We have rules with respect to safeguarding market integrity, protecting against fraud and manipulation, and facilitating capital formation. If a company builds a crypto market that protects investors and meets the gold standard of our market regulations, then customers will be more likely to trust and have greater confidence in that market. In my view, regulation both protects investors and promotes investor confidence, in the same way that traffic laws protect drivers and promote driver confidence.
Some have asked if the current exemptions for so-called alternative trading systems ATSs could be generally available to crypto platforms. ATSs for the equity and fixed income markets, though, are generally used by institutional investors. This is quite different than crypto asset platforms, which have millions and sometimes tens of millions of retail customers directly buying and selling on the platform without going through a broker. Currently, the venues that the SEC oversees solely trade securities.
The third area is around crypto custody. Further, unlike traditional securities exchanges, crypto trading platforms also may act as market makers and thus as principals trading on their own platforms for their own accounts on the other side of their customers. As it relates to crypto lending platforms, we recently charged BlockFi with failing to register the offering of its retail crypto lending product, among other violations.
BlockFi agreed to attempt to bring its business into compliance with the Investment Company Act, and its parent company announced that it intends to register under the Securities Act of the offer and sale of a new lending product. They are not issued by a central government and are not legal tender. Stablecoins, though, in offering features similar to and potentially competing with bank deposits and money market funds, raise three important sets of policy issues.
First, stablecoins raise public policy considerations around financial stability and monetary policy. Such policy considerations underlie regulations that banking regulators have with respect to deposits and that we at the SEC have with respect to money market funds and other types of securities.
Further, stablecoins are so integral to the crypto ecosystem that a loss of the peg or a failure of the issuer could imperil one or more trading platforms, and may reverberate across the wider crypto ecosystem. Second, stablecoins raise issues on how they potentially can be used for illicit activity.
Stablecoins primarily are used for crypto-to-crypto transactions, thus potentially facilitating platforms and users avoiding or deferring an on-ramp or off-ramp with the fiat banking system. Thus, the use of stablecoins on platforms may facilitate those seeking to sidestep a host of public policy goals connected to our traditional banking and financial system: anti-money laundering, tax compliance, sanctions, and the like. Third, stablecoins raise issues for investor protection.
Stablecoins were first adopted and continue to be dominantly used on crypto trading and lending platforms. About 80 to 85 percent of trading and lending on these platforms involves stablecoins. When trading on a platform, the tokens actually often are owned by the platforms, and the customers just have a counterparty relationship with the platform. The three largest stablecoins were created by trading or lending platforms themselves, and U.
There are conflicts of interest and market integrity questions that would benefit from more oversight. Then, thirdly from a policy perspective are all the other crypto tokens. The fact is, most crypto tokens involve a group of entrepreneurs raising money from the public in anticipation of profits — the hallmark of an investment contract or a security under our jurisdiction. Some, probably only a few, are like digital gold; they may not be securities. Even fewer, if any, are actually operating like money.
In the s, Congress painted with a broad brush the definition of a security. Our laws have been amended many times since then, Congress has painted with an even wider brush, and the Supreme Court has weighed in numerous time. My predecessor Jay Clayton said it, and I will reiterate it: Without prejudging any one token, most crypto tokens are investment contracts under the Howey Test. Today, many entrepreneurs are raising money from the public by selling crypto tokens, with the expectation that the managers will build an ecosystem where the token is useful and which will draw more users to the project.
Thus, it is important that we work to get crypto tokens that are securities to be registered with the SEC. Issuers of crypto tokens that are securities must register their offers and sales of these assets with the SEC and comply with our disclosure requirements, or meet an exemption.
Issuers of all kinds across a variety of markets successfully register and provide disclosures every day. If there are, in fact, forms or disclosure with which crypto assets truly cannot comply, our staff is here to discuss and evaluate those concerns. Any token that is a security must play by the same market integrity rulebook as other securities under our laws. If one person wishes to sell an asset that another wishes to buy, it can be sold for cash or a different type of asset.
These mined assets can then be bought and sold on the secondary market. Some types of digital assets are limited as to the amount that can be created through mining—in theory, for example, there will never be more than 21 million bitcoins 4 —whereas some digital assets allow for an unlimited number to be mined or otherwise created. Further complicating the issue is that despite operating on a common underlying technology the blockchain , not all digital assets have the same fundamental properties and can be used for the same purpose.
Other proponents contend that many digital assets are currencies not unlike U. While some digital assets promise a stable value, the prices of many virtual assets fluctuate so wildly that asset holders are often unwilling to part with or receive them as payment for other goods and services; vendors are rarely willing to accept the risk that payments received could depreciate 10 percent, for example, over the course of a day, and keeping track of rapidly changing values and adjusting prices accordingly is not something many are likely to do voluntarily.
Importantly, products with these functions—and the infrastructure developed around them—have traditionally been regulated in the U. Yet, in part because digital assets have largely been unregulated, their prices are frequently manipulated, market participants are too often defrauded or simply exploited, assets are stolen outright, and taxes owed are often not reported, let alone paid; digital assets are also used to fund illicit activities, including ransomware attacks and drug trafficking.
These markets are new and are still evolving. Although legislation may be necessary in the future, regulators must begin using their existing statutory authorities to address many of the problems found in the markets in order to protect future investors and others from being harmed.
Imposing sensible regulation on digital assets is essential if their purported benefits are going to come to fruition. Properly functioning capital markets ensure that investments are driven in a fair, orderly, and efficient manner to their most productive uses; that investors are protected; and that the public interest is served. Today, the digital asset markets looks very similar to the capital markets of the s, with rampant speculation, 17 market manipulation, 18 deception, 19 and out-and-out theft.
Many, though not all, digital assets appear to facially meet the Howey and Reves tests. These products are subject to the securities laws and must work within our securities regime. The SEC can use its existing authorities to green the blockchain, protect investors, and prevent money laundering, tax evasion, and criminal activity. This blockchain technology has created opportunities for new markets and new methods of conducting business that were unimaginable 15 years ago.
However, some blockchain mining uses significant amounts of electricity: Estimates put bitcoin, the first such digital asset, alone at using as much as terawatt-hours to operate per year, 44 or roughly 0. Because interest in cryptocurrencies does not appear to be waning, efforts are underway to make the digital asset markets more—or at least appear more—environmentally friendly.
The Bitcoin Mining Council, a coalition of bitcoin miners, has released the Crypto Climate Accord to work towards net-zero emissions from digital assets by , 51 and some bitcoin miners are moving their operations to locales that are powered by solar power or hydroelectricity. Essentially, the same amount of dirty energy is used, just by different industries.
Perhaps the most effective efforts to green the digital asset markets are those that make the underlying technologies more energy efficient, such that the same output can be achieved with less power. Although the imperative is for the private sector to migrate digital assets to more environmentally friendly technologies, the government also has a role to play in ensuring that the migration is efficient.
Regulating some digital assets as securities will give the SEC several policy options that would help do just that. This would allow investors to move their capital to the most energy-efficient uses. For example, the SEC could require digital asset issuers to disclose which blockchain underlies their assets and the amount of computational power necessary to transact on that blockchain.
Beyond simply providing information to investors so they can make decisions about where to invest their capital, the movement of capital from energy-inefficient digital assets to more efficient ones would incentivize issuers to migrate their ledgers away from energy-intensive technologies, reducing greenhouse gas emissions.
Additionally, the exchanges that transact in digital asset securities could impose listing standards, such that only those assets that meet minimum environmental standards could be listed and traded on their platforms.
Because listed securities are easier for the public to trade, limiting digital asset securities to the greenest blockchain technologies would incentivize issuers to migrate to those technologies. Furthermore, regulating digital asset securities would increase opportunities for clearing digital assets through a central depository. This would not necessarily green blockchains, but it would also result in energy efficiencies by bypassing blockchains.
Today, very few people physically own their securities; securities are largely held in trust by a regulated third party, the Depository Trust Company DTC. Third-party trustees holding digital asset securities in trust results in similar energy efficiency gains. As explained above, whenever a digital asset is bought or sold on a blockchain, computers undertake cryptographic computations to update the ledger.
In a system where digital assets are held in trust, for each individual asset, the blockchain is updated only once to grant ownership of an asset to the trust company, and cryptographic calculations are completed only to record that transfer. Some digital asset exchanges currently use this model, 59 while others still record all updates on the blockchain.
This has resulted in disjointed markets in which investors may only transact with others on the same exchange and any transactions between or off exchanges are energy intensive. If digital asset exchanges were to become subject to SEC regulations, requirements that they use trust companies that interface fully with one another could incentivize the creation of a single trustee for all digital asset securities.
This single trustee could record all digital asset security transactions on its own ledger, removing the need for energy-intensive blockchain transactions entirely. Digital asset markets are rife with abuse. These abuses should not occur, especially as the law already exists to put a stop to most of them. These latter plans and rules would mean that brokerages and exchanges have minimal errors and outages and that investors have continuous market access.
No new regulations would be required; the SEC would only have to enforce the law. Regardless of whether the SEC acknowledges that a particular digital asset is a security or that a particular actor transacts in securities, private-party investors are permitted to bring suit against these actors under the securities laws. Having the SEC and the broker membership organization the Financial Industry Regulatory Authority FINRA —both of which have significant resources—involved in surveillance and enforcement would allow for greater execution of the securities rules and regulations, beyond what may be obtained through investor lawsuits alone.
Beyond the SEC requirements, exchanges could impose listing standards on digital asset securities in ways that protect investors. It has been said that the primary uses for digital assets are to evade financial sanctions and collect ransoms. As the Colonial Pipeline hack demonstrated, this can have significant real-world consequences.
These blatant violations of the law are possible because individuals can trade digital assets with pseudonymity; although all transactions are registered on a blockchain, it is possible for people to set up and use digital asset wallets without verifying their identities. Treasury over the next decade as a result of U. The markets for digital assets are a growing area of interest to investors and a growing area of concern for legislators and regulators; without market oversight and the transparency that regulation brings, not only will investors not understand the risks to their investments and be liable to be significantly harmed, but the purported benefits of digital assets will also certainly fail to come to fruition.
Fortunately, although new legislation may be necessary in the future, regulators already have at least some legal authority—through enforcing the rules already in place and drafting new regulations—to address any issues that digital assets raise.
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The legislation comprised several bills, including the Virtual Financial Assets Act VFA which set a global precedent by establishing a regulatory regime applicable to crypto exchanges, ICOs, brokers, wallet providers, advisers, and asset managers. The VFA regulations effective November were accompanied by the Innovative Technology Arrangements and Services Act which established the regime for the future registration, and accountability, of crypto service providers.
The Malta Digital Innovation Authority was also established: the MDIA is the government authority responsible for creating crypto policy, collaborating with other nations and organizations, and enforcing ethical standards for the use of crypto and blockchain technology. The Maltese government has also indicated that it will turn its focus to the integration of AI with cryptocurrency regulation and may implement specific guidelines for security token offerings. With those strategies in mind, additional Maltese regulations are likely in the near future.
Cryptocurrency regulations in Estonia are open and innovative , especially in comparison to other EU member-states. Accordingly, it classifies them as digital assets for tax purposes but does not subject them to VAT.
In , the Anti Money Laundering and Terrorism Finance Act introduced robust new regulations for crypto businesses operating in Estonia. Cryptocurrency exchanges are legal in Estonia and operate under a well-defined regulatory framework that includes strict reporting and KYC rules. In , the Estonian government passed legislation tightening licensing requirements and went further in , asserting that virtual currency service providers would be treated the same manner as financial institutions under the Money Laundering and Terrorist Financing Prevention Act.
In late , the Estonian government revoked over 1, operating licenses after legislative amendments rendered many cryptocurrency service providers non-compliant with regulations. The draft bill created fears that Estonia was banning private ownership of cryptocurrencies, and prompted the government to issue a press release in January clarifying that the law would only apply to private wallets issued by VASPs.
Gibraltar is a global leader in cryptocurrency regulation. Cryptocurrency is not considered legal tender in the country but cryptocurrency exchanges are legal and operate within a well-defined regulatory framework. Gibraltar has a reputation as a low taxation environment : it does not impose capital gains or dividend tax on cryptocurrencies, and crypto exchanges are subject to a business-friendly In September , Gibraltar updated its DLT framework regulations to better align with FATF recommendations, taking into account the higher risk factors associated with some virtual asset instruments.
In , Gibraltar convened a Market Integrity working group to further define appropriate market standards for cryptocurrency exchanges in coordination with standards set by other jurisdictions such as the UK and the EU. If sanctioned by the Gibraltar Financial Services Commission , the move would pave the way for a fully-regulated exchange dealing in both fiat and digital currencies. In , authorities issued advice on the tax treatment of cryptocurrencies which, in a business context, depends on the type of transaction involved.
Following those statements, in early lawmakers passed legislation that gave blockchain technology transactions the same legal status as those executed using traditional methods. Cryptocurrency exchanges in Luxembourg are regulated by the CSSF and new crypto businesses must obtain a payments institutions license if they wish to begin trading.
In Latin America, cryptocurrency regulations run the legislative spectrum. Those countries with harsher regulations include Bolivia which has comprehensively banned cryptocurrencies and exchanges , and Ecuador which has issued a ban on the circulation of all cryptocurrencies apart from the government-issued SDE token in operation from to By contrast, in Mexico, Argentina, Brazil, Venezuela and Chile, cryptocurrencies are commonly accepted as payment by retail outlets and merchants.
For tax purposes, cryptocurrencies are often treated as assets. They are broadly subject to capital gains tax across the region while transactions in Brazil, Argentina, and Chile are also subject to income tax in some contexts. In September , El Salvador became the first country in Latin America to make Bitcoin legal tender, issuing a government digital wallet app, and allowing consumers to use the tokens in all transactions alongside payments with the US dollar. Cryptocurrency exchange regulations in Latin America are sparse.
Many countries have no specific laws governing the trade of cryptocurrencies and so, beyond the scope of existing legislation, do not regulate exchanges. The lack of regulation combined with high adoption rates has made Latin America an attractive option for businesses looking to capitalize on the interest in virtual currencies.
Subsequent court rulings have offered protection to these exchanges for the time being but it is clear that more definitive guidelines are needed. In contrast to other Latin American countries, Mexico does, to an extent, regulate cryptocurrency exchanges through the Law to Regulate Financial Technology Companies.
The law extends Mexican AML regulations to cryptocurrency services providers by imposing a variety of registration and reporting requirements. Many Latin American countries have expressed concern about the effect of cryptocurrencies on financial stability — and about their money laundering risks. Beyond issuing official warnings , however, most financial authorities across the region have yet to reveal plans for any significant future cryptocurrency regulations.
Some exceptions have emerged: Chile, for example, introduced draft cryptocurrency legislation in April but has offered scant detail on the legislation since, or how it will function if it comes into effect. Mexico has also announced plans to release its own digital currency by , seeking to take advantage of advances in payment technology to promote financial inclusion. In , in coordination with crypto exchanges, Colombia introduced a sandbox test environment for cryptocurrencies in order to help firms try out their business models in respect of draft legislation.
Want to meet and exceed the expectations of regulators around the world? Find out how ComplyAdvantage works with crypto businesses here. Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information. Request Demo Login.
Download now. The content in this article was last updated in February United States Cryptocurrencies: Not considered legal tender Cryptocurrency exchanges: Legal, regulation varies by state While it is difficult to find a consistent legal approach at the state level, the US continues to progress in developing federal cryptocurrency legislation.
Future Regulation The US Treasury has emphasized an urgent need for crypto regulations to combat global and domestic criminal activities. Canada Cryptocurrencies: Not legal tender Cryptocurrency exchanges: Legal, required to register with FinTRAC after June 1, Cryptocurrencies are not legal tender in Canada but can be used to buy goods and services online or in stores that accept them.
Exchanges After an amendment to the PCMLTFA in , exchanges in Canada are essentially regulated in the same way as money services businesses and are subject to the same due diligence and reporting obligations. Future Regulation While regulations are constantly evolving, there are no signs of significant additional legislation on the horizon.
Singapore Cryptocurrencies: Not legal tender Cryptocurrency exchanges: Legal, registration with the Monetary Authority of Singapore required In Singapore, cryptocurrency exchanges and trading are legal, and the city-state has taken a friendlier position on the issue than some of its regional neighbors. Exchanges MAS has generally taken an accommodating approach to cryptocurrency exchange regulation, applying existing legal frameworks where possible.
Australia Cryptocurrencies: Legal, treated as property Cryptocurrency exchanges: Legal, must register with AUSTRAC Cryptocurrencies and exchanges are legal in Australia, and the country has been progressive in its implementation of cryptocurrency regulations. Exchanges Cryptocurrency exchange regulations in Japan are similarly progressive. South Korea Cryptocurrencies: Not legal tender Cryptocurrency Exchanges: Legal, must register with FSS In South Korea, cryptocurrencies are not considered legal tender and exchanges, while legal, are part of a closely-monitored regulatory system.
Exchanges In June , China banned all domestic cryptocurrency mining , and followed-up by outlawing cryptocurrencies outright in September India Cryptocurrencies: Not legal tender Cryptocurrency exchanges: Regulations being considered Cryptocurrencies are not legal tender in India and the status of exchanges remains murky, as new regulations are being considered. Exchange Regulations Cryptocurrency exchange regulations in India have grown increasingly strict.
Future Regulations In , a leaked, alleged draft bill suggested that a blanket ban of cryptocurrencies was in the works — but made an exception for a proposed official digital currency. Switzerland Cryptocurrencies: Legal, accepted as payment in some contexts Cryptocurrency exchanges: Legal, regulated by SFTA In Switzerland, cryptocurrencies and exchanges are legal and the country has adopted a remarkably progressive stance towards cryptocurrency regulations.
The EU Cryptocurrencies: Legal, member-states may not introduce their own cryptocurrencies Cryptocurrency exchanges: Regulations vary by member-state Cryptocurrencies are broadly considered legal across the European Union, but cryptocurrency exchange regulations are different in individual member states.
Exchanges Cryptocurrency exchanges are not currently regulated at a regional level. Future Regulations The EU is actively exploring further cryptocurrency regulations. Estonia Cryptocurrencies: Not legal tender Cryptocurrency exchanges: Legal, must register with the Financial Intelligence Unit Cryptocurrency regulations in Estonia are open and innovative , especially in comparison to other EU member-states. Exchanges Cryptocurrency exchanges are legal in Estonia and operate under a well-defined regulatory framework that includes strict reporting and KYC rules.
Gibraltar Cryptocurrencies: Not considered legal tender Cryptocurrency exchanges: Legal, must register with the GFSC Gibraltar is a global leader in cryptocurrency regulation. Exchanges Cryptocurrency exchanges in Luxembourg are regulated by the CSSF and new crypto businesses must obtain a payments institutions license if they wish to begin trading.
Latin America Cryptocurrencies: Laws vary by country Cryptocurrency exchanges: Sparse regulation, laws vary by country In Latin America, cryptocurrency regulations run the legislative spectrum. Exchanges Cryptocurrency exchange regulations in Latin America are sparse. Future Regulations Many Latin American countries have expressed concern about the effect of cryptocurrencies on financial stability — and about their money laundering risks.
Request Demo. Related Content. While the SEC has yet to announce any enforcement actions, at least one NFT operator is facing litigation from investors who believe they were sold unregistered securities. Crypto exchanges have been historically opaque, allowing their operators to generate profits without accountability before governments or their customers. Many exchanges have been accused of wash trading , front running , or freezing customer balances. If registered with the SEC, crypto exchanges would be forced to record their trades and adopt technology systems to make their order books audit-compliant.
They would also face strict rules on order execution to prevent market manipulation. In the past, many exchanges have chosen to avoid U. However, many exchanges accept compliance as the cost of access to the lucrative U. Another likely focus for regulators is stablecoins , blockchain tokens whose value is pegged to the dollar or other fiat currency. Most stablecoins back their peg by keeping large reserves of cash, treasuries, or other low-risk assets.
However, some stablecoin issuers have been accused of manipulating the market, by buying cryptocurrency in order to raise prices. Although ostensibly backed by cash, a substantial portion of tether's reserves consisted of unsecured debt, third-party bank accounts, and other cryptocurrencies. The settlement followed similar litigation by the New York Attorney General's office.
Stablecoins may also attract the attention of the SEC. Since the Commission considers crypto exchanges as de facto securities brokers, that means the majority of stablecoin trades are also securities transactions. Although the SEC has not yet launched litigation, the regulator has indicated that it may also be investigating the largest stablecoin. Investing in cryptocurrencies and other Initial Coin Offerings "ICOs" is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs.
Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.
As of the date this article was written, the author owns 0. Securities and Exchange Commission. Does the SEC Care? Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways In , the Securities and Exchange Commission warned that many blockchain tokens represented investment securities, which must be registered with the SEC.
Many crypto issuers have already been subject to SEC enforcement. Stablecoins may also face regulatory scrutiny, since they are likely to be involved in securities trades. While there are many new types of tokens to invest in, they are still subject to securities laws. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
According to the SEC's complaint, from June through the present, the Barksdales offered and sold Ormeus Coin to investors on crypto. The SEC's complaint alleges that, from to , Ginster raised approximately $ million in Bitcoin through two online platforms—. The SEC's remit is overseeing the capital markets and our three-part mission: protecting investors, facilitating capital formation, and.