The U.S. Regulatory Framework on Cryptocurrency: Risks and Solutions

The current U.S. regulatory framework for cryptocurrency is burdened by unclear rules and opaque administrative guidelines. While there is no uniform definition of cryptocurrency, the IRS has defined cryptocurrency as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” Cryptocurrency does not have legal tender status in the U.S., even though it is frequently digitally traded, purchased for currency, and exchanged for currency. The document will primarily focus on the U.S. approach to cryptocurrency regulation and compare the approach to more restrictive countries like China and India. In the U.S., the primary approach adopted has been an administrative one. At the federal administrative and agency level, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Trade Commission and the Department of the Treasury, through the Internal Revenue Service (IRS), the Office of the Comptroller of the Currency (OCC), and the Financial Crimes Enforcement Network (FinCEN) have been the primary drivers of cryptocurrency regulation. Due to federal agencies and policymakers’ positive assessment of the technology, claiming it to be an “important part of the U.S.’s future infrastructure,” few formal rulemaking measures regarding the technology has been adopted. The “crypto-friendly” U.S. approach can be directly compared to the restrictive approach in China and India. In May 2021, China banned financial institutions and payment companies from providing services related to cryptocurrency transactions, and sent out warnings to investors against speculative crypto trading. Under the ban, banks and online payments channels cannot offer clients any cryptocurrency service. The China ban against cryptocurrency services was a direct response to issues relating to unstable values, frequent price manipulation, and trading contracts that did not comport with Chinese law. India has adopted a moderate approach to cryptocurrency regulation, nearly approaching an outright ban until February 2022, when the Reserve Bank of India announced it will launch a digital currency this year starting on April 1. India has been critical of cryptocurrency for years, effectively banning crypto transactions in 2018 until the Supreme Court struck down the restriction in March 2020. There have been consistent efforts to apply stricter rules regarding cryptocurrency, mainly due to concerns that an unregulated crypto-framework would draw more domestic household savings towards volatile assets, leaving many households and consumers vulnerable to a market crash. This paper will analyze the U.S. cryptocurrency regulatory framework in the following categories: Public Policy Concerns, Sales Regulations and Securities Laws, Money Transmission Laws, and Ownership and Licensing Requirements for Funds. In addition, it will assess the state-level approach to cryptocurrency regulation and analyze the general trend of friendly legislative bills over since 2021. Then, this paper will argue that the current U.S. cryptocurrency regulatory framework leaves Americans vulnerable to serious risks without adequate safeguards. Specifically, this paper will focus on the risks associated with clear market manipulation and the destabilizing of broader financial markets. Lastly, by engaging in a comparative analysis with the Chinese and Indian governments’ approach to regulation, this paper will argue that the only viable approach to preventing fraud, waste, and abuse arising from cryptocurrency activities is an outright ban on cryptocurrency services. 2008 should have been a lesson in allowing highly speculative adventures to run rampant, leaving everyday taxpayers to pick up the tab. Cryptocurrency presents the same scenario, and without immediate action, it will result in further economic inequity.