CRS Reviews Current Regulatory Authority over Crypto

The Congressional Research Service ("CRS") reviewed federal and state efforts to regulate cryptocurrencies and highlighted related policy issues.

In an In Focus report, CRS stated that "crypto attempts to replace the current financial system, of which a central tenet is trust, with one that does not require trust." In place of trust, CRS described the cryptocurrency system as one that "leverages a series of separate but concurrent incentives for different system participants." CRS acknowledged the development of an entire ecosystem to support cryptocurrencies, including "the custody or hosting services known as wallets, as well as exchanges, payment platforms that support crypto, decentralized finance platforms, and dozens more."

CRS focused on regulators' efforts to apply existing frameworks to cryptocurrency in lieu of a comprehensive federal regulatory framework, including:

• the SEC's supervision of crypto tokens and trading platforms when such tokens meet the definition of "securities" under the Supreme Court's Howey Test;
• the CFTC's supervision of virtual currencies based on the definition of "commodities" under the Commodity Exchange Act;
• federal and state banking regulators overseeing crypto firms seeking state or national bank charters; and
• state regulators' supervision of crypto exchanges by their authority over Money Services Businesses (MSBs), as well as FinCEN's supervision of such firms under the Bank Secrecy Act and related Anti-Money Laundering / Know Your Customer (AML/KYC) regulations;

CRS highlighted several policy issues introduced by cryptocurrency, including:

• balancing user privacy with crypto firms’ AML/KYC program compliance;
• examining the environmental impact of cryptocurrency due to the "significant amounts of energy" required to power sophisticated computers;
• determining if a regulatory regime tailored to crypto is necessary, specifically: (i) whether congressional action is required to provide federal agencies with additional authority, (ii) which agency would be the primary regulator and (iii) whether a new overarching structure or refinement of an existing framework is sufficient; and
• the lack of investment and consumer protections in light of recent scams and fraud within the crypto industry.