Cryptocurrency Regulations on the Horizon

As the use of cryptocurrency has expanded, financial, banking, and securities regulations have struggled to keep up. But there are signs that the regulatory state is finally getting up to speed with the blockchain technology that forms the basis of Bitcoin, Ethereum, and others.

Cryptocurrency is a promising innovation that promotes increased flexibility and security. While the legal landscape continues to evolve, however, the uncertainty will encourage some individuals to try to manipulate and defraud. Newman & Shapiro is committed to doing its part to protecting cryptocurrency investors, consumers, and markets from unscrupulous actors. If you’re aware of a company or individual engaging in fraud, we can help you become a whistleblower and potentially become eligible for a reward.

In 2020, we expect to see an increase in cryptocurrency regulations across numerous federal agencies from the Securities and Exchange Commission (SEC) to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Below are some of the possible changes.

“Safe Harbor” Securities Rule For Cryptocurrencies

The difficulties with regulating cryptocurrency are due largely to a lack of understanding of how the blockchain technology behind it works. More precisely, regulators can’t exactly define what the technology is used for now or what it might be used for in the future. As it stands, cryptocurrency tokens are often treated as securities, even though many will only be used as utilities. Securities laws are therefore automatically imposed on the sale or offering of these tokens.

This can prove problematic for developers of blockchain networks. At the start of a new crypto project, decentralization is low. The tokens are used to promote decentralization, but they may automatically run afoul of securities regulations. This is true even if there is no intent to offer the tokens as securities.

SEC Commissioner Hester Pierce has proposed a “safe harbor” change to the securities rules that control these tokens. This would protect well-meaning cryptocurrency projects during their critical development phase. If adopted, the rule would give crypto projects a three-year window in which to develop their blockchain networks and demonstrate to regulators the nature of their tokens.

Fighting Illegal Uses Of Cryptocurrencies

Cryptocurrencies are anonymous and difficult to trace, which makes them perfect currencies for drug trafficking, terrorism, and other black market activity. Within the cryptocurrency community, there is concern that new laws to combat illegal activity will have a damaging effect on the legitimate crypto market.

FinCEN has announced that it is preparing to introduce new regulations aimed at thwarting the criminal use of cryptocurrency. U.S. Treasury Secretary Steven Mnuchin has spoken of striking a balance between protecting innovation for legitimate uses of crypto technology and avoiding what would simply be the digital advent of the old secret Swiss bank accounts.

How these regulations will pan out remains to be seen. Cryptocurrencies thrive on anonymity, while FinCEN and other agencies demand transparency in how and for what purposes financial instruments are used. Resolving this inherent tension between cryptocurrencies and regulators will be challenging.

Who Is Responsible For Regulating Cryptocurrency?

The SEC and FinCEN clearly have two opposing views with respect to cryptocurrencies. At the SEC, there is a move towards relaxing at least some of the regulations. Meanwhile, FinCEN wants even more authority over the currencies. The differing approaches raise another critical question: who is actually responsible for regulating cryptocurrencies?

In February, former presidential candidate Michael Bloomberg put forth a financial reform plan aimed at providing some clarity to the matter. Although Mr. Bloomberg is no longer in the race for the White House, his ideas provide some insight into what a cohesive cryptocurrency regulation framework might look like. Among his proposals:

  • Require financial institutions to record all crypto transactions and monitor risk exposure for consumers
  • Creating a “regulatory sandbox” in which crypto startups can test their ideas while allowing regulators to examine how their technology is used
  • State which regulatory agencies will be responsible for cryptocurrency and determine a way to tax cryptocurrency investments

A more substantive move has already been made in Congress with the Cryptocurrency Act of 2020. This law would clarify which agencies have jurisdiction over cryptocurrency. It would also divide digital assets into three categories: crypto-commodities (to be regulated by the Commodity Futures Trading Commission); cryptocurrency (to be regulated by FinCEN); and crypto-security (to be regulated by the SEC).

Those promoting the legislation note that the cloud of regulatory uncertainty has made many would-be crypto investors wary.

Fraud Is Still Problematic; Here’s How We Can Help

As regulations and legislative proposals sprout up in 2020, con artists, criminals, and other unscrupulous actors will continue to pose a challenge to the legitimacy of cryptocurrency. Now more than ever, regulatory agencies need the public’s help in stopping scams and protecting the healthy growth of the crypto market. Whistleblowers play a critical role in that mission.

If you suspect that a cryptocurrency project is being operated as a means to defraud investors or otherwise violate securities laws, we want to know. We are also inviting those with knowledge about illegal use of cryptocurrencies, including tax evasion, to step forward. Whistleblowers who have original, non-public information about cryptocurrency fraud may be eligible for a reward.

Claiming a reward begins with making a strong case to regulators. Very few whistleblower claims are pursued to completion, and having a skilled whistleblower attorney is critical. Newman & Shapiro is experienced with whistleblower laws and knows how to get the attention of the SEC, FinCEN, and other agencies. We also know how to negotiate the maximum reward for whistleblowers and fight for their protection from employer harassment and retaliation.

Regardless of how the regulatory landscape for cryptocurrencies turns out, fraud and illegal activity will continue. We can help put an end to this activity and fight for you to be compensated in the process. Give Newman & Shapiro a call today to set up a confidential consultation.