Left or right? Analyzing the US crypto regulatory policy in 2021

Source: Ostrich Blockchain, author: Chen Yiwanfeng, original title: "It's hard to distinguish between friends and foes, the compliance signpost of US regulation in 2020"

The United States' ambition to take the lead in the field of digital currency and blockchain has always been obvious to the general public in the industry. As a bellwether of cryptocurrency, the United States also has a positive attitude towards the overall regulatory policy in the field of cryptocurrency and blockchain, adopting a strategy of encouraging investment and strict supervision. At the end of 2019, the U.S. Congress proposed a total of 21 draft bills related to blockchain and encrypted digital currency, and these draft bills were also included in the 2020 congressional agenda.

On March 9, 2020, U.S. Congressman Paul Gosar proposed a new version of the Cryptocurrency Act of 2020, which mainly clarifies the scope of authority of federal regulators over cryptocurrencies and divides cryptocurrencies into three categories: crypto commodities, cryptocurrencies, and crypto securities. The United States has really begun to accelerate its conquest of the cryptocurrency field, and is determined to firmly sit on the "lord of the crypto world".

01 Office of the Comptroller of the Currency (OCC)

The OCC was established in 1863 and is affiliated with the U.S. Treasury Department. It is primarily responsible for supervising the federal banking system, including national banks, federal savings associations, and branches and institutions of foreign banks in the United States, totaling 1,200. These institutions hold 70% of the total assets of the U.S. banking system.

Since 2020, the attitudes of regulators and institutional investors towards digital currencies have diverged. The intensity of regulation has been changing, and institutional investors have entered the market in large numbers, all focusing on the US digital asset industry. The US banking industry has also begun to accelerate in opening up cryptocurrency financial services.

In March 2020, Brian Brooks was appointed as the Chief Operating Officer and First Deputy Director of the OCC. In May of the same year, he was promoted to Acting Director and focused on promoting the transformation of the US banking industry towards digital assets. Brian Brooks believes that crypto companies may be subject to the federal licensing system. If the services they provide can be called payment services, whether it makes more sense to regard crypto projects as local projects or global projects. If they are global, then it makes more sense to have a single national license. In Brian Brooks's cognition, crypto technology is becoming more and more like the banking industry in the 21st century.

On June 4, 2020, the OCC sought public comments on regulating new technologies and digital banking activities, including cryptocurrencies and blockchain tools. In a proposed rulemaking notice, it stated that the OCC is reviewing regulations on digital banking activities to ensure that these regulations can continue to evolve with the development of the industry.

Brian Brooks has always been very friendly to the blockchain and encryption fields. He believes that blockchain and encryption technology have huge and broad prospects. Although he recognizes the benefits of Bitcoin, Ethereum and XRP, he does not think that the federal government needs to issue central bank digital currency (CBDC). He believes that this is not the role of the government, but the Federal Reserve and the U.S. Securities and Exchange Commission need to establish a framework for digital currency.

Soon, Brian Brooks announced that the OCC plans to launch "Payments Charter 1.0" in the fall of 2020. Version 1.0 will be a "national version of the money transmission license in each U.S. state," providing non-bank payment providers with a "national platform with priority," but without access to the Federal Reserve's payment system. Brian Brooks said that after running under version 1.0 for about 18 months, the OCC will launch version 2.0, which he expects will include direct access to the Federal Reserve's payment system.

On July 23, 2020, the OCC published an open letter stating that national savings banks and federal savings associations can provide cryptocurrency custody services to their customers. This move comes just one month after the OCC sought public input on the digital activities of such institutions, including in the field of digital assets and blockchain, and also marks a major change in the relationship between the U.S. banking industry and the nascent cryptocurrency ecosystem.

Regarding the OCC's statement that national savings banks and federal savings associations can provide cryptocurrency custody services to customers, Gu Yanxi, a long-term practitioner in the US and Chinese securities markets and a researcher on blockchain and encrypted digital assets, said that US retail customers have more options for preserving their encrypted digital currency assets, and the cost of custody will be reduced, which will also help commercial banks enter the encrypted digital currency field. Therefore, this is a good thing for both commercial banks and retail customers.

On August 11, 2020, the OCC solicited comments on the proposed rules for "digital activities of national banks and federal savings associations", and several US banks responded. Notably, several banks, including Bank of America and PNC, said they may be interested in providing crypto custody and other services to customers.

On September 21, the OCC issued new guidance that federally chartered banks can hold reserves for stable currency issuers. Brian Brooks said in a statement that this guidance provides greater regulatory certainty for banks within the federal banking system, allowing them to serve customers in a safe and reliable manner. On November 1, U.S. banking institutions have approached crypto custodians such as Anchorage and Coinbase. At that time, Brian Brooks also speculated that banks would cooperate with custodians or acquire them to manage customers' cryptocurrencies due to the complexity of Bitcoin custody. On November 17, the OCC issued a "Payment Charter" and indicated that a "National Trust Bank License" was a way to apply for a crypto bank, and at that time the OCC had received applications from some crypto companies to convert their state trust company licenses to national trust bank licenses.

Brian Brooks has never stopped on the road of promoting the development of the digital asset industry. On December 4, Brian Brooks said on CNBC that the Trump administration will launch a series of cryptocurrency banking and policy-friendly actions in the last few days of its term. He seemed to imply that transparency in crypto banking will come. Brian Brooks said that for crypto, we don't need 50 regulations, but we need to be clear about what is allowed. "Banks directly entering the blockchain as a payment network" is certain. Cryptocurrency may have been a bubble two years ago, but as its clarity increases, institutions that recognize its value have begun to adopt it on a large scale.

For most of Trump's term, the OCC did not intervene in the crypto space in a big way, except for the legal disputes surrounding the FinTech Charter. It was not until Brian Brooks joined the OCC that the OCC really began to take initiatives related to the industry. Brian Brooks once said that regulatory transparency is the factor currently driving the price of cryptocurrencies, and the legal policies of the digital asset industry are currently facing an uncertain future.

On January 15, 2021, cryptocurrency-friendly Brian Brooks officially stepped down as acting director of the OCC, and OCC Chief Operating Officer Blake Paulson will take over his position.

02 U.S. Securities and Exchange Commission (SEC)

The SEC was established in 1934. It is an independent quasi-judicial agency directly under the U.S. federal government. It is responsible for securities supervision and management in the United States and is the highest agency in the U.S. securities industry.

If the OCC can be described as a "kind mother", then the SEC can definitely be called a "strict father".

When talking about the SEC, one will think of the mainstream currency XRP, which has been delisted by major exchanges. On January 14, 2020, CFTC Chairman Heath Tarbert said in an interview that the third largest cryptocurrency XRP could be listed as a security by the SEC. Perhaps inspired by this, the SEC finally "lived up to expectations" and took action against Ripple. Messari founder and CEO Ryan Selkis once talked about the SEC, claiming that the SEC's move seemed to be more strategic than most people thought, but compared with the speed of development of this industry, it was painfully slow. On the same day, the SEC approved Grayscale's application to register GBTC, and Grayscale resumed allocating its shares to "qualified" investors. It was also from that time that Grayscale officially began its "hunting moment."

On February 7, 2020, SEC Commissioner "Crypto Mom" ​​Hester Peirce expressed the hope that a three-year security period would be provided to legitimate crypto projects without violating U.S. securities laws, sufficient to pass the SEC's securities assessment (including Howey). This proposal aims to provide a legal framework for the issuance and sale of tokens under federal securities laws.

On February 25, the SEC issued an advisory to investors, warning them not to conduct illegal ICOs and participate in crypto scams. In order to combat illegal ICOs and IEOs, the SEC has compiled a list covering a range of topics to help investors avoid scams, including: Ponzi schemes using virtual currencies; fraudsters setting up fake crypto websites and offering fake transactions; public companies that have been suspended for claiming to invest in cryptocurrencies; background information on red flags for Bitcoin and investment fraud; background information on ICOs and potential warnings for investment scams; scammers using false SEC and CFTC claims on digital assets to attract investors, etc.

In terms of anti-fraud supervision, the SEC has always been a benchmark, and at this time the SEC has not yet begun its "harvest."

On March 5, the SEC voted to propose a series of rule changes to simplify and improve the "patchwork" rules for exempt securities offerings. The proposed rule changes are intended to improve the existing "complex and confusing" framework and make it easier for companies to launch products that still protect investors. In the United States, securities offerings, including ICOs, must be registered with the SEC or qualify for an exemption. On May 5, the SEC made temporary changes to its guidelines for regulating crowdfunding, making it easier for crypto blockchain companies that seek to raise funds through crowdfunding platforms to raise funds during the new coronavirus epidemic. Under the adjustment plan, companies seeking to raise funds through crowdfunding will not need to provide documents, including financial statements, that may be difficult to obtain due to the obstruction of the coronavirus. The newly revised guidelines are valid until August 31.

On August 6, Grayscale announced that it had submitted an application for registration of Ethereum Trust to the SEC. If the review is passed, it will become the second licensed digital currency investment tool. At the same time, more than 20 institutions have submitted revenue documents for the last quarter to the SEC. The documents show that they have all invested in Grayscale Investment's Bitcoin Trust (GBTC). Among them, these institutions include old investment companies such as Ark Invest, which manages $4.5 billion in assets, and Horizon Kinetic, which manages $5.3 billion in assets. In addition, new investment companies such as Rothschild and Addison Capital also participated in the investment.

On August 26, the SEC officially announced that it would expand the definition of qualified investors by revising the rules. At the same time, affected by the qualified investor regulations, Grayscale's Bitcoin Trust and Ethereum Trust registered with the SEC are only open to qualified investors. Hester Peirce once said that in the field of cryptocurrency, investors are open to reclassification. A large part of the investment market is actually token buyers, who may not be investors at all.

On September 22, the OCC and SEC issued their first stablecoin guidance, providing the first detailed regulatory guidance on how to treat fiat-backed cryptocurrencies in accordance with the law. The OCC clarified that the stablecoins it refers to are stablecoins backed one-to-one by fiat currencies, excluding algorithmic stablecoins. In addition, the SEC stated that certain stablecoin assets may not be securities under federal law, but recommended that issuers work with the SEC and legal counsel for secondary confirmation. According to the statement, the SEC expressed its willingness to issue a no-action letter to assure the recipient that no enforcement action will be taken against the company.

On the 29th of the same month, in a letter to an executive of the Financial Industry Regulatory Authority (FINRA), a self-regulatory agency on Wall Street, the SEC's trading and market division stated that exchanges that do their best to comply with existing regulations will not be sanctioned. The SEC's crackdown on ICOs often makes it seen as an industry demon, but as a symbolic version of an already strictly regulated asset class, digital security products are already largely compliant with federal law. As the crackdown on unregulated ICOs gradually subsides, US regulators, especially the SEC, are preparing for a series of compliant digital security products. On June 4, 2019, the SEC was suing Kik for conducting unregistered securities sales when it launched its ICO in 2017. The lawsuit was not known until October 21, 2020, when the court has ruled on the incident and Kik will need to pay a $5 million fine to the SEC and notify the SEC of any financing in the next three years.

On December 21, the SEC accused Ripple of violating investor protection laws when selling XRP, and notified Ripple that the regulator planned to sue Ripple, CEO Brad Garlinghouse, and co-founder Chris Larsen in federal civil court soon. Ripple responded immediately, saying that the SEC was wrong in both law and fact, and said it would defend its rights to the end. Despite this, it still set off a wave of XRP delistings, and members of the community also said at one point that XRP would return to zero. In response to the SEC's charges against Ripple, the Southern District Court of New York has set the trial date for the lawsuit as February 22, 2021. Prior to this, XRP continued to plummet and is now quoted at $0.35845, with no signs of recovery.

Ripple CEO Brad Garlinghouse once expressed his opinion on how the SEC will classify cryptocurrencies. It has been more than two years since the SEC announced that Bitcoin and Ethereum are not securities. US regulators have remained silent on the prospects of crypto regulation. Companies including Ripple may be forced to explore other countries with crypto-friendly regulations. Money will flow to where it is easiest to flow. The more obstacles the government sets up (one of which is to do nothing), the less chance there is to position the United States as a crypto leader.

03 U.S. Commodity Futures Trading Commission (CFTC)

Established in 1974, the CFTC is responsible for regulating the U.S. commodity futures, options and financial futures and options markets, and ensuring the openness, competitiveness and financial reliability of the futures and options markets.

Former CFTC Chairman Heath Tarbert defined the CFTC as helping to build a regulated futures market where investors will be able to "rely on" better "price discovery, hedging and risk management." Heath Tarbert said that by allowing cryptocurrencies to enter the CFTC world, investors can better access trusted and regulated financial products, thereby increasing overall confidence in this asset class, which helps to legitimize digital assets and add liquidity to these markets.

On February 26, 2020, the CFTC Technical Advisory Committee held a public meeting to learn about stablecoins, cryptocurrency insurance, regulatory practices, and cybersecurity. CFTC Commissioner Brian Quintenz said that in order to provide relevant value, through tokenization, stablecoins have the potential to serve as a viable medium of exchange for liquidity and become a powerful enabler of smart contracts.

Tarbert believes that financial regulation should be based on broader principles rather than specific rules. Tarbert said that one area where principle-based regulation is often more appropriate is the development of financial technology (fintech), including blockchain and digital assets. The United States must lead the world in this technology, and the overuse of prescriptive rules may hinder the development of this important market.

The CFTC issued final interpretative guidance on the term “actual delivery” under the Commodity Exchange Act (CEA), which took effect on June 24, 2020. The CFTC unanimously adopted the guidance in March, “Retail Commodity Transactions Involving Certain Digital Assets.”

In the interview, Tarbert carefully outlined the difference between the work of the CFTC and its sister regulator, the SEC. Tarbert said the CFTC is waiting for the SEC to allow more digital asset futures trading. He said it is "the sole responsibility of the SEC" to determine whether a digital asset is a security. If they determine it is not a security, then the CFTC can start considering it under its own authority. Once people start to get clear on whether something is a security, you will start to see more digital asset futures. It is critical that the United States lead in technology, especially blockchain technology, but he is not satisfied with the current framework in the United States.

In its final four-year strategy released on July 8, the CFTC has made comprehensive cryptocurrency regulation a priority. In its strategic goals, it promised to develop a holistic framework to promote responsible innovation in digital assets.

On September 2, the CFTC sued 20 entities, including some crypto traders and exchanges. They falsely claimed to have CFTC registration and membership in the National Futures Association (NFA). It is reported that these are mandatory registrations that allow exchanges to provide services related to digital assets, derivatives and foreign exchange trading in the United States. Among the 20 entities, 10 companies allegedly claimed on their websites that they were registered with the CFTC. According to the report, these so-called exchanges have never been registered with the CFTC or NFA in any capacity, including Bitfx24option.com, which claims to trade and exchange Bitcoin, Fidelityfxtrade.com, a cryptocurrency foreign exchange and investment platform, and Granttradefx.com.

On October 1, the CFTC charged BitMEX holders, believing that the agency illegally operated a cryptocurrency derivatives trading platform and violated anti-money laundering regulations. Hester Peirce said in an interview that the latest charges against BitMEX by the DOJ and CFTC have aroused the crypto industry's attention to the US Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations, and conveyed to the crypto industry that "US laws need to be enforced when there are products and services involving US users." Hester Peirce also discussed the SEC's apparent resistance to Bitcoin exchange-traded funds (ETFs), saying that this is not fair to investors.

On October 22, the CFTC issued new guidance for crypto derivatives markets that hold customer funds, advising them to be extremely cautious in holding customer funds. Specific provisions of the guidance restrict where "futures commission merchants" (FCMs) can deposit customer virtual currencies, including "banks, trust companies, other FCMs, or clearing organizations that clear virtual currency futures." In addition, the CFTC warned FCMs that they need to keep any such deposits in accounts clearly marked as customer funds and may not use gains in one account to offset losses in another account.

On January 22, Heath Tarbert, the cryptocurrency-friendly chairman of the U.S. CFTC, officially stepped down. There are many opinions about his candidate. According to foreign media reports, the most promising candidate is Chris Brummer, a law professor at Georgetown University and former CFTC commissioner nominee. It is reported that Chris Brummer, like Gary Gensler, is also very familiar with the crypto field. In recent years, in addition to hosting the Fintech Week conference, he has also testified at the CFTC on issues such as cryptocurrency and central bank digital currency.

04 Conclusion

In fact, at this stage, US regulators are still unclear about the classification of encrypted digital currencies, which indirectly leads to the "Ripple-style" dilemma.

Before the release of the Cryptocurrency Guidelines in March 2020, the United States had many major law enforcement agencies for cryptocurrency regulation, including the Commodity Futures Trading Commission (CFTC), the Financial Services Enforcement Unit (FinCEN) under the U.S. Treasury Department, the Federal Trade Commission (FTC), the Internal Revenue Service (IRS), the Consumer Financial Protection Bureau (CFPB), and the Office of the Comptroller of the Currency (OCC). While each agency performs its duties, friction is inevitable.

In 2021, with the reshuffle of the Biden administration and the massive entry of Wall Street, the United States seems to be gradually moving from a cryptocurrency leader to a monopolist. Where will the US cryptocurrency compliance path go in the future? It may be difficult to predict, but it is certain that no matter what encryption policy the United States adopts, it will cause considerable shock in the encryption world.