The world’s largest countries are building up their regulatory frameworks for cryptocurrencies and the emerging decentralized finance (DeFi) sector. But the emergence of cryptos is creating an enormous challenge for lawmakers and regulators to manage because of their unique legal characteristics. As a result, many of the guiding principles are still unclear. For example, many cryptocurrencies are designed to operate outside the traditional financial system and can be transferred between users without being tied to any specific identity. This makes it difficult for authorities to trace them or take them back from criminals. The Treasury Department recently cracked down on this issue by imposing its first sanctions against a crypto exchange, blocking all transactions with the Russian-based Suex, after it was linked to a ransomware attack that hit the Colonial Pipeline.
While this crackdown may provide a positive step forward, it’s only one aspect of an ongoing effort to regulate a space that is rife with concerns about money laundering, scams and cybercrime. Another big challenge is that cryptocurrencies are designed to be untraceable, making them attractive to criminals and other bad actors who want to avoid detection. The blockchain, the digital ledger that cryptos are based on, makes it easy to record transfers without linking them to any particular identity. This is why most of the money raised through cryptos is held in wallets, where the owner’s name is not shown to anyone who isn’t authorized to see them.
Many legislators and regulators are grappling with how to balance these risks with the promise of decentralized financial technology. In the United States, for example, Securities and Exchange Commission Chairman Gary Gensler has called the crypto market a “Wild West” and urged Congress to give SEC more authority to oversee it. Meanwhile, Federal Reserve Chair Jerome Powell has emphasized that the U.S. must balance the need for strong investor protection with a healthy market that promotes economic growth. The state of New York has taken a leadership role in this area with a bill introduced by Attorney General Letitia James that would bring stronger regulation to the industry. Her program bill, which was announced today, would increase transparency, prohibit conflicts of interest, and require that companies that promote cryptos disclose their own stakes in those assets to investors.
The bill would also strengthen the ability of the New York State Department of Financial Services to enforce regulations on crypto platforms and require that these companies reimburse customers who are victims of fraud. The law would also require independent public audits of crypto exchanges and prohibit individuals from owning both brokerages and tokens to prevent conflicts of interest. The program bill is the most comprehensive proposal to date for regulating cryptos and would help protect New Yorkers from the serious risks that come with this industry. It is an essential step to ensure that the multibillion-dollar industry is subject to the same laws and standards as other financial markets in order to safeguard consumers.
