The short version
- Cryptocurrencies are relatively new and subject to few regulations.
- Several federal and state agencies have made moves to regulate cryptocurrency.
- We’re likely to see additional consumer protection regulations in the future.
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How is crypto regulated today?
When crypto was brand new, no one knew how to regulate it. It was just invented, after all. But over time, the government will create consumer protection regulations, rules to prevent use in financial crimes or other potential laws to outline how the industry can operate.
As of this writing, regulations specific to cryptocurrency are nearly nonexistent. Instead, regulators have applied securities and payment laws to cryptocurrencies. We’ll likely see new laws and regulations specifically designed for digital currencies implemented in the near future.
Who regulates cryptocurrency in the United States?
Bitcoin was the first cryptocurrency and it was launched to the public in 2009. It didn’t initially gain much traction but eventually exploded in value, creating overnight “Bitcoin Millionaires” as the currency went from a few cents to more than $70,000 per bitcoin at its peak value.
With massive gains and losses in the active crypto markets, regulators in Washington, New York, and other jurisdictions put crypto in the crosshairs. The following agencies and organizations have some level of oversight over cryptocurrencies:
Securities and Exchange Commission (SEC)
The SEC is the primary regulator of financial equity markets like the stock market. The SEC asserts that some currencies are more like a stock than a kind of money, putting them under the SEC’s regulatory authority.
In September 2022, the SEC announced plans to create a new Office of Crypto Assets, a division dedicated exclusively to regulating digital assets. This is likely to emerge as a top source of cryptocurrency laws and regulations in the future.
More: What is the SEC? How does it affect my investments?
Commodities Futures Trading Commission (CFTC)
The CFTC maintains oversight over commodities trading markets. When certain cryptocurrency options and futures products launch, the CFTC is responsible for keeping an eye on these crypto-focused assets.
The CFTC provides a series of resources and consumer advisory alerts related to cryptocurrencies. This commission can levy fines and other regulatory actions against bad actors in the industry.
Even looking beyond cryptocurrencies, the agency levied fines against a DAO, a distributed asset ownership group relying on the same blockchain technology as cryptocurrencies.
The Federal Reserve
The Federal Reserve is primarily focused on regulating banks. While it is usually concerned primarily with dollars and dollar-based assets, crypto has crept onto the Fed’s radar in a small way. The Federal Reserve mainly regulates cryptocurrency holdings by banks, not the currencies themselves.
One big job of the Federal Reserve is ensuring banks comply with a wide range of banking regulations and maintain certain minimum liquidity requirements. When banks hold cryptocurrency assets, there’s a risk those could go down in value, hurting the bank’s asset position and ability to fund customer withdrawals.
The Fed also explored creating a central bank digital currency (CBDC) in the future. But at this point, a digital dollar is only speculation.
New York State
While financial regulations are often left to federal agencies, the State of New York steps into the financial markets from time to time.
New York has several cryptocurrency laws designed for what it defines as virtual currency businesses and requires certain cryptocurrencies to register with the state.
The New York Attorney General has led prosecutions against several crypto-related businesses and the state also recently announced a ban on energy-intensive cryptocurrency mining.
More: Do eco-friendly cryptocurrencies exist?
Consumer Financial Protection Bureau (CFPB)
The CFPB regulates various financial companies, products, and services. It offers many online articles and publications educating consumers about how cryptocurrency works and warnings of the significant risks. The CFPB also levies enforcement actions against bad players in consumer-facing financial industries.
If you encounter a financial scam or fraud, you can report it directly to the CFPB online. This agency is keeping close track of stablecoins, cryptocurrency that’s supposed to always hold the same value as another underlying currency, like the dollar. After the high-profile failure of the Terra LUNA stablecoin, it’s clear that oversight could help protect individual investors.
More: How to avoid the most common investment scams today
The Biden White House has released several reports and directives around digital currency. The President has he has instructed federal agencies to create more explicit frameworks and protections for digital currency users.
A more recent report focused on the environmental impact of cryptocurrency mining. While many currencies use a lower-energy method called proof-of-stake, Bitcoin uses more energy than many countries supporting its proof-of-work algorithms. The White House directed the Environmental Protection Agency (EPA) and the Department of Energy (DOE) to work on this issue.
More: Biden's crypto executive order: what's in it?
Why is the U.S. government considering cryptocurrency regulation?
Cryptocurrency may be just over a decade old, but its marketplace has more than 10,000 currencies worth as much as $3 trillion at its peak. While many crypto businesses work with the best intentions, new financial markets almost always attract scammers and fraudsters looking to make a quick buck.
Crypto regulations may help prevent financial crime. Tracking cryptocurrency markets enables regulators and law enforcement to track terrorists, drug dealers, weapon sellers, and other nefarious users.
Regulations and guidelines can also help individual investors avoid scams and huge losses in investment markets they don’t understand and may not work fairly.
There’s no shortage of stories about market manipulation and fraud in crypto. With new regulations, those stories will hopefully come to an end. However, as with nearly all industries, lobbyists and corporate interests are pushing back and working to guide regulations to be as favorable as possible to for-profit cryptocurrency companies. The industry spent about $9 million lobbying lawmakers in 2021.
More: How to spot a crypto scam
How will regulation affect cryptocurrency? pros & cons
- Additional protections for consumers and businesses investing and transacting in the cryptocurrency markets.
- Closer monitoring for illegal activities, money laundering, and fraud.
- Clear guidelines for what’s legal and what’s not legal for cryptocurrency exchanges and digital asset businesses.
- Some cryptocurrency projects may be negatively affected by new regulations.
- Higher costs and hurdles to remain compliant for crypto companies.
- Potential to stifle innovation in the cryptocurrency space.
The bottom line
Cryptocurrency regulation is a mixed bag, with some benefits and some drawbacks. Adding new regulations to what is mostly a completely unregulated industry may offer more good than bad. Consumer and business protections and legal guidelines for the industry can help everyone chart a customer-friendly path forward.
Learn about crypto:
- What is the future of crypto? 5 (crazy?) predictions
- Why are there so many cryptocurrencies?
- 8 tips to help you maximize your crypto investments
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