Deciphering the Alphabet Soup of Crypto Regs

If you granted a wish to virtually anyone doing business in the cryptocurrency world, and especially those involved in making payments and transferring money, they would probably ask for regulatory certainty.

With the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Office of the Comptroller of the Currency (OCC), Internal Revenue Service (IRS) and a whole alphabet soup of other federal and state agencies demanding at least some control over cryptocurrencies and cryptocurrency transactions, crypto companies often find themselves unsure of which rules apply.

The sheer number of players in the regulatory space makes companies wonder where the guardrails actually are, said Stephen Gardner, general counsel at Zero Hash, a B2B2C infrastructure provider for companies looking to offer crypto to their end users.

Uncertainty prevails

“Without guardrails,” Gardner told PYMNTS, companies just want to know “which consumer laws apply — and when — and who will enforce them. Often they overlap, and crypto firms need to be adept at responding to each of the different regulatory bodies.” »

However, he said there are signs that clarity may be coming, with lawmakers like Sens. Cynthia Lummis of Wyoming and Kristen Gillibrand of New York are pushing legislation to clarify both traffic rules and who enforces them.

See also: Bill giving CFTC regulatory oversight would reshape crypto

For now, however, one of the three biggest legal challenges facing the crypto-asset industry is “clearly defining which assets are securities, which assets are commodities,” he said.

The problem is that there are no rules set forth by the SEC and the Financial Industry Regulatory Authority (FINRA) that specifically address the custody of crypto assets.

If almost all crypto firms issue or back cryptocurrencies that are securities, as the SEC claims, “It’s one thing to say, ‘OK, everybody’s going to be a broker-dealer,'” Gardner said. “Well, after that, how do we legally and properly keep assets?”

Decentralized finance (DeFi) could be another pitfall in this regard, Gardner said.

“I think people who aren’t really in the business don’t understand the difference” between centralized and decentralized finance, Gardner said. “Let’s assume the SEC says these DeFi centrals should be regulated centrals. What an interaction with it [technology] will require additional licensing? If I can allow a customer to withdraw to a DeFi wallet, am I facilitating this stock exchange business?”

Be careful

Another big issue – probably the biggest from a payment perspective – is about taxes. Specifically, the IRS now treats any sale of cryptocurrency as a realized gain that must be reported, Gardner said.

“People want to see tax rules that recognize that if I use crypto to buy a gum at CVS, it’s a little onerous to have a realized tax event at that moment, and that hurts the industry in general,” he said. “It’s been kind of a hot-button issue for a while.”

Read more: When it comes to accepting crypto as payment, taxes are very burdensome

The problem, he said, is that a cryptocurrency “can be a payment, it can be an investment, it can be a [non-fungible token (NFT)] – sometimes all three at the same time.

As a result, he added, “Payments really can’t take off.”

Finally, there’s bankruptcy, which became a bigger concern when Nasdaq-listed crypto exchange Coinbase was forced to add a warning to its 10-Q filing that customer funds it holds could leave customers treated as unsecured creditors in the event of a bankruptcy.

See more: Crypto exchanges may be necessary to keep client funds separate, the report says

“There are established bankruptcy rules and procedures and precedent,” he said. “I think people want to see how crypto will fit in. Will it be a UCC asset that protects the customer’s assets in the event of bankruptcy?”

Get a specialist

That’s why it’s so important to work with a company built specifically for crypto, he said.

While there are basics that any compliance department can handle — the anti-money laundering (AML) requirements of the Bank Secrecy Act, for example — “identifying the red flag and following what it means,” or what alerts from blockchain intelligence firms mean, “takes some specialized knowledge,” Gardner said.

But even putting aside AML compliance, there are other considerations, such as “Is your balance sheet built to handle the volatility of cryptoassets?” he said. “Do you want crypto assets on your balance sheet? Will your regulators allow you to do that?”

Using a regulated business that specializes “in the business of crypto and only crypto allows you to avoid some of those governance pitfalls that companies aren’t really prepared for,” Gardner said.

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