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Cryptocurrency: Industry and Regulatory Updates

Cryptocurrency is having its best year yet in 2021. While being one of the few industries to grow in 2020, with recent developments in the U.S. and around the world, virtual currencies are only becoming more popular, mainstream, and accessible.

Recent Developments in the Crypto Industry

In the last six months, the crypto economy experienced significant milestones, fueling the record surge of the digital asset; and the industry is expected to preserve momentum even after rallies come to an end. Although we only just entered the second quarter of the year, we have seen a number of noteworthy developments in the field of cryptocurrencies, some of which are highlighted below. 

  • On April 20, 2021, Venmo announced it is adding crypto support to its platform, joining the long list of companies that recently began recognizing and accepting virtual currencies. 
  • As announced in the first week of April 2021, Square Inc., Fidelity and Coinbase are forming The Crypto Council for Innovation, with a mission to serve as the industry’s voice and “communicate cryptocurrencies’ benefits to policymakers, regulators and people around the world”. 
  • During that same week, Goldman Sachs announced it is making Bitcoin funds available to its wealthy clients, speeding up the institutional adoption of the virtual currency. The investment bank will soon be helping wealthy clients invest in cryptocurrency, through a new Digital Assets Group within its private wealth management division. 
  • On March 30, 2021, Paypal announced it has started allowing U.S. consumers to use their cryptocurrency holdings to pay at millions of its online merchants internationally. As a result, customers who hold virtual currencies in PayPal digital wallets will now be able to use their assets at checkout to make purchases. This check-out feature builds on PayPal’s offering to buy, sell and hold cryptocurrencies, which was only launched in October of last year. 
  • A few days prior to PayPal’s news, Tesla Inc. announced that the company would now start accepting Bitcoin as a form of payment. While PayPal’s technology settles the transactions in fiat currency, limiting any exposure for merchants, Tesla will be holding the Bitcoin used as payment. Despite high price volatility and associated solvency risks, the tech-billionaire, Elon Musk, has embraced Bitcoin and other cryptocurrencies more than any other major CEO and this type of operating model is not expected to be widely adopted by many. Tesla also announced it invested $1.5 billion in Bitcoin to “further diversify and maximize” the return on its cash in a Securities and Exchange Commission (SEC) filing earlier in February 2021.  As an influential business leader, Elon Musk’s constant support for Bitcoin and other cryptocurrencies, often through Twitter, has been a significant contributor to cryptocurrencies' all-time high prices. 
  • In late March 2021, Visa announced it will allow the use of cryptocurrency USD coin, a stable cryptocurrency whose value is pegged directly to the US dollar, to settle transactions on its payment network. As part of a pilot program, the payments network will work with the platform and Anchorage, a digital-asset bank. 
  • On March 18, 2021, Bank of New York Mellon, one of the largest custody banks in the world, invested in cryptocurrency custody Fireblocks, a market leader in providing secure technology to support digital asset services. Earlier this year, BNY Mellon said it would offer Bitcoin and other crypto custody services to its clients. BNY Mellon plans to use Fireblock’s technology towards its plan to serve as a custodian for digital assets on behalf of its institutional investors. 
  • Fireblocks was also the custodian of Facebook’s rebranded digital asset, Diem, which is also expected to launch in 2021. Facebook’s digital currency project, previously known as Libra, has been in the works since 2019 and was offset by several roadblocks from regulators, supervisors, policymakers as well as central banks, and governments from the wider G8. Despite addressing the regulatory challenges, concerns regarding a social media giant being at the epicenter of the global financial system are still well-grounded. 
  • Morgan Stanley becomes the first big U.S. bank to offer access to Bitcoin funds for their wealthy clients, announced on March 17, 2021. The investment bank will offer access to three funds that enable ownership of Bitcoin for investors with an “aggressive risk tolerance”.
  • During the same week, JPMorgan announced it is exploring Bitcoin and cryptocurrency clearinghouse options, emphasizing the need for a middleman to sit between over-the-counter (OTC) desks and traders to create market liquidity and guarantee trade enforcement.
  • Square Inc., an American digital payments company, is another company after Tesla, which began to embrace the world’s biggest cryptocurrency, Bitcoin, with its own investments. Square announced in February 2021, that it is investing $170 million more in Bitcoin, in addition to a $50 million Bitcoin purchase in October 2020.
  • As of February 18, 2021, the world’s first Bitcoin exchange-traded fund (ETF) in North America was approved and launched. The ETF is owned by Purpose Investments, a Canadian investment firm, and is traded on Toronto Stock Exchange (TSX) after obtaining approval from Canada’s securities regulator. 
  • In January 2021, Blackrock added Bitcoin futures for two of its funds as a potential investment, according to filings with the SEC. The two funds are BlackRock Strategic Income Opportunities and BlackRock Global Allocation Fund.
  • Popular trading applications such as Revolut and Robinhood also had Bitcoin and other popular cryptocurrencies available to their users for the last few years, since 2017 and 2018, respectively; yet have experienced a spike in their cryptocurrency trading volumes and new traders on their platforms. Robinhood said its cryptocurrency service has added 6 million funded accounts in the first two months of 2021 only, when its total customer count was 13 million users in May 2020. 

Overall, the emerging crypto market is not only attracting retail investors, but also traditional financial institutions and large corporations that are looking to profit from the emerging trend of digital assets. Accordingly, we are experiencing the greatest appreciation of cryptocurrency in history and it is becoming clear the field is here to stay.

Cryptocurrency Regulatory Landscape and Compliance Challenges for Businesses

Following the explosive rise of their price and popularity, cryptocurrencies have come under increased scrutiny from governments and regulatory bodies. Although the legislative field is still playing catch up with respect to players in the virtual currency arena, there have been enforcement actions and a renewed focus on the regulation of crypto activities and participants.

Most notably, the appointment of Gary Gensler by President Biden on April 14, 2021, as the new Chairman of the Securities and Exchange Commission (SEC), commences a new era for cryptocurrencies, and financial technologies in general. Before joining the SEC, following his public sector role as the Chairman of the Commodity Futures Trading Commission, Gensler was a professor at MIT, where his teaching and research focused on blockchain technologies and digital currencies – all of which signal there is more coming to the crypto-regulatory space. 

Most recently, on April 23, 2021, The Office of the Comptroller of the Currency (OCC) announced preliminary conditional approval of the application to charter for Paxos National Trust. If granted, Paxos will become the third cryptocurrency firm to score a federal trust charter through the OCC. 

Within the U.S. Federal government, the regulatory focus for cryptocurrencies has been at the administrative and agency-level including:

  • Commodity Futures Trading Commission (CFTC),
  • Securities and Exchange Commission (SEC),
  • Federal Trade Commission (FTC),
  • Internal Revenue Service (IRS),
  • Office of the Comptroller of the Currency (OCC),
  • Federal Reserve,
  • Financial Crimes Enforcement Network (FinCEN).

Each regulator has its own stance on the regulation of cryptocurrency, or on the contrary, deregulation. Additionally, the different classifications of cryptocurrency by the regulators often make it confusing. The SEC oversees digital assets that are considered securities; the CFTC treats virtual currency as a commodity, while the IRS treats it as property. Additionally, the divide between pro-cryptocurrency states such as Wyoming and Colorado, and states with tighter regulations such as New York, adds another layer to the messy web of rules for companies dealing with virtual currencies. 

Our recent article covers regulatory requirements for crypto entities operating in the U.S., regarding anti-money laundering rules within FinCEN and licensing regulations at state level. In addition to FinCEN, there is a long list of regulatory bodies and ever-changing obligations that organizations dealing with cryptocurrencies need to consider. 

Most recently, in February 2021, The Office of Foreign Assets Control Group (OFAC) fined BitPay Inc. for violations of multiple sanctions programs related to cryptocurrency transactions, with a settlement of $507,375. In March 2021, Coinbase, a digital currency exchange operator, paid a penalty of $6.5 million to settle charges from the CFTC for reporting violations and improper trading activity. 

Next Steps for Entities Dealing with Cryptocurrencies

Considering the serious legal and financial consequences of non-compliance with regulations, it is critical for businesses to understand, monitor, and fulfil their regulatory requirements. All entities dealing with cryptocurrencies must comply with their associated registration, licensing, and reporting requirements, in an accurate, timely and efficient practice. 

With our extensive abilities in regulatory compliance, including former U.S. regulators on staff, Sia Partners is ready to assist clients with regulatory requirements and help manage all types of compliance needs for crypto-dealing businesses. Sia Partners remains current on all state and federal level regulations applicable to cryptocurrencies, to provide clients with the best strategy and compliance solutions aligned with their business plans. If you would like to obtain more information, please reach out to your Sia Partners contact.

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