BitOoda Regulatory & Geopolitical Analysis, 6/8/2020: Addressing the gaps and overlaps between federal and state-level digital asset regulation?
It has been awhile since we have addressed one of the key questions surrounding U.S. digital asset governance: federal vs. state regulation. As our readers know, U.S. digital asset regulation at the federal level involves a mix of agencies (e.g., SEC, CFTC, FinCEN, IRS) with jurisdictions that remain ambiguous and riddled with gaps and overlaps. A continued complication for American firms is that they also must navigate state-level regulations that have no consistency or uniformity with each other, much less with applicable federal rules. The NY BitLicense is the best-known example, while Wyoming has become known as the most crypto-friendly state and numerous other states (for example, Colorado, Ohio, Texas, Hawaii, California, and most recently Louisiana) have passed or proposed some elements of digital asset legislation.
How is this structure evolving over time? In the general absence of formal guidance from executive-branch agencies and the lack of a federal legislative framework, a growing number of states are implementing their own regulatory structures for digital assets with a range of approaches, rules, and requirements. Some states are encouraging blockchain technology writ large, some are addressing the use of cryptocurrency as money and addressing issues such as money transmission licensing, and some have tried to address how securities or other laws apply to crypto activities.
This is occurring while other countries around the world are clarifying, refining, or enacting national-level regulatory frameworks. For example, Canada decided that businesses “dealing in virtual currency” were to be treated as MSBs, the U.K.’s FCA clarified its jurisdiction over digital asset financial activity, and Japan has continued to refine its established national regulatory regime.
In our view, states will continue to put forth their own approaches until/unless national-level guidance is issued to clarify how to regulate digital assets. Similar to what we have seen at the international level, state-specific approaches will differ in their overall ‘attitude’ toward digital assets, the scope of their regulation, and of course the particular requirements and provisions they put in place. States that passed some of the first crypto regulations are now looking to refine their initial approaches, and even use them for higher-level economic objectives; for example, New York’s DFS recently entered into an agreement with France’s ACPR (an independent administrative body that monitors the activity of French banks) to ‘boost international fintech cooperation.’
So what does this mean and how do we see this playing out? We are hopeful that within the next year or two, Congress will meaningfully focus on one of the many bills that have been proposed addressing some of the more fundamental questions about a U.S. digital asset regulatory architecture. The Acting Head of the Office of the Comptroller of the Currency (OCC) also has hinted about the possible development of a national licensing regime for crypto companies if they provide payment services. However, we have seen little formal guidance from the most relevant regulators — SEC, CFTC, and Treasury — proposing a comprehensive or unifying national framework. While it is possible that the momentum behind the Digital Dollar will force a discussion on some of those questions, we foresee the continued proliferation of state-level digital asset guidelines, further reinforcing the growing importance of working with fully-regulated firms with strong compliance programs.