes or fraud.
An Overview of Crypto Regulations in the U.S.
Various regulatory agencies have been established by legislative authorities in the U.S. in seeking to protect investors.
Regulatory Landscape and Key Agencies
In the U.S., there are several regulatory agencies providing oversight of the crypto industry, including but not limited to:
- The U.S. Securities and Exchange Commission (SEC): Established during the presidency of Franklin D. Roosevelt in 1933, the SEC aims to enforce the law against market manipulation in securities, such as digital assets which are deemed to be securities for such purpose.
- The Commodity Futures Trading Commission (CFTC): This agency regulates the U.S. derivatives markets, including futures and swaps. Their purview is also on certain digital assets which are characterized as commodities and any derivatives on digital assets.
- The Internal Revenue Service (IRS): The IRS administers and enforces tax laws and regulations in the U.S. This agency has created tax guidelines for reporting income from digital assets.
- The Financial Crimes Enforcement Network (FinCEN): The FinCEN investigates and prosecutes financial crimes, such as international money laundering and terrorist financing in the crypto industry.
One of the U.S.’s main policy concerns is that cryptocurrency can open the doors for illicit financing to fund terrorist operations. The U.S. Treasury introduced new proposals to prevent international money laundering schemes that use cryptocurrency as a vehicle. This proposal is designed to expose the illicit financing schemes of terrorist organizations.
The Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) are two consumer-targeted agencies that can also warn investors about fraudulent crypto opportunities.
Classification and Legal Status of Cryptocurrencies
There is a growing debate in the U.S. about whether crypto assets should be classified as securities or commodities.
Specifically, under the Commodity Exchange Act, certain crypto assets are considered commodities and regulated by the CFTC.
ICO and Securities Regulations
Those crypto assets which are considered securities are regulated by the SEC. A securities offering, such as an initial coin offering (ICO) to raise funds for a crypto project, is subject to registration with the SEC, unless an exemption applies.
AML and KYC Compliance
Anti-Money Laundering (AML) and Know Your Customer (KYC) are security frameworks that are intended to protect investors from participating in investments in businesses engaged in global financial crimes and fraudulent financial services.
The U.S. Treasury is primarily responsible for AML/KYC regulation. FinCEN, the U.S. Treasury’s Financial Crimes Enforcement Network, requires crypto businesses to comply with rigorous AML and Customer Due Diligence (CDD) protocols (which KYC falls under) to prevent unauthorized cryptocurrency transactions and fraudulent money schemes.
Taxation of Cryptocurrencies
In the U.S., crypto generally is subject to taxation on gains realized from the sale of cryptocurrencies, based on the applicable American tax rates for cryptocurrencies.
State-Specific Legislation and Policies
Individual states may propose and enforce their own crypto policies. Crypto businesses operating in these jurisdictions are required to abide by state-specific rules.
For example, New York requires all crypto businesses to register for a BitLicense to conduct business in virtual currencies in that state.
Current Trends and Future Regulatory Outlook
After the collapse of FTX and the subsequent criminal conviction of Binance’s Changpeng Zhao, U.S. regulators will likely continue to enforce stricter measures on cryptocurrency exchanges and crypto-as-a-service ventures to promote financial transparency and consumer safety.
Crypto Regulations in the EU
Just like in the U.S., cryptocurrency regulations are common throughout Europe. Below, we’ll look at some of the most significant aspects of the EU’s approach to crypto regulations.
Overview of EU’s Crypto Regulatory Framework
The EU is in the process of pushing forward a comprehensive regulatory framework for crypto assets, called Markets in Crypto-Assets Regulation (MiCA).
This regulation focused mostly on stablecoins, which are digital coins tied to fiat currencies or values. MiCA will fall under the European Securities and Markets Authority (ESMA) and the European Banking Authority’s (EBA) purview.
Both agencies will oversee uniform rules for crypto assets in the EU. While MICA will be applied across the EU, each EU member country has its own crypto regulations. For example, France passed the Sorare law that provides a regulatory framework for companies running games that use cryptocurrency and non-fungible tokens (NFTs) as base elements.
Markets in Crypto-Assets (MiCA) Regulation
MiCA covers crypto assets not currently listed in past EU crypto legislation. This mainly includes asset-reference tokens and e-money tokens. MiCA aims to enforce uniform standards for transparency, disclosure, authorization, and supervision of crypto transactions and to promote financial stability and consumer confidence.
AML and KYC Compliance
Similar to the U.S., the EU has passed several AML directives, requiring businesses and financial institutions to implement security protocols to deter international terrorists and keep innocent investors safe.
Specifically, the EU’s Fifth and Sixth Anti-Money Laundering Directives require crypto businesses to prioritize KYC protocols to confirm a customer’s identity and avoid dealing with criminals.
Classification and Treatment of Cryptocurrencies
MiCA recognizes the value of cryptocurrencies as legitimate currency. Under this legislation, cryptocurrencies fall into three asset classes:
- Utility tokens: These are crypto assets designed to provide access to a good or service. An example is fractionalized stocks and bonds.
- Asset-referenced tokens: These are cryptocurrencies backed by other forms of currency, such as legal tender, fiat currency, and commodities. Stablecoins are a popular example.
- E-Money tokens: These are crypto assets used to pay for goods and services. Standard cryptocurrencies like Bitcoin and Ethereum fall under this category.
All of these crypto assets must meet the same compliance standards under MiCA.
Consumer Protection and ICO Regulations
The EU is currently in the process of agreeing to a resolution for new ventures to register and provide notice of their ICOs to a regulatory authority authorized by ESMA and the EBA.
Future Outlook and Regulatory Developments
MiCA is one of the world’s first extensive set of crypto regulations. It’s designed to promote market integrity and ensure crypto businesses are setting appropriate security protocols in place to combat money laundering and fraud.
MiCA’s response and efficiency will undoubtedly impact how other nations approach their own crypto financial regulations.
Discover How AlphaPoint Powers Digital Asset Exchanges Globally
Successful crypto businesses stay on top of crypto regulations in jurisdictions across the world — it’s how they can maintain compliance and best serve their customers. If you’re starting a crypto exchange or another digital asset venture, you’ll have to do the same.
This is where AlphaPoint comes in. For over a decade, AlphaPoint has worked with over 150 customers across 50 countries and has had the opportunity to immerse ourselves in domestic and international crypto regulations.
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