By Ayomide Ogunsakin
Flowing through the stream of regulatory developments so far, there is a specific narrative: that the crypto industry, with its revolutionary technology and decentralized nature, has transformed the financial landscape; but this innovation has also brought forth the need for comprehensive regulation to safeguard investors, prevent illicit activities, and maintain the integrity of financial markets.
Arguably, the U.S has made the most efforts in regulating the crypto in industry and largely, their regulatory moves are setting foundations for other jurisdictions to follow. Hence, it makes sense to apply the U.S setting as a case study.
Although the industry is replete with virtual assets, not all are regulated and in this week’s Issue, we take a peek into how some aspects of the industry are being regulated in the U.S!
→ EXCHANGES: Crypto exchanges, the gateways between traditional fiat currencies and digital assets, are crucial elements of the crypto ecosystem. In the U.S, these platforms are regulated by agencies like the Securities and Exchange Commission (SEC), Financial Crimes Enforcement Network (FinCEN), and the Commodities and Futures Trading Commission (CFTC).
Exchanges like Binance adhere to strict anti-money laundering (AML) and know your customer (KYC) regulations which require the verification of users’ identities and reporting of suspicious activities, to prevent money laundering or other financial crimes and ensure safer trading environments.
For instance, Coinbase is compliant with FinCEN regulations, as it makes users verify their identities with government-issued IDs.
The SEC has also been tailing crypto exchanges; the SEC Chair, Gary Gensler in 2022, stated that the top five crypto exchanges are “likely trading securities” and thus need to register with the SEC.
→ CRYPTOCURRENCIES LIKE BITCOIN: With the recent SEC and CFTC moves, many cryptocurrencies and tokens are now being classified as either securities or commodities, with different regulatory implications.
The SEC regulates crypto assets deemed as securities to prevent market manipulation and fraudulent activities, while the CFTC regulates assets classified as commodities, focusing on derivatives and futures contracts.
Following this classification, ‘true cryptocurrencies’ like Bitcoin and Ether are seen commodities, and not securities, as they are beyond the SEC’s jurisdiction.
The CFTC has also defined Bitcoin as a commodity under the U.S Commodity Exchange Act.
So why is Bitcoin classified as a commodity according to the CFTC?
✓ Because it “looks and acts” like a commodity, based on its function.
✓ It is fungible, meaning that each coin is identical and can be exchanged.
✓ Its price is driven by supply and demand, and remains uninfluenced by any centralized entity.
Additionally, Bitcoin has never sought public funds to develop its technology—even Satoshi Nakamoto, the presumed developer of Bitcoin’s whitepaper is unknown— it does not pass the Howey Test used by the SEC to classify tokens as securities.
→ICOs: Initial Coin Offerings (ICOs) are the crypto industry’s equivalent of Initial Public Offerings (IPOs), which companies use to raise funds for projects, apps or services, by issuing tokens.
Let’s talk a little more on ICOs.
Basically, interested investors buy into the ICO to receive the new token after it’s been issued by the company; the token may have some utility related to the company’s product or service but unlike with some IPOs, ICOs don’t give invests an ownership stake in the crypto project or company.
ICO participants merely take the chance that the penniless currency will potentially increase in value later on. This is a major reason why the U.S. SEC has started to closely monitor some token sales—especially those they recognize as securities.
The SEC enforces securities laws, ensuring that companies issuing tokens comply with registration and disclosure requirements.
As crypto has attained substantial growth, several platforms have began to use ICOs (pre-sales) to raise capital and gain traction for their projects.
Typically these offerings involve the opportunity for individual investors to exchange currencies like $USDT or cryptos in return for other token asset.
This explains why these authorities have began and will likely continue to regulate ICOs, cryptocurrencies and crypto exchanges.
Ayomide Ogunsakin, the brain behind the DeFi Law Digest, is a law undergraduate at the Obafemi Awolowo University (OAU), Ile-Ife. She can be reached through email: email@example.com
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