Cryptocurrency regulation has been a hot topic of discussion for a while, as some demand the digital currency conform to them whilst others have argued regulations would destroy the very purpose of crypto. Statements and laws are being passed across the globe in response to cryptocurrency’s enormous growth, and the US federal agencies have been the latest to suggest some sort of change could take place.
On 23 November 2021, the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (FRB), and the Office of the Comptroller of the Currency (OCC) (the “agencies”) issued a ‘Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps’ (the “Joint Statement”).
Kate Gee and Alasdair Marshall, counsel and associate at Signature Litigation LLP respectively, have analysed the agencies’ statement and have reviewed the possible outcomes that could take place in 2022:
The first indications of a crackdown on crypto-assets
In anticipation of the Joint Statement, Michael Hsu, acting head of the OCC, said in a speech on 16 November 2021 that:
“The agencies are approaching crypto activities very carefully and with a high degree of caution. We expect banks to do the same. To the extent the OCC’s prior communications have been interpreted as a tacit encouragement to engage in crypto activities, the forthcoming releases will clarify that safety and soundness is paramount. The releases should not be interpreted as a green light or a solid red light, but rather as reflective of a disciplined, deliberative, and diligent approach to a novel and risky area. We will proceed carefully and cautiously and will hold banks to the same.”
The Joint Statement summarises the work undertaken during the recent interagency policy sprints focused on crypto-assets, and provides a roadmap of future planned work. The agencies concluded that ‘public clarity’ (i.e. regulation) is warranted in a number of areas. Accordingly, they plan to provide “greater clarity on whether certain activities related to crypto-assets conducted by banking organisations are legally permissible, and expectations for safety and soundness, consumer protection, and compliance with existing laws and regulations”. These activities include:
- Crypto-asset safekeeping and traditional custody services, including exchanging crypto-assets and fiat currency, and transaction settlement;
- Ancillary custody services, including staking and facilitating crypto-asset lending;
- Facilitation of customer purchases and sales of crypto-assets;
- Loans collateralised by crypto-assets;
- Issuance and distribution of stablecoins (which are digital assets designed to maintain a stable value relative to a reference asset such as a national currency);
- Activities involving the holding of crypto-assets on balance sheets; and
- Application of bank capital and liquidity standards to crypto-assets.
Significance of the Joint Statement
Crypto-assets have been a hot topic with US regulators for a while, with Gary Gensler (Chair of the SEC) repeatedly calling for regulation. However, by comparison, the agencies have been slow to reach even the point of making the Joint Statement. It remains to be seen whether they will follow through on their ‘roadmap’ and produce concrete regulation in 2022. Notably, the Joint Statement neither indicates whether any preliminary analysis has been completed in relation to the chosen activities, nor gives any timeframe for the agencies to issue their guidance. It may, in fact, be that the Joint Statement is the first of a series of announcements concerning the regulation of the crypto market at a crucial point for the industry and fintech more widely.
The Joint Statement does not indicate how strict the agencies’ regulation will be. It is highly unlikely that the US will adopt as strict an approach as China, which in September 2021 declared all crypto-currency transactions to be illegal. By contrast, the US has generally adopted more balanced rhetoric towards crypto-assets, acknowledging their potential value whilst emphasising the need for consumer protection. One example of this is the SEC’s recent approval of a bitcoin-linked exchange-traded fund. The Joint Statement reflects this stance, referring to the “potential opportunities” as well as “risks” posed by crypto-assets.
Perhaps the trickiest issue facing the agencies is the appropriate scope of any regulation. A distinction can be drawn between: (i) the broad list of crypto-related activities which will be subject to regulation; and (ii) to whom these regulations will apply. The latter is of particular interest.
The Joint Statement refers to crypto-asset activities conducted by “banking organisations”, and the precise meaning of this term is crucial. While this covers traditional banks, the crypto space is diverse with entities that do not neatly fall within pre-existing regulatory definitions or boundaries. For example:
- Stablecoin issuers act as quasi-banks, issuing their stablecoins to customers in return for fiat deposits. Interestingly, Circle (which issues USDC, the second largest stablecoin) has announced its intention to become a registered bank, whilst Facebook has partnered with Silvergate Capital to issue Diem. However, other stablecoin issuers, such as Tether Limited (which issues Tether, the largest stablecoin), remain in no man’s land. At present, it is unclear how the agencies could impose regulations on Tether Limited and others without distorting the definition of “banking organisations”, and potentially overstepping their authority.
- The Joint Statement made clear an intent to regulate “ancillary custody services”, including “facilitating crypto-asset lending”. However, specialised platforms which enable crypto-holders to earn interest by lending cryptocurrencies do not naturally fall within the traditional concept of “banking organisations”.
- The application of bank capital and liquidity standards to crypto-assets activities by “banking organisations” may resolve one of the main controversies surrounding stablecoins – their fiat-backing. Again, the key issue is whether stablecoin issuers can sensibly constitute “banking organisations” and so be subject to these rules.
Given that – as matters stand – no single entity has the power to regulate the whole crypto-space, careful coordination will be required to ensure coherent and intra vires regulation.
Anticipated impact on the crypto-market
Interestingly, the Joint Statement had little to no immediate impact on cryptocurrency prices, particularly in comparison to China’s crypto ban which caused Bitcoin to drop by more than $2,000. This is likely because the Joint Statement only signals future regulation, with little indication of the implementation date, severity or scope. It is thought that the more significant drop seen later in the week of publication was caused by the emergence of the new covid variant, Omicron.
With China having already stormed ahead with its zero-tolerance approach, the latest signal of intent by the US to regulate crypto-assets may put pressure on other nations to expedite their own crypto-asset regulation, for fear of falling behind. For instance, the FCA in the UK does not yet regulate crypto-assets, and only requires exchanges to be registered to operate. However, it has demonstrated its willingness to act strongly when required (for example by banning Binance in June 2021) and has called for further regulation to protect consumers. Meanwhile, the EU has proposed a dedicated regime for crypto-asset providers with its ‘MiCA’ regulation, under which only licensed providers will be able to conduct crypto-related activities, but could do so in any Member State. It remains to be seen whether these and other measures will be expedited by the Joint Statement.
The Joint Statement indicates that regulation is on its way to the crypto-space. With increased regulation will come more investigations into compliance, and the potential for subsequent disputes.