This year was a noteworthy one for crypto companies, as Binance was hit with a $4 billion settlement and several high-profile lawsuits were brought against them by regulators. The U.S. was the main spearheader of taking legal action, with the Securities and Exchange Commission charging Coinbase and Binance. Meanwhile, the European Union passed its Markets in Crypto-Assets regulation, the first of its kind across the world, with laws that pertain to the crypto industry.
In 2023, regulators across the globe, ranging from Europe to Asia, took giant strides towards formalizing laws surrounding digital currencies. The United States, however, was particularly stringent in its legal methods of preventing misconduct in the industry. This resulted in Binance being obliged to pay the US authorities more than $4 billion and the admission of guilt by its former CEO, alongside the SEC's prosecution of five crypto companies. Simultaneously, other countries have crafted new legislation or requested more restrictions to quell the misdeeds of wrongdoers. Now, we are at a crossroads in the crypto regulation and enforcement, and the next step lies in what the following year of 2024 has in store.
The U.S. has been a major player in the enforcement of penalties and legal action against crypto companies this year, due to the collapse of Sam Bankman-Fried's crypto empire — including his FTX exchange and sister firm Alameda Research. Renato Mariotti, who used to be a part of the U.S. Justice Department's Securities and Commodities Fraud Section, stated that in some cases, like FTX, enforcement was necessary. He also said that the 'regulation by enforcement' approach taken by the U.S. in enforcing market participants is debatable.The U.S. is the only country that has taken steps to actively punish large crypto companies and projects. It has taken a stricter stance in comparison to other countries, often levying penalties and fines. Mariotti explained the reason behind this discrepancy, saying, "Other countries have a comprehensive regulatory framework in place. We don't. As a result, issues that should be determined by legislation or regulation are instead litigated."
Absent clear guidelines from Capitol Hill, the SEC, CFTC, Justice Department, and Treasury's FinCen have acted in parallel to police the crypto sector, using regulation-by-enforcement techniques. According to Richard Levin, a partner at Nelson Mullins Riley & Scarborough who has represented clients before the mentioned agencies, they have provided guidance to the industry about how digital assets and crypto must be offered, sold, traded, and held.
The US Attorney for the Southern District of New York Damian Williams has been at the forefront of Justice's most prominent crypto-related cases, which includes the recent trial of the Bankman-Fried, FTX's disgraced founder, who was found guilty of all seven charges after just few hours of deliberations.
Annual reports from the CFTC and SEC indicate that nearly half of the enforcement actions in 2023 involved crypto asset-related misconduct, such as fraud, unregistered assets, and unlawful celebrity endorsements. The SEC's enforcement efforts since 2014 have resulted in more than 200 cases related to crypto assets and cyber offenses.
Some of the most stringent examples of this occurred in the first half of the year when the SEC charged Coinbase and Binance for illegal securities dealing. Not only was Binance accused of violating securities law, but the SEC also asserted that it commingled customers' assets with the company's funds. Moreover, the SEC claimed that at least 13 crypto assets traded on Coinbase, such as Filecoin, Cardano, and Solana, were considered securities and therefore must undergo strict disclosure and visibility requirements.Despite the threat of companies leaving the US due to the policing by enforcement, crypto companies have pushed back. Coinbase CEO Brian Armstrong initially stated the company may have to relocate its headquarters, but walked back the threat. Nonetheless, Coinbase, as well as other major crypto firms, have begun to invest heavily in their international operations.Individuals in the crypto market hope that the numerous legal battles being fought in 2023 will provide clarity in the form of new regulations. Alyse Killeen, a managing partner for Stillmark Capital, pointed out that clearer frameworks from regulators have resulted in more widespread participation in the bitcoin market.Progress on cryptocurrency laws in the US happened this year, with one of the digital asset bills making it through House committees for the first time. Nonetheless, there is still no specific law for the industry. Nelson Mullins Riley & Scarborough's Levin stated that it's unlikely there will be much development this year with the US having a divided government and it being a presidential election year.He then argued that although there are no rules on crypto from legislators, the US regulators still give guidance to the crypto industry. Levin pointed out that the SEC even created a fake asset that gave advice to the FinTech community on how to launch a digital asset.Killeen of Stillmark Capital does not anticipate the regulator becoming fatigued by crypto in 2024. This is despite two leading figures of the crypto industry being jailed. The stock price of Coinbase has risen by over 400% and the prices of bitcoin and ether have both roughly doubled since this year started. This is likely in anticipation that the SEC will soon approve a bitcoin exchange-traded fund.
It appears that the European Union is poised to begin enforcing its Markets in Crypto-Assets regulations early in 2021. This legislation was established to address the lawlessness of the cryptocurrency sector, as a consequence of Facebook's digital currency venture Diem (formerly known as Libra). The act is intended to tackle fraud, money laundering, and other forms of illegal financing in the crypto domain, while also targeting any other wrongdoers in the industry.
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It also aimed to respond to a potential danger from stablecoins, or digital tokens supported by blockchain that function as mirror images of government money but are upheld by private entities. Stablecoins emulate digital forms of payment that are bound to the price of paper money, such as the dollar. Although tether and Circle's USDC aren't viewed as resources that can be disruptive to financial equilibrium, a stablecoin from a giant firm such as Meta, Visa or Mastercard, may present a larger risk and could feasibly weaken sovereign forms of currency - according to many EU central bankers.
As part of the EU's framework for cryptocurrency, measures have been put in place to protect against threats like attempting to undermine the euro. Notably, it has become impossible for issuers to create stablecoins backed by any currency other than the euro if the transactions exceed 1 million in a single day. This year, the Markets in Crypto-Assets Regulation (MiCA) was approved by the three main political institutions of the EU, taking effect in June 2023. Companies are already preparing to capitalize on the regulations, with Coinbase filing for a universal MiCA license in Ireland; if approved, they would be able to offer their services in Germany, France, Italy, and the Netherlands. However, it won't be fully enforced until December 2024.
Braden Perry, former federal enforcement attorney and current partner at law firm Kennyhertz Perry, noted that while the US has been particularly proactive in addressing fraud and security issues in the crypto market, other jurisdictions have stepped in with clearer rules, leading to a possible decline in its reputation as a regulator. This includes Singapore, Dubai, Hong Kong, and the European Union, which possess significant and sometimes stringent regulatory mechanisms. Regarding the EU, France has made an effort to attract crypto companies and traders with promises of tax cuts and a smoother registration process for digital asset firms. However, the French regulator has also acted to prevent fraudulent activity from taking place within the crypto world. Additionally, Germany's financial regulator Bafin has plans to accelerate their approach to licensing crypto custody services. The U.K., meanwhile, passed a law in June that grants regulators the ability to oversee stablecoins, although there are currently no concrete rules for crypto. Their Treasury Department confirmed their intention to bring a range of crypto activities, including crypto custody and lending, within existing laws governing financial services firms in the country.
Earlier this year, the Monetary Authority of Singapore, known for its clear fintech and crypto regulations that avoid heavy enforcement, completed regulations for stablecoins, making it among the first jurisdictions to do so.Singapore suffered the consequences of TerraUSD’s collapse in 2022, a controversial algorithmic stablecoin, and 3AC’s fall, both of which had their headquarters in the nation.Singapore's new framework requires stablecoin issuers to back them with low-risk and highly-liquid assets, these assets must be equal or greater than tokens in circulation at all times, they must return the par value of the digital currency to holders within five business days of a redemption request, and they must make known the audit results of reserves to users.Hong Kong is currently going through a public consultation on stablecoins and plans to introduce rules in the upcoming year, whereas China, having forbidden bitcoin trading and mining in 2021, has implemented a general anti-crypto policy.The Hong Kong Securities and Futures Commission, the SFC, started a registration process for digital asset companies earlier this year, with clear regulations for crypto exchanges and funds.As of now, only two companies, OSL Digital and Hash Blockchain, have been granted licenses.
The UAE has become an appealing base for the fintech industry due to its lack of personal taxation, lenient visa regulations, and attractive incentives for foreign workers and companies. In 2022, to become a frontrunner in the virtual assets sector in the Middle East and Africa, Dubai - the country's most populous city - introduced VARA, or the Virtual Asset Regulatory Authority. Perry stated that "Dubai and the UAE have generated favourable conditions for cryptocurrency business, providing particular zones and regulations for crypto dealing". According to a report by blockchain analytics organisation Chainalysis, authorities in the UAE were early to adopt cryptocurrency, with Dubai as the pioneer when it introduced its blockchain plan in 2016. Chainalysis' report added that “the UAE regulators have remained at the forefront of the industry”. Then in 2018, Abu Dhabi Global Market established the world’s first regulatory framework for cryptocurrency intended to facilitiate innovation whilst still protecting consumers. This year, the UAE sanctioned additional crypto regulations at a federal level to simplify supervising the sector and running economic-free zones by regulators such as VARA.
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