From the collapse of big names like FTX to the arrest of crypto whales like the former Binance CEO and founder Changpeng “CZ” Zhao, it’s obvious that regulations are getting a bit tighter in the crypto sector. 

The U.S. Securities and Exchange Commission (SEC) is playing a leading role among all the regulators, having taken 26 aggressive actions in 2023 alone. Many on the other side have objected to such crackdowns, claiming that the SEC does not have the authority to oversee the cryptocurrency market, and they are right, to some degree.

But who should be in charge? And what are the appropriate actions? Still, regulatory challenges prevent us from answering these questions.

Nations Fragmented

Many laws are becoming clearer, but the global crypto market is still raw and fragmented when it comes to regulations. Different countries have different regulations about how to regulate cryptocurrencies, which can make it hard for people in the market to find their way around.

Inconsistency like this can stop new ideas from coming up and make it harder for new projects to get started, especially for startups and smaller projects that might not have the resources to make sure they follow the rules in all potential areas. Also, quick regulation changes or crackdowns in big markets can disrupt and destabilize the sector.

This was the main talking point of a recent study published in the European Journal of Law and Economics, suggesting that there’s no “unified national legal framework” among European states, and if the EU intends to move closer to a uniform regulatory approach, it needs to put Markets in Crypto Assets Regulation (MiCA) as a top priority.

The Anti-Money Laundering (AML) Puzzle

Recently, a group of U.S senators, led by Elizabeth Warren, advised that the government should treat the crypto industry like the banking sector and impose “the same anti-money-laundering (AML) rules that banks have to follow” to fight this long-standing crisis in the digital realm.

Keeping up with AML regulations is a major challenge for anyone working in the cryptocurrency sector. Cryptocurrencies are especially problematic because they are anonymous, which makes it hard to determine who is really making deals. This built-in privacy creates a veil of secrecy that bad actors can use to hide where money comes from.

Plus, since transactions may take place across international borders, it becomes even harder to manage AML initiatives. As deals happen around the world very quickly, it becomes very hard to coordinate governmental control and compliance measures in different places.

One common tool is the KYC protocol. The goal of these regulatory compliance procedures is to stop illicit activities like terrorism funding and money laundering. These safeguards are now essential in the cryptocurrency sector for the sake of openness, safety, and compliance with regulations.

Several nations have passed laws mandating that Bitcoin wallet and exchange providers comply with KYC protocols. By adhering to regulations, these businesses are able to function legally and get the appropriate permits. There is an increasing movement for worldwide crypto KYC and AML regulations as the cryptocurrency business develops.

The Legal Question Mark Over Crypto

In response to the industry-wide outcry, the SEC director, Gurbir Grewal, stated that the organization “had to change strategies” since the cryptocurrency sector failed to show the required level of compliance. 

But that doesn’t clear any confusion over the blurry classification of cryptocurrency by U.S. regulatory entities. For instance, while the CFTC considers crypto (Bitcoin, in particular) as a commodity, the IRS classifies it as taxable property.

The SEC has begun to look closely at Uniswap. They have sent them a Wells Notice for possible regulatory violations, saying that it is running an unregistered securities exchange and hiring unlicensed brokers. Uniswap Labs has responded that its system does not meet the standards needed for an exchange under current rules and cannot be supervised by the SEC. People who work for them say that all they did was create the system, which is now used by buyers to easily trade crypto.

In addition, Uniswap has attacked the SEC’s aggressive behavior, saying that the regulator seeks to expand its influence without a good reason and has not embraced open-source technologies that could bring the financial world up to date.

Perhaps Marco Santori, Kraken’s Chief Legal Officer, best summed it up by stating that crypto is essentially a “legal platypus” that can’t be reduced to one traditional asset class. 

Following the Leaders

Certain nations serve as examples when it comes to cryptocurrency, especially in Asia. Japan may be the most telling sign of regional policy on regulation going forward. In 2017, the government formally acknowledged cryptocurrency as property.

Additionally, startups that want to hold an ICO must get a license that sets the base standards and details for the offering. Lastly, there are restrictions regarding Know Your Customer (KYC) as well as capital requirements and rigorous IT compliance audits that exchanges must adhere to. 

In 2025, South Korea intends to implement a regulation that would impose a 20% tax on any cryptocurrency revenues over 2.5 million won.

Some suggest that the U.S. can take a similar approach, treating cryptocurrencies as similar to stocks, bonds, or the closest financial instrument on the board. By doing so, the government can rely on existing laws to regulate the whole sector and all of its participants, clearing all confusion for both camps.  

But, this is a rather distant reality that could severely hurt the market.

So, Where Do We Go From Here? 

Given the diversity of crypto assets with unique features and applications, it’s not wise to follow a one-size-fits-all approach because it can easily lead to over-regulation in some assets and under-regulation in many others. Such moves will only disrupt the balance between innovation and security, creating even more confusion down the line. 

For now, it’s wiser to follow the SEC’s actions in clarifying the legal status of different crypto assets so we can come up with a fitting framework that can address the unique characteristics of each asset class.

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