FTX has changed the crypto regulations. Here’s what 2023 has in store for you

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There was a time in 2022 when it looked like the Securities and Exchange Commission (SEC) might back down from its shoot-first-ask-questions-later approach to crypto regulation. After months of aggressively pursuing and investigating crypto exchanges for allegedly violating US securities law at the behest of crypto critic and SEC Chairman Gary Gensler, at least one of the regulator’s commissioners expressed dissatisfaction with how Gensler was carrying out the organization’s mandate.

While speaking to nft now in the summer of 2022, SEC Commissioner Hester Peirce made it clear that the body should work with crypto exchanges collaboratively rather than simply punitively. “I would say 2022 is the year to lay the groundwork for future legislative and regulatory activity,” she said, hopefully.

But after the fall of FTX, crypto advocates and skeptics alike came together to recognize that no matter what, something has to change about Web3 monitoring. If 2022 was the time to lay the groundwork for regulatory activity in the crypto industry, you would think that 2023 would kick-start that activity. But lawmakers are taking a moment to step back from enacting such legislation. And they are right to do so.

SEC vs. CFTC: Who wins?

One of the ways the US government plans to respond to FTX’s downfall is through the Senate Agriculture Committee’s Digital Products Consumer Protection Act (DCCPA). The proposed bill, which was drafted at the time of FTX’s collapse and has since been shelved in light of that event, remains a potential and controversial option in Washington for several reasons.

ablokhin/iStock

First, it would give the Commodity Futures Trading Commission (CFTC), not the SEC, jurisdiction over Bitcoin, Ethereum, and likely other cryptocurrencies. The two bodies are increasingly arguing over a central question: are digital assets like cryptocurrencies commodities or securities? If ranked first, they would likely fall under CFTC jurisdiction. And while CFTC Chairman Rostin Behnam has asserted that the perception of the organization as a more lax regulator of the industry is an illusion, some of the stipulated provisions (at least in some versions of the DCCPA) indicate opposite.

According to the Wall Street Journal, while at least some versions of the bill maintain the SEC’s ability to sue exchanges that list tokens that meet its definition of a security, the legislation would give exchanges themselves a trial deferral to determine whether or not a particular listed token was a security or a commodity. While this wouldn’t give exchanges the final say, it would give them some authority to determine this crucial legal issue, which is far more leeway than they would likely be granted if they were placed under the official jurisdiction of the DRY.

Crypto Industry Steps Up Lobbying Efforts

Over the past 12 months, crypto lobbyists have formed a cohesive force in Washington, leading several members of Congress to speak out in favor of bills like the pro-CFTC DCCPA and urge the SEC to back down. to its antagonistic position towards the industry. Representatives like Tom Emmer (R-MN) and Ritchie Torres (D-NY) are part of this group.

Ethical waters are getting murky here, however, as both individuals have received donations from crypto lobbyists and industry heavyweights like Ben Horowitz, Chris Dixon, Anthony Albanese, and FTX executives.

Another reason why the DCCPA bill is so controversial is the lens of lobbying behind the curtain of success. But the controversy might be warranted even if the FTX arc never happened. If the bill passes, it would result in years of rule-writing by the CFTC to build a regulatory framework from the ground up. indeed, the CFTC is the smaller of the two regulatory bodies aiming to rein in the industry and does not yet have the specific regulatory infrastructure to do so. However, once launched, the industry would exert strong pressure on the organization and Congress to bend these rules in its favor.

Security or merchandise?

Regulators need to reach a definitive consensus on whether specific digital tokens are securities. For years, Gensler has expressed his desire to put digital assets under the purview of the regulator, repeatedly saying that most cryptocurrencies can be classified as securities and exchanges should register as national stock exchanges.

Because Gensler believes that more traditional methods (like the Howey test) of determining whether something is a security are fully applicable to digital assets, the need to draft new legislation to deal with these Web3 phenomena is less urgent than the enforcement of existing law. CFTC’s Benham thinks the two organizations can work together on these gray area issues. Yet few in the crypto industry are likely to trust this collaboration until clear lines are drawn around the classification of cryptocurrencies.

While the DCCPA is still considered the bill most likely to become law in Washington (despite its current stasis), one of the reasons it’s on hold is that one of its greatest champions was Sam Bankman-Fried. This connection alone gave the entire legislative apparatus a reason to stop.

How Crypto Exchanges Should Prepare for 2023

For much of 2022, crypto exchanges and brokers have been waiting for the US Treasury Department and the Internal Revenue Service (IRS) to clarify their position on how these entities will need to interact with Sections 6045 and 6045A of the IRS. ‘Internal Revenue Code. These sections state that anyone carrying on business as a broker must report details of the names, addresses, and other information of their clients to the IRS.

The answer to the question of who qualifies as a broker remains unknown. Notably, the Infrastructure Investment and Employment Act (IIJA), which President Biden signed into law in November 2021, provided an updated definition of the term “broker,” which now includes “any person who ( for compensation) is responsible for regularly providing a service that performs transfers of digital assets on behalf of another person”. Crypto exchanges, both centralized and decentralized, are now scrambling to guess whether they fit the definition.

Sebastien Pichler/Unsplash

On December 23, 2022, the Treasury provided less clarity on this issue than exchanges had hoped when it only announced that crypto brokers are not required to report additional information than they already are “in with respect to digital asset dispositions until final regulations are issued under Sections 6045 and 6045A.

The announcement is essentially an interim measure, with the language used in the report being intentionally vague. The IRS is probably in no rush to get ahead before a more cohesive and consistent regulatory framework regarding exchanges and brokers emerges. The wording of the announcement also seems to indicate that taxpayers who are not brokers or crypto exchanges will not be required to provide additional reports to the IRS regarding transfers of digital assets until regulations. updates be added to sections 6045 and 6045A.

But changes are likely to occur in the regulatory landscape in 2023, and exchanges will need to be ready, at least by the end of this year. Speaking at a Jan. 5 webinar hosted by Blockworks, Erin Fennimore, Head of Tax Reporting and Information Solutions at TaxBit, explained that exchanges should do their best to review the tax code framework. existing and the IIJA to determine whether or not they might fall. under the category of “dealer” when sections 6045 and 6045A are updated. If they think they will fall into this category, Fennimore advises them to start collecting details about the types of customer information stipulated in these sections and to start integrating data collection methods into their processes. integration.

As for FTX’s effect on all of this, Fennimore was candid.

“We never want [events like FTX] happen,” Fennimore said while speaking to nft now during the Blockworks webinar. “I think they highlight the critical need for regulation. […] Overall, what I took away from this year with FTX and others is that there is a clear need for regulation in various aspects. Whether fiscal or financial, all of this has highlighted this need much more clearly. I hope this will result in faster regulation by our government agencies.

Washington Crypto Regulation Pause

An increased regulatory pace for crypto and NFTs is more likely than ever, but Washington is rightly taking a moment to pull itself together before moving forward on this agenda and that’s for the best. Although SBF’s involvement in the development of DCCPA may have benefited FTX at the expense of other exchanges or Web3 in general, it is clear that some of the industry’s first significant regulations should not depend on the influence of one of his biggest frauds.

As the Web3 world continues to pick up the pieces of FTX calamity and Sam Bankman-Fried’s recklessness, making at least some regulatory progress is definitely not a bad idea. Exactly how this plays out will determine how the industry evolves. But regardless of which organizations end up being its arbiters and enforcers, legislators need to be careful and make sure they get it right from the start, something the industry itself too often seems to fail to do. worry about doing.

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