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Why Does the US Have Strict Regulations for Crypto Exchanges

As countries around the globe attempt to regulate the shady cryptocurrency industry, regulation is an important topic at the moment. Several regulations have already been implemented in the US, and more are likely to be added.

Many cryptocurrency exchanges are unable to operate in the United States due to the restrictions that are currently in place, both at the state and federal levels. For example, exchanges must register as money service companies (MSBs) and get money transfer permits.

Some foreign exchanges have decided that the expense and administration could be more worthwhile. Others provide services that are in violation of American law. The crypto sector has also become increasingly aware of and involved with politics at the same time. Therefore, it is probable that this sector will continue to grow. 

Why are cryptocurrency exchanges finding it so hard to thrive in the USA, then? And why are cryptocurrency exchanges subject to harsh US regulations? In this essay, we’ll talk about both of these topics.

Current Crypto Regulations in the USA

Before we answer the why of the question, let’s see what the current regulations for crypto exchanges in the USA are. 

Despite the challenges of establishing uniform legal approaches at the state level, the US is making progress in creating a federal cryptocurrency law. On the grounds that cryptocurrency tokens are “other value that substitutes for cash,” the Financial Crimes Enforcement Network (FinCEN), which does not consider cryptocurrencies to be legal tender, believes cryptocurrency exchanges to be money transmitters. 

The Internal Revenue Service (IRS) has published tax guidelines defining bitcoin as “a digital representation of value that operates as a medium of exchange, a unit of account, and a store of value,” even though it is not regarded as legal cash by the IRS.

A banking secrecy act (BSA) governs the exchange of cryptocurrency in the US. The requirement is essential that companies that provide bitcoin exchange services must register with FinCEN, implement AML/CFT programs, keep appropriate records, and file reports. 

In the meantime, the US Securities and Exchange Commission (SEC) has stated it views cryptocurrency as security and that digital wallets and exchanges must follow all applicable securities laws.

In contrast, the Commodities Futures Trading Commission (CFTC) has taken a more lenient, “do no harm” stance, referring to Bitcoin as a commodity and allowing bitcoin futures to trade openly.

The Financial Crimes Enforcement Network has announced that cryptocurrency exchanges are expected to adhere to the “Travel Rule” and collect and disclose information on cryptocurrency originators and beneficiaries in accordance with the guidelines released by the FATF in June.

It applies all the same laws, including those outlined in the Bank Secrecy Act, which has its own version of the Travel Rule and puts virtual currency exchangers in the same legal category as conventional money transmitters. Additionally, FinCEN released a Notice of Proposed Rulemaking (NPRM) on amendments to the Travel Rule in October 2020, including new compliance requirements for bitcoin exchanges.

Why the USA Thinks These Regulations Are Helpful

Regulators believe that regulations will aid the industry. Here’s how.

Regulations will increase investor protection

Gensler called crypto “the Wild West” for a reason. Scams abound, and there are few regulations in place to stop insider trading or market manipulation.

In addition, many investors fail to take into account hidden hazards. How confident are you that your money is safe, for instance, if you invest it in a cryptocurrency platform that pays interest? What if the platform is compromised or goes bankrupt? Regulation may ultimately solve these issues.

Regulations will help to curb money laundering and tax evasion.

Many contend that regulation is necessary because criminals utilize cryptocurrency trading’s anonymity to launder their illicit profits. In addition, there is concern that cryptocurrencies are being used as a conduit for money from illegal operations or to fund terrorism.

Because of this, the majority of significant cryptocurrency exchanges have know-your-customer (KYC) policies. Before they may register an account or make a deposit, users must provide personal information, including their name and a copy of their identification. However, there are still a ton of anonymous trading exchanges that do not need KYC.

Safer Crypto Ecosystem

There are no regulations in the cryptocurrency sector, which is why Gary Gensler of the SEC has compared it to the “Wild West.” Without regulations, there are many opportunities for fraud, manipulation, and other dishonest practices.

There has been a significant increase in cryptocurrency crime over the last two years. In 2020, fraudsters stole $7.8 billion worth of cryptocurrency, setting a new record yearly. According to blockchain analytics company Chainalysis, fraudsters stole $14 billion worth of cryptocurrency last year. In addition, over 17,000 altcoins have a higher risk of cryptocurrency fraud and scams than Bitcoin and tend to be more volatile and speculative than Bitcoin. A number of new and emerging threats are being faced by even the most knowledgeable and passionate cryptocurrency specialists.

Crypto Regulations: What’s Next

 Clear regulations are still being developed, despite the fact that growth in crypto adoption by the general public in 2021 sparked an ongoing discussion over the role of the government in this mostly unregulated industry. In addition, the introduction of hundreds of tokens and digital currencies and the emergence of new businesses and platforms to assist in their storage and trading has left the sector in the dark.

Because blockchain and cryptocurrency haven’t been used before, policies haven’t been developed yet, therefore, it’s a difficult undertaking, according to Greenberg. “I can see why people are delaying, but something has to be done right now.”

Recent discussions on Capitol Hill indicate that the question is not when there will be more regulation but rather if. For example, President Biden approved new crypto law about taxation late last year as part of the $1.2 trillion bipartisan infrastructure agreement. Additionally, the Federal Reserve is considering launching digital money for the United States.

In January, the Fed made long-awaited research on the advantages and disadvantages of a national digital currency available. Ultimately, the report postponed making a final decision on whether to proceed. Instead, the Fed is allowing the public and other stakeholders until May 20 to provide their feedback before taking any action. Another contentious subject is stablecoins, which many experts predict will be the first cryptocurrency to be subject to regulation.

Although new regulations may increase market stability, investing in cryptocurrencies is still quite risky and speculative. As a result, financial experts urge most investors to limit their cryptocurrency holdings to less than 5% of their total portfolios and never put money into cryptocurrency at the price of emergency savings or paying off high-interest debt.

Conclusion

It’s important to note that some experts believe regulation would, over time, have a favorable effect on pricing. For instance, money from significant institutional investors may eventually more than outweigh any short-term loss of illegal funds. Additionally, legislation that fosters confidence and increases investor protection would support the industry’s continued expansion.

What matters most, in the end, is how any new cryptocurrency legislation is structured. Of course, regulators should use restraint to avoid severely impeding the operations of genuine initiatives. However, reasonable regulation that eliminates unscrupulous actors could foster an atmosphere where sincere ventures can succeed.

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