The US plays a key role in cryptocurrency following years of building interest from consumers, institutions, and regulators that have now developed a firm understanding of the asset class. Going forward, 2021 may mark the tipping point for mainstream adoption.
Last year saw several significant milestones for crypto. The price of Bitcoin smashed through its ATHs, and institutional and individuals alike poured billions of dollars into the asset class. The pandemic further catapulted digital payments and blockchain into the limelight and demonstrated the resilience benefits of digital infrastructure.
With companies like PayPal, Square, Tesla, and MicroStrategy investing a huge amount in bitcoin, and with many companies exploring integrating crypto payments into their product offering, there is no shortage of opportunities for this asset class.
More Clarity Comes To Crypto
Elements of regulatory clarity sought by many of us in the industry also started to take shape in 2020. The Office of the Comptroller of the Currency (OCC) took steps to clarify ambiguities around crypto custody and banking activities, announcing in July that national banks could custody the asset class. The Securities and Exchange Commission (SEC), for its part, was active on enforcement, expanding the legal parameters around ICOs with the conclusion of groundbreaking litigation against token issuers Telegram and Kik, and a new suit against Ripple.
On the state level, the New York State Department of Financial Services (NYDFS) is updating its BitLicense regime allowing exchanges with approved operational processes to list new digital assets for trading without embarking on an extended approval process. NYDFS also announced its “Conditional BitLicense” program, whereby unlicensed institutions can partner with licensed ones to engage in virtual currency activity in New York. Across the US, other states are also providing more clarity regarding their cryptocurrency regulatory frameworks (e.g., Wyoming).
Regulators in the US, both at the state and federal level, have a critical role to play by creating a regulatory structure that allows cryptocurrency adoption to flourish, and in doing so, they will help pave the way for American business to remain at the forefront of financial services innovation. The Biden administration has a great opportunity to build on the notable strides made in 2020 to implement effective crypto regulation — and the industry is here to help.
How The Biden Administration Can Lead In Crypto
Here are some key recommendations for this incoming administration to consider to help the US avoid lagging behind other nations and continue its key role in harnessing the promise of blockchain technology and cryptocurrency.
- While the new administration took the right first step by extending the comment period for the US Financial Crimes Enforcement Network (FinCEN) self-hosted wallet rule proposed in December, it has to spend considerable time identifying the most effective and tailored ways to solve for legitimate regulatory and law enforcement objectives. Our organization believes the current proposed rule would fail in its central purpose — to stem illicit financial activity through crypto transactions — and instead drive crypto activity abroad and into unregulated markets. We would encourage FinCEN to engage on these important issues with key industry participants.
- The SEC should allow for Bitcoin exchange-traded funds (ETFs) or provide additional details about what it seeks in a successful application. We say this as the COO of a company that provides services for Bitcoin ETFs in Canada. It is time for retail investors to have access to Bitcoin’s unprecedented growth through traditional, well-regulated investment vehicles. US-based Bitcoin ETFs could both enhance global financial markets and normalize investments in cryptocurrency.
- Clarity on the regulatory treatment of decentralized finance (Defi) applications is important for the future of cryptocurrency and financial services. The Defi craze, which connects individuals across the world through permissionless applications (e.g., autonomous smart contract technology), could be stunted by regulatory ambiguity (e.g., the FinCEN self-hosted wallet proposal) and be limited in its future potential to democratize financial services.
- Regulators should continue to work with the industry and provide guidance on how cryptocurrency companies can be deemed custodians under federal securities laws. As part of that, regulators should consider existing standards and best practices regarding the safeguarding of cryptocurrencies and how other frameworks have treated digital asset custody. While the OCC has guided custody cryptocurrency under federal banking law and the SEC has taken recent strides to provide safe harbors around narrow custody activities, there is a chance to further clarify securities law expectations to more fully integrate custody models into mainstream markets.
These recommendations and more will build on the big steps taken in 2020 and will provide continued crucial regulatory clarity for this industry.
There Is No Time To Lose
Technological innovation in the 21st century has moved at big speeds — the cryptocurrency industry even more so. Without appropriate regulatory frameworks, the US will lose its leading role in cryptocurrency that promises to be a pillar of the financial system of the future. We urge policymakers to implement cryptocurrency rules and regulations that will set the stage for the US to play a key role in financial innovation in the decades to come.
Mainstream adoption of Bitcoin and other blockchain technologies is closer than ever. All industry players must work together to usher in this new era of financial inclusion and individual empowerment with thoughtful and effective regulation that can set a foundation to be built on for coming years.