Here's the global state of crypto regulation and enforcement in 2023 – and a look at what to expect in 2024.
The U.S. has proven to be one of the most active enforcers of penalties and legal action against crypto companies this year, as authorities sought to to counteract bad practices in the industry by Alameda Research.
“To be clear, in some cases – like FTX – enforcement was necessary,” said Renato Mariotti, a former prosecutor in the U.S. Department of Justice’s Securities and Commodities Fraud Division. “But U.S. enforcement actions against market participants that are more compliance-oriented are questionable and the result of the U.S. 'regulation by enforcement' approach.”
While many regions have passed laws with potentially harsh penalties, the US is still the only country actively cracking down on large crypto companies and projects. To date, the US has led the enforcement campaign against crypto firms and has been by far the strictest regulator in terms of penalties and fines.
“Other countries have a comprehensive regulatory framework. We don’t,” Mariotti told CNBC. “Consequently, matters are being negotiated that should be regulated by law or regulation.”
In the absence of strict rules from Capitol Hill, the SEC, the Commodity Futures Trading Commission, the Justice Department and the Treasury Department's Financial Crimes Enforcement Network (FinCen) have worked in parallel to police the space in a sort of patch-quilt version of regulation through enforcement.
Richard Levin, a partner at Nelson Mullins Riley & Scarborough, who has represented clients before the SEC, CFTC and Congress, tells CNBC that these agencies are among the most active enforcement agencies in the world in regulating digital assets and cryptocurrencies.
“These agencies have provided guidance to the industry on how digital assets and cryptocurrencies must be offered and sold, traded and held by custodians,” said Levin, who has worked in the fintech sector for 30 years.
“However, much of their work has been to provide guidance to the industry through enforcement actions,” Levin continued.
Since 2019, the Justice Department's Market Integrity and Major Frauds Unit has prosecuted cryptocurrency fraud cases involving over $2 billion in intended financial losses to investors worldwide.
In its annual report summarizing enforcement actions, the CFTC noted that nearly half of all cases in 2023 involved conduct involving digital assets. Meanwhile, the SEC highlighted that 2023 will be marked by enforcement of “crypto-related misconduct, including fraud schemes, unregistered crypto assets and platforms, and illegal celebrity endorsements.” Since 2014, the SEC has filed more than 200 lawsuits related to crypto asset enforcement and cyberattacks.
The most serious cases occurred in the first half of the year, when the SEC accused Binance and Coinbase of engaging in illegal securities trading in two lawsuits.
Specifically, the SEC claims that at least 13 crypto assets available to Coinbase customers – including Solana's Sol, Cardano's Ada and Protocol Labs Filecoin – should be considered securities, meaning they would have to be subject to strict transparency and disclosure requirements.
In the case of Binance, the SEC went a step further. In addition to securities law violations, the company and its co-founder and CEO Changpeng Zhao were also accused of commingling customer assets with company funds.
When it comes to criminal enforcement, Damian Williams, the U.S. attorney for the Southern District of New York, has led some of the justice system's most high-profile crypto prosecutions, including the month-long trial of Bankman-Fried, the disgraced FTX founder. In November, a jury found the former FTX boss guilty of all seven criminal charges against him after deliberating for several hours.
But crypto companies have begun to fight back, with some threatening to pull out of the US entirely if this momentum of police enforcement continues.
Coinbase CEO Brian Armstrong condemned the SEC's crackdown on the exchange and suggested the company may be forced to move its headquarters overseas. Armstrong later walked back the threat of moving overseas, but Coinbase and other major crypto firms have still begun investing more heavily in their international operations.
Still, crypto market participants are hoping that the deluge of legal challenges facing crypto companies in 2023 will bring clarity in the form of new regulations.
“Clearer regulatory frameworks and the stance of regulators worldwide have provided a sense of legitimacy and security and encouraged broader participation in the Bitcoin market,” Alyse Killeen, managing partner of Stillmark Capital, told CNBC.
The crypto industry saw the most legislative progress on crypto laws in the US this year, with one of the competing digital asset bills passing multiple House committees for the first time.
Even though US lawmakers are taking steps towards crypto legislation, there is still no law in the US specifically tailored to the industry. Levin of Nelson Mullins Riley & Scarborough tells CNBC it's unlikely we'll see much progress in a presidential election year and with a divided federal government.
He argues that routine complaints about U.S. regulators failing to provide guidance to the industry are unfounded, even if lawmakers do not set rules for cryptocurrencies.
According to Levin, “The SEC, CFTC, and FinCEN regularly provide informal guidance on the regulation of digital assets and cryptocurrencies.”
“The SEC even went so far as to provide a framework for analyzing digital assets and cryptocurrencies. The SEC also created a fake digital asset (Hosey Coin) that gave the FinTech community advice on how not to launch a digital asset,” Levin added.
“Some members of the industry forget that the SEC relies on laws that were written when American football players wore leather helmets and that the SEC must apply those laws to the FinTech industry,” he said.
Although enthusiasm for cryptocurrencies has waned recently, Stillmark Capital's Killeen does not expect regulators to become fatigued with cryptocurrencies in 2024. In the same year that two of cryptocurrency's leading figures were sent to prison, shares of Coinbase fell – and the prices of digital currencies like Bitcoin and Ether – have risen sharply.
Since the beginning of this year, Coinbase's share price has risen more than 400%. The price of Bitcoin and Ether has now roughly doubled. Investors expect SEC approval of a Bitcoin exchange-traded fund to be imminent.
The European Union is expected to fully apply its crypto asset markets legislation aimed at taming the crypto industry's “Wild West” from next year.
The law, originally proposed in 2019 in response to Meta's digital currency project Diem, formerly known as Libra, was aimed at combating fraud, money laundering and other illicit financing in the crypto space and more broadly rooting out the sector's bad actors.
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It also sought to combat a perceived threat from so-called stablecoins, or blockchain-based tokens that serve as a representation of government funds but are backed by private companies. Stablecoins are essentially digital currencies pegged to the value of fiat currencies like the dollar.
While Tether and Circle's USDC are not considered “systemic” assets capable of disrupting financial stability, a private stablecoin from a major company such as Meta, Visa or Mastercard could pose a greater threat and potentially undermine state currencies, according to several EU central bankers. Eyes.
The U.S.'s dominant role in global finance and its focus on consumer protection play a critical role in its leadership in enforcing crypto regulation. However, the landscape is evolving and other jurisdictions are continually improving their cryptocurrency regulatory and enforcement frameworks.
Braden Perry
Former federal prosecutor and current partner at
Part of the EU's crypto framework aims to combat threats – particularly those of an undermining of the euro – by making it impossible for issuers to mint stablecoins backed by currencies other than the euro, such as the US dollar once they reach the threshold of more than 1 million transactions per day.
Meanwhile, the European Union is aiming for a uniform regulatory framework for cryptocurrencies with its Markets in Crypto-Assets Regulation (MiCA).
This year, the EU's three main political institutions approved MiCA, paving the way for the regulation's adoption. The MiCA came into force in June 2023 but is not expected to come into full force until December 2024.
Companies are already preparing to take advantage of the new rules, with Coinbase submitting an application for a universal MiCA license in Ireland. If approved, Coinbase could “fit” its services into other countries such as Germany, France, Italy and the Netherlands.
Braden Perry, a former federal prosecutor and current partner at law firm Kennyhertz Perry, said that while the U.S. remains a top enforcer for the crypto industry, its perception as a regulator “may be diminishing” as other jurisdictions step in with clearer rules would have.
“This perception is due to the proactive measures taken by US regulators such as the SEC, CFTC and IRS, particularly in combating fraud and security issues in the crypto market. High-profile legal action in the US further cements its image as a tough enforcement agency,” he said.
“However, other regions, including Singapore, Dubai, Hong Kong and the European Union, are also developing robust regulatory frameworks,” Perry added. “While these regions may not be as highly visible in the international media for enforcement action, they do have significant and sometimes rigorous regulatory mechanisms.”
But while the EU at large struggles to implement new crypto laws, individual European countries have not rested on their laurels.
France is luring crypto companies and traders alike with the promise of tax cuts on crypto profits and a smoother registration process for digital asset companies.
According to a statement from the regulator in August, the French Financial Markets Authority (AMF) will change its registration requirements for crypto firms to better align with MiCA from January 1, 2024.
At the same time, French authorities are watching fraudulent activities by various crypto actors with skepticism. In September, French regulators added 22 fraudulent websites – including some that marketed trading in cryptocurrencies and crypto-related derivatives – to a blacklist of unauthorized foreign exchange providers.
Meanwhile, in Germany, financial regulator Bafin has said it wants to accelerate its approach to licensing crypto custody services as part of a broader effort to create trust and transparency in the crypto market.
The United Kingdom, a non-EU member, passed a law in June giving regulators the ability to oversee stablecoins. However, there are still no concrete rules for crypto.
The UK Treasury published its response to a consultation on new crypto rules earlier this year, confirming that it plans to integrate a range of crypto activities, including crypto custody and lending, into existing laws for financial services firms in the country.
Earlier this year, the Monetary Authority of Singapore, known for clear fintech and crypto regulations that do not rely heavily on enforcement actions, finalized rules for stablecoins, becoming one of the first jurisdictions in the world to do so.
Singapore was particularly affected by the collapse of TerraUSD, a controversial algorithmic stablecoin, in 2022, as well as the fall of Three Arrows Capital (3AC). Both Terra Labs, the company behind Terra, and 3AC were headquartered in Singapore.
Singapore's new framework requires stablecoin issuers to support them with low-risk and highly liquid assets that must at all times equal or exceed the value of the tokens in circulation, and to return the face value of the digital currency to holders within five business days of submitting a redemption request and Disclose test results of reserves to users.
Hong Kong, meanwhile, is conducting a public consultation on stablecoins and aims to introduce regulation next year.
Despite a broader anti-crypto push from China, which banned Bitcoin trading and mining in 2021, the region has shown increasing interest in crypto assets.
The Hong Kong Securities and Futures Commission (SFC) introduced a registration system for digital asset companies earlier this year, with clear regulations for crypto exchanges and funds.
So far, only two companies, OSL Digital and Hash Blockchain, have been issued licenses.
The UAE has become a popular location for the broader fintech sector due to its lack of income tax, flexible visa requirements and competitive incentives for international businesses and workers.
In 2022, Dubai – the most populous city in the United Arab Emirates – established VARA, the Virtual Asset Regulatory Authority, to take the lead in the virtual assets sector in the Middle East and Africa.
“Dubai and the United Arab Emirates have created favorable conditions for cryptocurrency business and offered specific zones and policies for crypto trading,” Perry said.
Blockchain analytics firm Chainalysis notes that regulators in the UAE were early adopters of cryptocurrency, with Dubai leading the way by launching a blockchain strategy in 2016.
“Since then, UAE regulators have continued to lead the industry,” said a Chainalysis report.
Two years later, in 2018, Abu Dhabi Global Market created the world's first cryptocurrency regulatory framework to encourage innovation while protecting consumers.
Earlier this year, the UAE passed additional crypto regulations at the federal level to make it easier for regulators like VARA to oversee the sector and operate economic free zones.