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Cryptocurrency Regulation: The Evolving Landscape

by Pamela Michaels Fay

Let’s face it: regulation of cryptocurrencies is a little hazy. Are they securities? Not according to any legal definition. So just what are the rules?

According to Margaret Paproski, COO and co-founder of InvestDefy, “The SEC’s view seems to be that most digital assets would be considered a security and therefore the regulation of cryptocurrency would be captured under the existing regulatory regime for securities.” That could be where regulations are headed in the long term.

The current reality, however, is, well, quite fluid. Personal finance guru Darren Hazan says, “Most cryptocurrencies, including Bitcoin, Ethereum and stablecoins, are not considered securities and so the SEC cannot regulate them under the Securities Exchange Act of 1934.” He acknowledges that this is constantly changing and evolving as the U.S. and other countries seek to gain better control of crypto assets.

Tightly regulated or not, cryptocurrency is coming to a bank or credit union near you. The financial institutions that will do best are the ones that take the necessary steps to compete in the cryptocurrency arena. Here’s what you need to know.

Why Is Cryptocurrency Regulation So Important?

Regulations are critical. They help make the market more attractive to depositors and investors, everyday people, who aren’t looking to ride shotgun in the Wild West. In other words, they want regulations and risk mitigation. 

“How can we expect the average person to use a cryptocurrency if it is unregulated, untracked and unsafe? In order to be adopted and used as a key part of the economy, it has to be regulated,” says Hazan. “But maybe not in a conventional way.”

Whether regulation is traditional or new, the key to cryptocurrency success for banking consumers will be a robust and trusted regulatory environment. Many of the risks from crypto are the same as for other assets, only magnified. In addition to the potential for fraud and money laundering, there are the price volatilities of these assets. Although digital currencies’ original claim to fame — and high earnings — is the lack of a central bank authority, there’s nothing like a traditional bank or credit union for users who want a transparent and efficient asset class.

Who’s Regulating Cryptocurrency?

Remember Blockbuster? Kyle Hauptman, vice chairman of the National Credit Union Administration (NCUA) told American Banker in 2021, “We don’t want credit unions to slowly go the way of Blockbuster Video because they didn’t have the clarity that allowed them to compete … and because their regulator hamstrung their ability to adapt.”

But the lack of real regulation is a problem too. Hazan says that cryptocurrency is neither here nor there: “While crypto exchanges fall under the regulatory scope of the Bank Secrecy Act and must register with the Financial Crimes Enforcement Network, cryptocurrencies themselves have no real regulation unless they are considered a security, which … they are not.”

Where there is regulation, the states play a key role. Hazan continues, “Some states have legislated that virtual currencies are included under the Uniform Commercial Code and amended the Uniform Money Services Act.”

So who’s regulating crypto? It’s a work in progress.

Digital Currencies and the Digital Economy

During the pandemic, financial institutions had to flex some muscles they didn’t know they had. Banks and credit unions of every size rushed to serve their users via digital channels. For their part, users have embraced the technology and loudly proclaimed that digital is the future. Cryptocurrencies seem to be a natural extension of that. 

According to Fiserv research, 61% of millennials and Gen Zers want their bank or credit union to hold crypto. Why not? It’s the institution they know and trust. But here’s the thing: 79% of users aren’t asking for these services. And when they do ask, only 3% of credit unions actually report tracking the information. 

But the demand is real. Among the older generations, Gen X and boomers — who have bought and sold crypto, however, 78% went through a fintech that was not associated with a traditional financial institution. 

What do people want to do with crypto? According to a Fiserv poll, consumers are interested in cryptocurrency for the following uses:

  • 35% – Hold and trade as an asset
  • 40% – Rewards for credit or debit card
  • 21% – Rewards for engagement with the credit union
  • 12% – Payment of dividends or interest

Financial institutions must meet their users where they are. That means preparing for the crypto revolution and understanding and embracing crypto regulations. These regulations start with the user.

Risks for Consumers

Banking regulations, of course, exist to protect consumers. Cryptocurrency is a risky and volatile asset. As Paproski explains, “There are … concerns about protecting investors from purchasing assets and taking on financial exposure thinking that they are going to ‘hit the jackpot’ without being fully aware or able to suffer the potential risk of loss, especially since digital assets generally have a greater volatility than traditional financial assets.” 

There’s another side to this crypto coin, however. A central bank digital currency could provide access to the underserved in the banking system, but regulation can perpetuate inequalities. As financial institutions add their voices to the evolving system, it’s good to keep equity in mind. “[Some] would argue that the regimes set up to purportedly protect investors have also resulted in the majority being locked out of the most lucrative opportunities to generate wealth,” Paproski says.

Where Are Bank Regulations Heading?

It’s early days, but the wheels of change are grinding. Current laws and regulations prevent credit unions from holding crypto directly. This is not true, however, for banks. Many of the big banks slowly started rolling out crypto services in 2021. JPMorgan Chase, for example, was one of the first to do so for its retail clients. Banks face stringent capital requirements, though. Crypto is, after all, a high-risk asset. 

It’s likely that stablecoins, whose value is tied to the U.S. dollar, will be most attractive as an everyday purchasing vehicle. Consequently, the SEC, the Federal Reserve, U.S. Treasury Secretary Janet Yellen and the Biden administration are all paying close attention.

In fact, the President’s Working Group on Financial Markets, along with the FDIC and the Office of the Comptroller of the Currency, published a report on stablecoins in November 2021. In it, they speak generously about the viability of stablecoins in the broader market. They also acknowledge the regulatory gap and the need for oversight and a formal market structure to protect and inform investors, issuers and exchanges. 

The most salient suggestion is that the administration recommend that Congress limit the issuance of stablecoins to insured banks. This would prevent, or at least hinder, stablecoins being used to circumvent laws preventing money laundering, illegal activities or tax evasion. This puts stablecoins, at least, squarely within the jurisdiction of the regulators. 

The report further recommends that Congress legislate to ensure that stablecoins are subject to the federal prudential framework. Prudential risks include, for example, a run on the currency and the inability of an issuer to honor a redemption request. Critics question whether there are sufficient dollar reserves to back stablecoins, which is part of the reason President Biden’s economic advisers want to limit their issuance. 

If the legislation passes, stablecoin issuers would be classified as banks. They would then fall under the jurisdiction of the FDIC and the Federal Reserve, including whatever capital and liquidity standards these institutions decide to put in place.

Credit Union Regulation

Credit unions want to offer crypto services directly in the same way that banks can. In December 2021, the National Credit Union Administration issued a letter to federally insured credit unions that clarifies their authority to provide crypto services through third-party providers. It defers to the laws and regulations of the chartering state. In addition to the rules and regulations set forth by §721.7 of the NCUA, credit unions are also subject to the jurisdiction of the SEC, the Commodities Futures Trading Commission (CFTC) and the Financial Crimes Enforcement Network. 

The NCUA stipulates that federally insured credit unions should “exercise sound judgment and conduct the necessary due diligence, risk assessment and planning” when bringing on an outside vendor. This means establishing the necessary and effective risk management and controls. 

The State of the U.S. Central Bank Digital Currency

It’s 2022 and the U.S. is no closer to having a central bank digital currency (CBDC) than in 2019. In December 2021, Jerome Powell, chairman of the board of governors of the Federal Reserve, said on Bloomberg TV, “Stablecoins can certainly be a useful, efficient, consumer-serving part of the financial system if they are properly regulated.” Therein lies the rub. 

There is a bright spot on the horizon, however. On January 19, 2022, the Federal Reserve released a report on the risks and benefits of a CBDC, opening up the dialogue about what happens next. Commercial banks can breathe a collective sigh of relief, because the document seems to put the kibosh on holding consumer bank accounts at the Federal Reserve. Rather, it states that CBDC accounts would need to be operated by banks and other service providers. There won’t be a stablecoin soon, but the conversation has begun in earnest.

Why does it matter? Because when the U.S. has a CBDC, it will help expand consumer access to financial systems, preserve the international status of the U.S. dollar and help expedite the regulatory process for the entire class of digital currency. This includes crypto. 

Regulatory Actions for the Future

The SEC doesn’t have jurisdiction over crypto. But it isn’t the only agency that matters. When President Biden signed the Infrastructure Investment and Jobs Act in November 2021, he also expanded tax information reporting for certain crypto transactions. This doesn’t officially come into effect until 2024, when crypto exchanges will be treated similarly to traditional brokerage houses. 

There are also several pieces of pending and passed legislation that clarify the treatment of cryptocurrency and mitigate its role in criminal activity. These include:

  • The Sanction and Stop Ransomware Act, which seeks to develop regulations that would reduce the anonymity of crypto exchanges 
  • The Eliminate Barriers to Innovation Act, which passed the House in April 2021, requires the SEC and the CFTC to establish a joint group to promote regulatory clarity and encourage innovation. The bill has been received in the Senate and referred to Banking, Housing and Urban Affairs.
  • The Token Taxonomy Act, which seeks to create regulatory transparency by defining digital tokens to exempt them from the definition of a security

Sundie Seefried, the current president and CEO of Safe Harbor Financial and the former CEO of Partner Colorado Credit Union, believes that regulators should prioritize reporting requirements. The degree of anonymity in cryptocurrency transactions can, indeed, be alarming. “The history of virtual coin has included moving value and funds around the world as well as into potential dark markets. Furthermore, this market has had anonymity with transactions. This makes bank secrecy top of the list for regulations,” says Seefried.

How To Stay on Top of Changing Cryptocurrency Regulations

With limited regulatory oversight of crypto, several states and various national agencies have rushed in to fill the void. This means that the regulatory environment is fragmented. The SEC, the IRS and the CFTC are all part of the mass confusion.

What this means for financial institutions is that the rules and regulations are under fast development. We aren’t there yet. As the rules of the game begin to solidify, banks and credits unions must do four things:

  • Ask questions: Get curious about your users. Take polls. Talk to your user-facing staff. Invite key users to focus groups. Stay abreast of the current news and the statistics that will help you understand the trends.
  • Learn: Read articles, trade publications and books. There are some excellent programs online that can help you understand more about cryptocurrency, blockchain, stablecoins and digital technologies. Attend one or more.
  • Build: Invest in your digital-assets team. Make sure that they are educated and aware of the latest developments. Hire the people you need and start building third-party alliances.
  • Engage: Join associations of like-minded business people. Speak to lawmakers in your state and at the federal level, as well. You still have an opportunity to shape the discussion and get engaged in the conversation. 

Cryptocurrency in Digital Banking

Seefried concurs. She is continually finding ways to increase her knowledge and support her work. She says, “I am finding so many options for education from different sources. … Start with educating anywhere and anyhow possible. It is apparent that regulators and federal agencies realize this as well, so staying in touch with associations and the like to stay abreast of what is happening is highly important.”

Lumin Digital is redefining digital banking through its proprietary user engagement platform. Contact us to request a demo

Pamela Michaels Fay is a business, financial, technology, legal and lifestyle writer, whose work is informed by over 20 years of strategy, leadership and organizational development consulting for Fortune 500 companies.


American Banker – NCUA has asked credit unions to comment on crypto. So far, crickets.

Fiserv – Fintech Adoption

Fiserv – Cryptocurrency and the Opportunity for Credit Unions

U.S. Treasury – Report on Stablecoins

National Credit Union Administration (NCUA) – Relationships with Third Parties that Provide Services Related to Digital Assets

Yahoo Finance – Stablecoins could be super useful — ‘if they’re properly regulated,’ according to Fed Chair Powell

CoinDesk – In Long-Awaited CBDC White Paper, Fed Flags Privacy, Financial Stability Risks

BAI – Cryptocurrency regulations and banking in 2022

Bill Track 50 – US HR1602