The current state of cryptocurrency regulation is a “Catch-22”, a series of absurd and contradictory rules and requirements that are impossible to follow.
Marcelo M. Prates is a central bank lawyer and researcher.
In Joseph Heller's famous novel, the “Catch-22” refers to the provision that allows pilots seeking exemption from combat duty to file a claim of insanity. There is one catch. Filing a claim means that the claimant is sane and therefore not entitled to immunity.
In America in 2024, the SEC’s “come and register” approach is a catch-22 for cryptocurrencies.
SEC Chairman Gary Gensler likes to say that registering with the SEC to comply with securities regulations is easy: “It's just a form on our website.” And even though crypto issuers and exchanges know how to do it, they “just choose not to do it.” The SEC Chairman sounds like crypto companies were unreasonably (if not illegally) stubborn in not filing the required registrations in the face of a welcoming SEC. This characterization hides a pitfall.
Even if we assume, as Gensler does, that all crypto tokens are securities and should be registered with the SEC (although this is debatable), we assume that the registration process is simple. Even (this is not easy), a successful registration would lead to a dead end. Registered crypto tokens, like other registered securities, can only be traded on registered exchanges through registered broker-dealers. But today that is not possible.
The Financial Industry Regulatory Authority (FINRA), the self-regulatory body that oversees broker-dealers, has approved only a few institutions to handle crypto tokens. Only one of these institutions, Promethium, a special purpose broker-dealer, remains inactive almost a year after its approval and has yet to list any tokens for trading.
Additionally, the SEC currently does not allow registered exchanges or broker-dealers to list, store, or trade crypto tokens. The SEC's view is that a registrar wishing to handle crypto tokens “cannot trade in, conduct transactions in, maintain custody of, or otherwise operate an alternative trading system for traditional securities.”
Furthermore, to date, virtual currency tokens are virtually unregistered with the SEC. And that's pitfall 22. Issuers do not register their crypto tokens before finding a registered exchange or broker-dealer to work with. Also, registered exchanges and broker-dealers will not start handling crypto tokens until a sufficient number is found. Tokens registered to make business models economically viable.
The reality for fintech is not so bright. In the absence of a specific federal licensing framework, fintech companies that use technology to provide more efficient and cost-effective financial products and services, from debit cards and loans to mobile payments and money transfers, can need to partner with. This partnership between fintech and banks is known as Banking-as-a-Service or BaaS.
Even if a fintech startup is a state-approved money transmitter, it will need to partner with a bank to make dollar payments, since only banks have direct access to payment systems. As a result, U.S. chartered banks will be required to introduce new ideas to the financial system, thus serving as gatekeepers of financial innovation.
The country's banking regulator, the Office of the Comptroller of the Currency, has grown wary of BaaS arrangements, making it more difficult and costly for banks to maintain “third-party relationships” with fintech companies. Regulators will need to determine how fintech partners accept customers, monitor transactions and handle sensitive information, and how banks manage these risks to ensure compliance with applicable rules and regulations. He says he is concerned about whether this will happen.
There's another catch-22 there. In the current regulatory environment, fintechs can only survive in the United States with the active cooperation of banks, but federal regulators do not want banks to partner with fintech companies. What can you do?
However, none of these state laws or systems relieves state-compliant institutions from facing problems at the federal level.Please listen to me for a moment coinbaseHolds a BitLicense but is being sued by the SEC for “operating as an unregistered securities exchange, broker, or clearinghouse,” or custodiais a certified SPDI that cannot directly provide basic payment services because it was not allowed to hold a master account with the Fed.
Congress must act to keep financial innovation alive. Enacting a federal licensing and regulatory framework tailored to cryptocurrencies and fintech is critical to maintaining the integrity, competitiveness, and inclusiveness of U.S. capital and financial markets. In Heller's words, crypto and fintech companies need to embrace the idea of ”live forever or die trying.”
