What is cryptocurrency regulation?
In its early days, cryptocurrencies like Bitcoin aimed to disrupt the established world of traditional finance (TradFi), but existing legal frameworks weren't prepared for this technological revolution.
Like the dawn of the internet or social media, cryptocurrency emerged into a legal landscape devoid of precedents or guidelines. The initial lack of attention and user base meant regulation wasn't a priority, leaving a grey area for individuals, companies, and even governments to navigate.
However, over time crypto grew so much in both users and value that it could no longer be ignored by regulators. These institutions—mostly government organizations—have roles in other facets of TradFi such as defining asset classes, taxation, controlling custodians and facilitators of asset transactions, and approving financial tools. Fiat flowed into crypto through exchanges, digital assets were freely exchanged among users, and decentralized finance (DeFi) changed our understanding of true asset ownership.
However, crypto regulation has not been straightforward, as it is not entirely comparable to TradFi regulation. There has been confusion (and even debate) about which institutions are responsible for regulating crypto. Further, policies have varied significantly worldwide, and even when regions adopt similar policies, their timelines for adoption may be very different.
The history of a crypto legal framework
The global crypto landscape is a patchwork of diverse and evolving regulations. Each country and region have crafted its own approach to crypto policy, leading to inconsistencies that can frustrate both individuals and businesses. The dynamic nature of this evolving regulatory environment adds another layer of complexity for those navigating the crypto world.
The closest attention has been paid to the United States, where crypto legislation has historically been stalled by other priorities and partisan politics. This has left regulatory bodies to debate their roles in governing crypto. The Financial Crimes Enforcement Network (FinCEN) first issued guidance for digital asset exchanges in 2013, but later the Securities and Exchange Commission (SEC) and the commodity Futures Trading Commission (CFTC) issued their own guidance. This trio of regulatory institutions, and the unclear jurisdiction of each, has sparked discord about characterizing digital assets as securities, commodities, currencies, or as a different class altogether.
Meanwhile, in Europe, crypto regulation has been defined by the Markets in Crypto-Assets (MiCA) Regulation. MiCA spent three years in development and became law in 2023. This legislation sets rules for companies who offer crypto services and defines standards for stablecoin issuance.
In China, cryptocurrency has had an unbalanced footing since 2013. The country’s government first banned financial institutions from transactions involving cryptocurrencies, then it prohibited initial coin offerings (ICOs), discouraged mining, and ultimately banned crypto trading.
An abbreviated timeline of worldwide crypto regulation
2013: China prohibits banks from participating in crypto transactions
2013: FinCEN issues guidance for U.S.-based crypto issuers/exchanges
2013: Gemini’s Winklevoss twins propose the first spot Bitcoin exchange traded fund (ETF), which is rejected by the SEC
2015: New York State issues its virtual currency regulation, “BitLicense”
2017: China bans ICOs
2020: The Bermuda Stock Exchange lists a crypto-based ETF
2020: FCA requires all cryptocurrency firms to register under supervisory regime
2021: China formally bans crypto trading
2021: The SEC approves the first Bitcoin futures ETF in the U.S.
2021: Canada approves 3 spot Bitcoin ETFs
2023: MiCA passes by a vote in the European Union
2024: The SEC approves 11 spot Bitcoin ETFs
Crypto compliance
Compliance with regulation often involves ensuring platforms and institutions follow anti-money laundering (AML) and Know Your Customer (KYC) processes. These are often put in place by regulators to ensure that fiat currencies—through crypto—are not being used illegally or funding nefarious causes like terrorism. Many consider this a worthy effort, as unregulated mixers like Tornado Cash have been used to launder stolen funds by hacking groups. Companies that do not implement AML/KYC can face significant penalties from governing bodies.
Otherwise, the definition of compliance differs based on the laws of the region. For instance, crypto exchanges in the U.S. may be required to obtain money transmitter licenses (like New York’s BitLicense) and register as money services businesses (MSBs) in the U.S. These designations come with expectations such as record-keeping and reporting of suspicious activity.