Navigating the crypto regulatory landscape

A volatile crypto policy framework

Over the course of 2022, three parallel paths of federal agency activity, a presidential executive order, and congressional efforts to legislate have made the US crypto policy framework appear more volatile than ever. In our report, we explore the major approaches to crypto policy currently under consideration and demystify the federal policy outlook by discussing the remaining tension points, latest developments, and policy outlook for the following topics:

• Classification and reporting of digital assets
• Regulating crypto exchanges
• Stablecoin issuance
• Path to a US central bank digital currency (CBDC)

Classification and reporting of digital assets

The innovative core of the asset class has been mired in regulatory uncertainty since its inception. While congressional proposals favor a commodities regime without legislation, the legal status of certain assets is increasingly left to the courts. As both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) step up their enforcement efforts, the pressure on the Congress to provide clarity intensifies.

Crypto policy for the exchanges

Exchanges that list digital assets have been thrust at the center of the legal debate over the products that they list. An exponential increase in digital asset trading volumes coupled with retail and institutional adoption, has motivated the SEC to impose the full spectrum of financial regulations on the exchanges. Institutions also need to invest in robust, digital assets-tailored monitoring and surveillance capabilities, and implement measures to cohesively integrate them within existing practices and systems.

Stablecoin regulation

Stablecoins could pose a significant threat to the financial system if not regulated effectively, especially if adoption and speculation continue. Stablecoin legislation could mark the first step toward establishing a clear policy framework for digital assets in the United States. Opportunities exist for Banks to issue and engage in Stablecoins if policy clarity is achieved. Failure to solidify the legal treatment of stablecoins and other digital assets in the US could risk driving economic activity elsewhere.

Path to a US central bank digital currency

President Biden’s executive order on “Ensuring Responsible Innovation of Digital Assets” accelerated the policy discussion around a US central bank digital currency (CBDC). Legislation authorizing a US CBDC could delegate broad authorities to the Fed to develop a CBDC or may define certain features, for example, by authorizing a wholesale only CBDC. The scope and purpose of a US CBDC in day-to-day transactions could be clarified in forthcoming pilots, reports and policy activities.

The road ahead

Consumer and investor protection likely will remain a near-universal focus area for policymakers. When the regulatory structure for stablecoins, exchanges and other digital assets becomes clearer, regulated financial institutions may be empowered to fully participate in the marketplace, and entities that have operated on the fringes of the regulatory perimeter likely will be challenged to meet elevated regulatory expectations.