CRYPTOCURRENCY LITIGATION SERIES: PART 1 OF FOUR
WHAT YOU NEED TO KNOW IN A MINUTE OR LESS
One of the hottest areas of law right now is cryptocurrencies and digital assets. You can’t seem to open a news website without seeing stories about cryptocurrency risks, pending legislation, enforcement actions and lawsuits. One of the reasons for this explosion in activity is the ever-changing nature of the cryptocurrency regulatory landscape.
Originally considered a toy for technologists and libertarians, cryptocurrencies are now the subject of mainstream investor interest: accepted by merchants, used for cross-border payments, and used as a hedge against inflation. This means regulators at all levels – local, state and federal – are taking notice, as is any entity operating in the investment, payments and FinTech space.
This four-part series will cover the ever-changing cryptocurrency regulatory landscape, enforcement trends, best practices for surviving a government investigation, and cryptocurrency litigation on the horizon.
The Persistent Myth That Cryptocurrencies and Digital Assets Are “Unregulated”
One of the most persistent myths about cryptocurrencies is that they are unregulated. To be clear, cryptocurrency is highly regulated. In fact, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has been regulating cryptocurrencies since 2013 in terms of anti-money laundering compliance.
Over 20 states require certain cryptocurrency exchanges to have state money transmitter licenses, a number that rises to over 45 states if the exchange also holds and moves fiat currencies. When consumers and businesses entrust their assets to the care of an exchange, strict regulatory obligations follow.
Regulation by enforcement and pending legislation
In addition to the plain language of federal and state laws explicitly regulating cryptocurrencies, there has been significant “regulation by enforcement,” with actions and proceedings initiated by the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Department of Justice, the Federal Trade Commission, the Office of Foreign Assets Control, and various government regulatory agencies. Why? Primarily because many traditional financial institutions and their regulators view cryptocurrencies as a threat to stability and consumers, and concerns are rising as the “crypto winter” drags on.
Secondarily, there are currently no final federal regulations identifying which agencies regulate which cryptocurrencies and how such products should be categorized under the law. Subsequent issues of the “Litigation Minute” will discuss these enforcement actions in more detail.
Adding to this uncertainty is the wave of pending federal legislation. According to the National Conference of State Legislatures – in addition to the many bills pending before Congress on cryptocurrencies (such as the Lummis-Gillibrand Financial Innovation Act and the Stabenow-Boozman Digital Commodities Consumer Protection Act) – there were more than 100 different state bills. introduced in 2021 and addresses various aspects of cryptocurrency regulation.
Running a Cryptocurrency Business in Times of Uncertainty
Those in the cryptocurrency space want to get on the right side of the rules before they inadvertently become the target of investigations, enforcement actions or lawsuits. Under current conditions, this security may be elusive. However, cryptocurrency business entities can reduce risks by following three key principles:
Stay abreast of changing laws, regulations and guidance by monitoring federal and state agency and legislative activities;
Establishing an infrastructure and system that is agile enough to implement changes quickly; and
Perhaps most importantly, strive to establish a culture of fairness and adherence to transparent information and fair pricing and terms, as well as prompt resolution of complaints.