Cryptocurrency – Could Regulation be on the Horizon?

The availability of cryptocurrency appears to be rapidly increasing.  However, with the increased availability of cryptocurrency, where’s the regulation?

Rachelle Dekker – Senior Compliance Advisor

Recently, I attended a professional sporting event and couldn’t help but realize the sponsorship. Rather than “Fox Sports” or “ESPN” sponsoring the game, it was a cryptocurrency exchange. Even the local mall is equipped with a cryptocurrency dispenser kiosk. Availability of cryptocurrency is pretty much at my fingertips just by using my Venmo App. The app offers the convenience of paying or accepting payments and the option to purchase cryptocurrency. Having the capability to “Buy crypto with as little as $1” seems pretty simple and convenient to me! Overall, the availability of cryptocurrency appears to be rapidly increasing. However, with the increased availability of cryptocurrency, where’s the regulation?

Currently, the regulations in place are not preventing cryptocurrency from being used in transactions related to criminal activity. FinCEN has issued several Advisories addressing cryptocurrency exchanges and other virtual currency activity. However, the proposal issued back in December 2020 related to regulation for cryptocurrency exchanges and wallets has not yet been finalized. Does this mean that regulators are putting cryptocurrency on the backburner? Probably not. There has been a “push” for innovation and guidance from the regulators.

In 2019 the FDIC established FDiTech, which was created to collaborate with community banks on how to deploy technology in delivery channels and back-office operations. In February 2022, FinCEN joined forces with the FDIC in the tech sprint by opening registration for the Digital Identity tech sprint. FDiTech has deployed other tech sprints with the intent to encourage innovation and partnership through engagement, technical assistance, tech sprints, and pilot programs. This is just one of the many “pushes” toward regulators seeking of innovation in order to determine a way to regulate cryptocurrency.

In addition, back in November 2021, federal regulators issued a joint statement on crypto-asset policy sprint initiative and next steps. This included the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (FRB), and the Office of the Comptroller of the Currency (OCC), who jointly addressed the work undertaken related to policy sprints on crypto-assets along with providing a roadmap of future work. The statement addressed the agencies’ focus on the emerging crypto-asset sector and the impact on the overall financial system. The agencies also mentioned how crypto-asset-related activities are emerging within supervised institutions; therefore, the agencies have addressed the need to focus on the importance of consumer protection, and the promotion of safety and soundness as it relates to applicable laws and regulations.

On March 9, 2022, President Biden signed an Executive Order on Ensuring Responsible Development of Digital Assets. The executive order addresses six principal policy objectives of the United States as it relates to digital assets. This includes the protection of consumers, investors, and businesses in the United States. In addition, it includes the protection of the United States, which includes focusing on global financial stability and mitigating systemic risk. It also includes the mitigation of illicit finance and national security risk when there is misuse of digital assets. Another principal policy of the executive order includes the reinforcement of United States leadership in the global financial system and in technological and economic competitiveness. The executive order addresses the importance of promoting access to safe and affordable financial services, and lastly, the executive order addresses the need to support technological advances that promote responsible development and use of digital assets.

What does this mean for financial institutions? With regulation sitting in limbo as “proposed” along with Biden’s Executive Order, it may not be too far away that financial institutions will face new final rules. Until then, federal agencies continue to address cryptocurrency, even with a lack of regulation. Recently, the acting Comptroller of the Currency discussed vulnerabilities in cryptocurrency at the DC Blockchain Summit 2022. He emphasized their careful and cautious approach to cryptocurrency to ensure the safety and soundness of the federal banking system. This topic is not uncommon for the Acting Comptroller of the Currency, as, in April 2022, he issued a statement on standards for stablecoin. The topic of cryptocurrency was also addressed by the FDIC back in April 2022. The FDIC reminded financial institutions that if the institution is supervised by the FDIC and they intend to engage in, or if they are currently engaged in activity related to crypto-assets, they must notify the FDIC. The statement issued by the FDIC states that an FDIC-supervised institution should promptly notify the appropriate FDIC Regional Director. From there, the institution must also provide necessary information to allow the agency to assess the safety and soundness, consumer protection, and financial stability implications of cryptocurrency-related activities. However, the FDIC also stated that the information requested from the federal agency would vary on a case-specific basis depending on the type of cryptocurrency activity. The initial notification to the FDIC is to describe a proposed timeline of when the cryptocurrency activity will be conducted and details of the activity. From there, the FDIC will review the notification from the financial institution, request additional information if needed, and provide relevant supervisory feedback to the institution.

New regulations could be on the horizon. The regulatory agenda released in Fall 2021 stated that FinCEN’s proposal for banks and money service businesses (MSBs) related to transactions involving convertible virtual currency (CVC) or digital assets with legal tender status that may be held in unhosted wallets or held in wallets hosted by financial institutions governed by FinCEN is on the regulatory agenda to become a final rule in September 2022. The proposed rule would require banks and MSBs to submit reports, keep records, and verify the identity of customers in relation to transactions involving convertible virtual currency (CVC) or digital assets with legal tender status. In addition, there are other proposed rules related to cryptocurrency. However, they all remain at the status of “proposed” rather than an action of “final rule.”

As the availability of cryptocurrency continues to increase, the agencies may continue to focus on finalizing regulatory requirements. When the regulatory environment changes, don’t hesitate to reach out to our Temenos Compliance Advisors for help.

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Rachelle Dekker – Senior Compliance Advisor