Crypto habits raise challenges for regulators

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The FTX implosion showed how well the crypto industry has thrived between regulatory and jurisdictional loopholes.

It also revealed the inherent dangers to consumers that exist when the companies to which they have ceded control of their assets collapse into these loopholes.

What U.S. regulators will do to prevent this, and how they will ensure it never happens again for U.S. consumers who are still looking to invest in alternative currencies one day, is an increasingly common question and important. This is all the more so since more than a million customers have probably lost everything they have entrusted to FTX.

The failure of the exchanges was also not without collateral damage for the crypto industry. The unexpected bankruptcy of FTX has severely shaken investor confidence and caused deep jolts across the entire market, bringing down several of their peers enmeshed in FTX simultaneously.

Are cryptocurrencies securities?

The answer to this question will likely determine the fate and viable use of most tokenized digital assets, at least in terms of their ability to legally operate on US soil and market to US consumers.

And the answer seems to be yes. Cryptocurrencies are actually securities. All 10+ thousand of them at least according to the agency in charge of their regulation, the Securities and Exchange Commission (SEC).

In a Wednesday, Dec. 7 interview with Yahoo! Finance, SEC Chairman Gary Gensler said there is nothing inconsistent in our securities and crypto laws, most of these tokens are securities, which means [they] must comply with our proven laws.

This comes as the Genslers agency, as reported by The Wall Street Journal (WSJ), faces growing calls to step up and enforce the repercussions of these laws.

Unfortunately for the investing public

There is only one big problem with the claimed enforcement of these existing securities laws: many crypto companies are strategically located in offshore locations like the Bahamas, Bermuda or the British Virgin Islands. These island havens, in addition to offering attractive tax environments, allow businesses to operate technically outside the jurisdiction of regulatory and governmental agencies in the Americas.

Unless the companies themselves tap into US markets or serve US customers through domestically incorporated businesses, they are subject only to the regulations of their host country. Several of these countries, including the Bahamas, have crafted legislation specifically aimed at attracting crypto businesses, creating a thorny situation at best.

Crypto is a global market. Companies headquartered overseas can still market their products to US consumers. American consumers can still invest in their offers. Ultimately, it’s up to consumers to do their due diligence and make their own responsible decisions with their hard-earned money.

Still, the trail is getting shorter for crypto firms operating in the United States, or hoping to do so, Gensler said. He made entrepreneurs and business leaders in the crypto space responsible for working with the SEC to ensure they comply with US laws. And the American investing public is an attractive audience to tap into.

Much of that is offshore, Gensler said. Unfortunately for the investing public, entrepreneurs in this field have chosen and it is a choice that they have chosen to try to circumvent the law, to set up shop overseas and to service foreign players . This is for other jurisdictions. This is for other regulators around the world. But if they are in US markets, they have to comply.

One of the most important steps crypto businesses should take to achieve compliance is to disaggregate their various businesses. After all, it was the allegedly inappropriate relationship between FTX’s cryptocurrency exchange business and its Alameda Research hedge fund that allegedly led to the rapid downfall of the two.

We don’t let the New York Stock Exchange (NYSE) also run a hedge fund and trade against clients. Separate a separate broker. Separate the separate guard function. And really use the proven rules of the road that are in the books, that’s Gensler’s advice for the crypto industry.

As reported by PYMNTS, the NYSE owner wholeheartedly agrees with this sentiment.

Gensler invites crypto leaders around the world to work with his agency to find a happy, compliant and safe solution to operate in the United States

Fortunately for the investing public

Regulatory clarity will come with time. Both the Commodity Futures Trading Commission (CFTC) and the SEC are confident in their authority and ability to oversee the sector. There are also many important bipartisan crypto bills coming to Congress this year that would expand regulatory authority and enforcement powers.

Gensler, who himself served as CFTC chairman more than a decade ago, supported giving the separate regulator a bigger role when it comes to crypto oversight around derivatives and of the spot market. If the two agencies can work together successfully to protect the American public from bad actors in the still-nascent crypto industry, that could also go a long way to closing the trust gap that has grown over the past month.

For all the PYMNTS crypto coverage, subscribe to the Daily Crypto Newsletter.

How consumers pay online with stored credentials Convenience drives some consumers to store their payment credentials with merchants, while security concerns give other customers pause. For How We Pay Digitally: Stored Credentials Edition, a collaboration with Amazon Web Services, PYMNTS surveyed 2,102 US consumers to analyze the consumer dilemma and reveal how merchants can overcome holdouts.

See More In: Bahamas, Bermuda, compliance, cryptocurrency, FTX, Gary Gensler, News, regulations, SEC, Technology, TechREG

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