Regulation
Catch-22 of US cryptocurrency regulations
The current state of cryptocurrency regulation is a “Take the 22nd”, a series of absurd and contradictory rules and requirements that are impossible to follow.
Marcelo M. Prates is a lawyer and central banking researcher.
In Joseph Heller’s famous novel, a Catch-22 refers to the stipulation that pilots seeking to be excused from their combat duties could submit a request stating that they are insane. With one problem: submitting the request implies that the applicant is of sound mind and, therefore, ineligible to be excused.
In the America of 2024, the SEC’s “come in and register” approach is a Catch-22 for cryptocurrencies.
SEC Chairman Gary Gensler says this often that registering with the SEC to comply with securities regulations is simple, “it’s just a form on our website.” And cryptocurrency issuers and exchanges are “simply choosing not to do it” despite knowing how to do it. The SEC Chairman makes it appear that cryptocurrency companies have been unreasonably (if not illegally) stubborn in not filing required registrations in the face of the SEC’s reception. This characterization hides a catch.
Even assuming, as Gensler does, that all crypto tokens are securities and must be registered with the SEC — which is questionable — and that the registration process is simple — which it isn’t — a successful registration would lead to a dead end. Registered crypto tokens, like any registered security, can only be traded on registered exchanges through registered broker-dealers. But today this is impossible.
The Financial Industry Regulatory Authority (FINRA), a self-regulatory organization that oversees financial intermediaries, has approved only a few institutions to manage crypto tokens. Among these institutions, only one is a special purpose broker-dealer, Prometheum, which remains inactive and has yet to list a token to trade nearly a year after approval.
The SEC also has not permitted any currently registered exchange or broker-dealer to list, hold, or trade crypto tokens. THE The SEC’s view is that any registered institution willing to work with crypto tokens “may not deal in, transact, maintain custody of, or operate an alternative trading system for traditional securities.”
Further, so far virtually no cryptographic tokens have been registered with the SEC. And that’s the Catch-22: Issuers won’t register their crypto tokens until they’ve found registered exchanges and broker-dealers that can work with them, and registered exchanges and broker-dealers won’t start working with crypto tokens until they will see enough tokens registered to make the business model economically viable.
The reality for fintech isn’t much rosier. Due to the lack of a specific federal licensing framework, fintech companies that use technology to offer more efficient and cost-effective financial products and services – from debit cards and loans to mobile payments and remittances – must partner with banks. This fintech-bank partnership is known as banking-as-a-service or BaaS.
Even when the fintech startup is a state-licensed money transmitter, it must partner with a bank to make and receive dollar payments since only banks can directly access the payment system. As a result, chartered banks in the United States end up acting as gatekeepers to financial innovation, as new ideas must be implemented into the financial system through them.
THE Office of the Comptroller of the Currencythe nation’s banking regulator, has been increasingly wary of BaaS deals, making it more difficult and costly for banks to maintain “third-party relationships” with fintech firms. Regulators say they are concerned about how fintech partners onboard customers, monitor transactions and handle sensitive information, as well as how banks manage these risks to ensure compliance with applicable rules and regulations.
Here we have another Catch-22: in the current regulatory environment, fintech can only survive in the United States with the active cooperation of banks, but federal regulators do not want banks to collaborate with fintech companies. What can be done?
But none of these state laws and regimes relieve state-compliant institutions from dealing with problems at the federal level. Just ask Coinbasewhich holds a BitLicense but it is being reported by the SEC “for operating as an unregistered stock exchange, broker, and clearing agency” or Custodya rented SPDI that was not permitted to hold a Fed Main Account and therefore cannot directly offer basic payment services.
Congress must act to keep financial innovation alive. Implementing tailored licensing and federal regulatory frameworks for cryptocurrencies and fintech is critical to keeping U.S. financial and capital markets robust, competitive, and inclusive. To paraphrase Heller, crypto and fintech companies should embrace the idea that they will “live forever or die trying.”