Regulation
The Trap of US Crypto Regulations
The current state of crypto regulation is a “Catch-22”, a series of absurd and contradictory rules and requirements that are impossible to follow.
Marcelo M. Prates is a lawyer and central banking researcher.
In Joseph Heller’s famous novel, a Catch-22 refers to a stipulation that pilots seeking relief from combat duty can file an application declaring themselves insane. With one problem: Filing the petition implies that the petitioner is of sound mind and, therefore, cannot be excused.
In 2024 America, the SEC’s “enter and save” approach is a dead end for crypto.
SEC Chairman Gary Gensler often says: that registering with the SEC to comply with securities regulations is simple, “it’s just a form on our website.” And crypto issuers and exchanges simply “choose not to do it” even if they know how to do it. The SEC chairman makes it seem like crypto companies have been unreasonably (if not illegally) stubborn in not filing required filings in the face of a welcoming SEC. This characterization hides a trap.
Even if we assume, as Gensler does, that all crypto tokens are securities and must be registered with the SEC – what is debatable — and the registration process is simple — who is not — a successful registration would lead to a dead end. Registered crypto tokens, like all registered securities, can only be traded on registered exchanges through registered brokers. But it is impossible today.
The Financial Industry Regulatory Authority (FINRA), a self-regulatory organization that oversees broker-dealers, has approved just a few institutions to manage crypto tokens. Of these institutions, only one is a specialized broker-dealer, Prometheum, which remains inactive and has yet to list a token for trading almost a year after approval.
Additionally, the SEC has not authorized any currently registered exchange or broker-dealer to list, maintain, or trade crypto tokens. THE The SEC’s View is that any registered institution willing to work with crypto tokens “would not be able to trade, transact, maintain custody of, or operate an alternative trading system for traditional securities.”
Further away, virtually no crypto tokens have been registered with the SEC so far. And that’s the Catch-22: issuers won’t register their crypto tokens until they find registered exchanges and brokers that can work with them, and registered exchanges and brokers won’t start working with tokens cryptography until they have seen enough. registered tokens to make the business model economically viable.
The reality of fintech isn’t much brighter. Due to the lack of a specific federal licensing framework, fintech companies that use technology to offer more efficient and profitable financial products and services – from debit cards and loans to payments and sending of mobile funds – must collaborate with banks. This fintech-bank partnership is known as banking-as-a-service or BaaS.
Even when the fintech startup is a state-licensed money transmitter, it must partner with a bank to make and receive payments in dollars, because only banks can directly access the payment system. As a result, banks licensed in the United States end up serving as gatekeepers of financial innovation, as new ideas in the financial system must be implemented through them.
THE Office of the Comptroller of the Currencythe national banking regulator, is increasingly wary of BaaS deals, making it harder and more expensive for banks to maintain “third-party relationships” with fintech companies. Regulators express concerns about how fintech partners onboard customers, monitor transactions and handle sensitive information, as well as how banks manage these risks to ensure compliance with applicable rules and regulations.
We are faced with another impasse: in the current regulatory environment, fintech can only survive in the United States with the active collaboration of banks, but federal regulators do not want banks to partner with fintech companies . What can be done?
But none of these state laws and schemes exempt state-compliant institutions from facing problems at the federal level. You just have to ask Coinbasewho holds a Bit License but is being sued by the SEC “to operate as an unregistered securities exchange, broker-dealer and clearing agency”, or Guardan approved SPDI who was not authorized to hold a Fed Main Account and therefore cannot directly offer basic payment services.
Congress must act to keep financial innovation alive. Implementing appropriate federal licensing and regulatory frameworks for crypto and fintech is crucial to keeping U.S. financial and capital markets healthy, competitive, and inclusive. To paraphrase Heller, crypto and fintech companies should embrace the idea that they “will live forever or die in the attempt.”