TL;DR: The Cryptocurrency Act 2020 outlines the governing bodies in America that will be responsible for regulating three classes of “cryptocurrency”. The CFTC to regulate native digital tokens, termed crypto-commodities. The SEC to regulate security tokens. The FinCEN to regulate cryptocurrencies (the likes of stablecoins, reserve backed assets like Facebook’s Libra, collateralized crypto-commodities like DAI).
Long-awaited cryptocurrency legislation in the USA is finally coming down the pipeline. The bill dubbed “Crypto-Currency Act of 2020” will shed light on which governing bodies are responsible for regulating different types of cryptocurrencies, thereby giving clarity to businesses, investors and developers in this space, which should lay the groundwork for the legitimate exponential expansion of this industry, unlike the unregulated crypto-tulip-bubble of 2017.
The US Congress is proposing a bill entitled “Crypto-Currency Act of 2020” which will outline the various types of cryptocurrencies based on technology, design and function in the economy. It then outlines which federal agencies will be responsible for regulating the different subtypes of cryptocurrencies, with respect to federal licenses, certifications, or registrations required to create, trade or hold such assets, and for other purposes.
There have been 3 proposed ‘Federal Crypto Regulators’ to be responsible for regulating digital assets. These are the CFTC, FinCEN and the SEC.
The Different Types of Digital Assets as Outlined by the Cryptocurrency Act 2020
(1) such representations or synthetic derivatives that are reserve-backed digital assets that are fully colleateralized in a correspondent banking account, such as stable coins.
(2) synthetic derivatives that are determined by decentralized oracles or smart contracts; and collateralized by crypto-commodities (i.e. BTC, ETH, XRP, EOS, ADA, LTC, etc), other crypto-currencies, or crypto-securities.
Point (1) refers to cryptocurrencies such as Tether (TUSD) or Gemini dollar (GUSD) where the synthetic derivative is backed 1-to-1 with USD or other appropriate collateral giving the underlying digital asset stability.
Point (2) refers to more crypto-native synthetic derivatives such as DAI stablecoin that uses ETH or Bitcoin as collateral (and over-collateral) for the DAI stablecoin that mimics the price of one USD, without USD backing it. These tend to be more complex, but potentially more transparent and trustworthy.
The definition of a crypto-commodity is:
Economic goods or services that a) has full or substantial fungibility, b) the markets treat with no regard for who produced the goods or services, and c) rests on a blockchain or decentralized cryptographic ledger.
These crypto-commodities are what we know of as natural cryptocurrencies such as Bitcoin, Ethereum, XRP, Litecoin, and others.
Crypto-securities refers to all debt, equity, and derivative instruments that rest on a blockchain or decentralized cryptographic ledger, with an exception. For a synthetic derivative that is operated and registered with the Department of the Treasury as a money services business and is operated in compliance with all Bank Secrecy Act and all of Federal anti-money laundering, anti-terrorism, and screening requirements of the Office of Foreign Assets Control and the Financial Crimes Enforcement Network (FinCEN).
Other Important Cryptocurrency Categories
- Decentralized Oracle
- Reserve-backed Stablecoin
- Synthetic Stablecoin
These are services that send and verifies real world information from external sources (outside of blockchains) and submits the information to smart contracts resting on the blockchain. Therefore, triggering the execution of predefined functions of the smart contract.
This is a critical service. Blockchains/cryptocurrencies and smart contracts are fantastic tools in their own right. And in an entirely digital world such as in video games, they make perfect sense as all the information that happens in the video game can easily be read and interpreted on the blockchain. However, in our physical world reality that interacts with the internet and blockchains, we need to be able to integrate real-world data to smart contracts in order for them to execute.
It does make sense to regulate oracles to ensure that they have a legal responsibility and accountability (as well as appropriate knowledge and training) to be inputting important raw data to fulfil smart contracts. This would likely include things like lawyers, accountants, insurance actuators etc.
Reserve-backed stablecoins are exactly as they sound: stablecoins that are backed by a reserve asset. In the Cryptocurrency Act 2020 it is defined as “a representation of currency issued by the United States or a foreign government that rests on a blockchain or decentralized cryptographic ledger, and is fully backed by such currency on a one-to-one basis and fully collateralized in a correspondent banking account.” (Forbes article, Jason Brett)
This appears to me to be a transition piece that integrates the old school legacy correspondent banking system into the digital cryptocurrency world. The value of fiat stablecoins is tenuous at best as they bring all of the same monetary policy issues (i.e. inflation) to their mirrored stablecoin. The only benefit is being able to send and receive funds 24/7 and it further integrates cryptocurrency technology with the legacy financial system.
I believe that Reserve-backed stablecoins will one day be a thing of the past, simply a transitioning measure to shift fiat dollars onto blockchains/cryptocurrencies directly, where central banks would be running nodes of their own fiat stablecoins and issue fiat directly onto their blockchain(s).
Synthetic stable coins refer to digital assets that are designed to maintain a relatively stable value in relation to the value of another currency or other asset. This could refer to a project such as Maker DAO’s DAI token.
Cryptocurrency Act 2020 Regulations
While we do not have a specific regulation outline or statement or any clauses, there is a general idea of what the regulations will be aiming at. The hint is given by Kenneth A. Blanco, Director of FinCEN:
You should be able to tell your examiner, and/or your regulator like FinCEN, how you mitigate risks… identify potentially suspicious activity and comply with reporting and recordkeeping requirements – including the Funds Travel Rule. You can count on being asked about this during an examination.Kenneth A. Blanco, Director of FinCEN (source).
The above statement gives us some insight into the theme of these regulations. Most likely a large chunk of the regulations will have to do with monitoring activity and mitigating what the authorities consider “risky” movement of funds and/or monitoring the activity of shady accounts.
Regarding who will regulate what, there is a rough outline but nothing set in stone.
FinCEN and Cryptocurrency Regulations
The FinCEN (Financial Crimes Enforcement Network) is to establish rules on tracing of cryptocurrency transactions… indicating that each cryptocurrency should allow for the tracing of transactions… which is possible right now on any open, uncensored public blockchain such as Bitcoin. However, the issue with this is that no one has control over the Bitcoin protocol and so if private transactions become possible the FinCEN would have to resort to KYC/AML endpoints of transactions (i.e. point-of-sale for cryptocurrencies) and not the cryptocurrency itself. Essentially companies, shops and services etc would have to have AML/KYC on customers, or the payment/wallet software would have that information integrated. Leading us into an even deeper surveillance state.
This is interesting since authorities will only be able to take action on services that are custodial, meaning that they hold the private keys to your Bitcoin or other native cryptocurrencies. However, if you custody your own private keys (i.e. on a Ledger Nano X or Trezor or Bitbox) then you can send funds anywhere in the world. Keeping in mind that the authorities may be able to track this via the blockchain and connecting your Bitcoin address to your identity through other means such as IP address, emails, withdrawals etc.
The SEC and Cryptocurrency Regulation
The SEC will be, unsurprisingly, responsible for regulating crypto-securities or security tokens. Security tokens will essentially replace stocks and other financial products (bonds, ETFs, etc) as we know them and put them onto blockchains such as Ethereum (check out my article on decentralized finance).
It appears that the SEC was correct in 2017 and 2018 – that most of the ICOs were unregulated securities – equity in companies. And now you can fundraise with security tokens as long as you follow SEC regulations.
I don’t imagine that the regulations for STOs will be much different than that of securities as we know them today. However, having digital security tokens has numerous advantages in the Age of the Internet in the 21st century. Check out my post on security tokens for a more in-depth discussion.
The CFTC and Cryptocurrency Regulations
The CFTC (Commodities Futures Trading Commission) will be responsible for regulating crypto-commodities, the likes of Bitcoin (BTC), Ethereum (ETH), XRP (XRP… Ripple), EOS, Cardano (ADA), Litecoin (LTC), Tether(?) (TUSD) etc.
This would also extend to cryptocurrencies, the likes of stables coins like Tether (USDT) and potentially even Facebook’s Libra “Cryptocurrency”.
I am most intrigued to see what sort of regulations the CFTC comes out with for truly native digital currencies like Bitcoin, Ethereum, Litecoin, XRP, etc. It would be like regulating gold… sure you can regulate the industries that handle gold but you can’t actually regulate gold the element. Similar to Bitcoin. They can regulate the exchanges and custody providers… but if you custody your own private keys… I’m curious to know how this will play out.
Markshire Crypto Conclusion on The Cryptocurrency Act 2020
There is much hesitation regarding development and entrepreneurship in the cryptocurrency industry was due to a lack of clarity on regulations in the USA. No large companies wanted to get too involved due to the potential for lawsuits, breaking future regulations and the high security that comes with dealing with people’s money.
I think that the development of the Cryptocurrency Act 2020 will be great for the entrepreneurs and business developers in America. Once those regulating bodies (the CFTC, FinCEN and the SEC) have established the rules that they want to play by, then the cryptocurrency industry in the USA will explode, as it will around the world since international companies will no longer fear to have American customers with clear government regulations.
I am very curious to know what sort of regulations the CFTC and FinCEN will come out with regarding regulating native digital assets like Bitcoin… you cannot truly regulate the Bitcoin protocol and who sends BTC to which address… Bitcoin is a game-changer for financial independence. They will try to regulate points of contact with bitcoin such as cryptocurrency exchanges and custody providers… I’m very curious to see how this will play out.
There is no deadline set for the Cryptocurrency Act 2020, however, I imagine that given the name of the bill that it is anticipated to pass within the next 12 months of 2020.
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