It would appear as though the U.S. government has made the turn on cryptocurrency regulation. The release of the Cryptocurrency Enforcement Framework (CEF) in early October 2020 indicates that the U.S. Department of Justice (DOJ) is finally taking the matter seriously. Now we wait to see where it all leads.
Calvin Ayre website suggests that the U.S. has historically lagged behind the rest of the world in cryptocurrency regulation out of fear of legitimizing crypto as an alternative monetary system. That may be part of it, but there is something else in play here: the U.S. has historically been slow to regulate. Limited regulation is built into their system specifically to prevent government overreach.
Another thing to consider about the U.S. system is that regulations are easier to reverse compared to most other developed nations. Thus, regulators tend to work as slowly as possible to craft regulations that they believe will withstand the test of time. There has been no rush to regulate cryptocurrency because its evolution moved too quickly in the first few years.
Now that the DOJ has laid down the gauntlet, what can we expect from Washington? Here are the top seven things we believe the CEF tells us about crypto regulators in the U.S.:
1. Government attitudes are changing
The DOJ report speaks rather positively of distributed ledger technology in its introduction.1 At the very top of the second page we read the following:
"At the outset, it bears emphasizing that distributed ledger technology, upon which all cryptocurrencies build, raises breathtaking possibilities for human flourishing. These possibilities are rightly being explored around the globe, from within academia and industry, and from within governments including our own."
Despite certain members of Congress - and even the president himself - expressing serious reservations about cryptocurrency in the past, the DOJ seems to see plenty of potential. That is very good in the sense that DOJ officials will play an important role in helping develop regulations moving forward.
This could be good for some industries already receptive to distributed ledgers and cryptocurrency. Online gambling immediately comes to mind. The specter of money laundering and generally negative attitudes about gambling in the States have caused trouble in the past. Common sense crypto regulations could turn the tide in favor of gambling operators.
2. Crypto's staying power is recognized
The U.S. was not alone in being skeptical of cryptocurrency and distributed ledger technology when Bitcoin first launched. Back then, the prevailing thought was that Bitcoin was a fad destined to fade away. As recently as five years ago, regulators and members of Congress remained skeptical that blockchain and distributed ledgers offered anything of any substance. That has apparently changed.
Establishing the CEF is proof positive that the DOJ now understands and recognizes crypto's staying power. Attorney General William Barr and his entire team have come to terms with the fact that distributed ledgers and blockchain are not going away. Not only that, the two technologies will be the foundation of everything from payments to software development in the future.
3. Rooting out crime has become a priority
Recognizing the legitimacy of blockchain and distributed ledgers immediately requires recognizing how both can be used for criminal activity. Barr's report does just that. It establishes three categories of crime the DOJ intends to focus heavily on:
- Illicit Activity - The DOJ will be looking into crimes involving cryptocurrency and things like drug sales, human trafficking, weapons sales, etc.
- Financial Crimes - The DOJ will focus on financial crimes involving cryptocurrency and digital assets. Things like money laundering and tax evasion are on the radar.
- Asset Theft - The DOJ will start investigating crimes involving the theft of digital assets by both scam artists and common thieves. This will include investigating crypto-based businesses that may not be legitimate.
It is clear from the report that Barr and the DOJ are especially concerned about crimes occurring within crypto markets themselves. The only thing that might be more important is the money laundering issue. Money laundering conceals illicit gains and reduces government tax revenues.
4. "Rogue nations" have become a priority
Deeper in the report, Barr reveals a DOJ concern about rogue nations and terrorist groups willing to use cryptocurrency markets to further their goals. We have seen incidents in the past in which Syria solicited Bitcoin donations. Likewise, North Korea and Syria have both been linked to ransomware attacks involving untraceable cryptocurrency payments.
China was not specifically mentioned in the report, though it is quite likely they are on the DOJ's radar as well. China has its hands in everything blockchain related. There is no reason to believe they will not use blockchain or distributed ledger technology to advance the goals of the nation's Communist Party.
5. The DOJ is willing to cooperate
This next point doesn't make sense if you don't know how U.S. government works. The administrative branch, of which both the DOJ and presidency are part, includes a rather large number of regulatory agencies with specific jurisdictions. Sometimes those jurisdictions overlap, other times they do not. What is important to understand is that the American system limits how these agencies can interact so as to make it more difficult to consolidate power.
Knowing that, it is surprising to learn that the CEF extends an olive branch of sorts to other government agencies. The DOJ is apparently ready to cooperate with the Securities Exchange Commission (SEO), Internal Revenue Service (IRS) and others to advance its enforcement goals. They are even willing to go so far as to work with international organizations like the Financial Action Task Force (FATF).
Extending an outstretched hand to the FATF doesn't bode well for crypto-based businesses attempting to fly under the radar where money-laundering is concerned. ICOs, exchanges, and even gambling operators don't need yet another nation joining with the FATF to uncover illicit activity.
6. Cryptocurrency seems to be the primary focus
Despite distributed ledger and blockchain technologies being mentioned in the report, it seems as though cryptocurrency is the DOJ's primary focus. This is not surprising given crypto's dominance within the blockchain arena. When someone mentions blockchain or distributed ledgers, the first thought is something like Bitcoin or Ethereum.
Moreover, whenever regulators speak in opposition to blockchain they almost always mention cryptocurrency volatility and the possibility of fraud within crypto markets. They rarely speak about blockchain as a technology for building software applications or improving logistics. They rarely talk about decentralized finance either.
The context of most objections has something to do with money laundering, unregulated securities, or something similar. This particular report doesn't stray too far from that. In fact, a literal reading of the report might leave you thinking that the DOJ still considers cryptocurrency a bad thing.
7. Regulators don't plan to give in
The final point is one that is not explicitly mentioned in the DOJ report. Rather, it is implied by what the report lacks: a comprehensive discussion of cryptocurrency, blockchain, and distributed ledgers as a means of replacing fiat. Again, there are no surprises here.
Any future regulations pursued in the U.S. will be built on a foundation of continued government control of monetary policy and currency. In simple English, the U.S. government has no plans to give in to Bitcoin, Facebook's Libra, or any other privately developed cryptocurrency. When the U.S. finally abandons bills and coins in favor of a digital currency, it will be because the U.S. treasury has developed a central bank digital currency (CBDC) it can control.
Underscoring the importance of CBDCs is the tone of the report itself. If regulators and the DOJ are going to take a more aggressive stance toward blockchain crime, they need every tool at their disposal. A CBDC is one such tool.
Any government able to develop CBDC should be able to develop a way to track every single coin from its inception. The goal would be to track every deposit, every payment, and every expenditure. That is something they cannot do with bills and coins. That's why money-laundering is so easy with cash.
Indeed, Las Vegas was built on casino gambling and money laundering. It is an open secret that few in the U.S. government don't know about. Thus, the regulators' keen interest in clamping down on money laundering in the online gambling environment. If their efforts can be advanced by releasing a CBDC, there is no reason to believe they will not encourage the Treasury to do so.
Given that our primary focus is Bitcoin gambling, we cannot say for sure how future U.S. regulations will affect gamblers. It could go either way at this point. What we can conclude from the CEF is that the U.S. has finally turned the corner on cryptocurrency regulation. The mere fact that the framework has been established makes it abundantly clear that crypto, blockchain, and distributed ledger technologies will no longer be able to escape government scrutiny.
It is also reasonable to assume that any future regulations coming from the U.S. will influence, and to be influenced by, what is happening in Europe, Asia, and elsewhere. The U.S. will be just one cog in a much larger regulatory wheel that will spin until regulators are satisfied with the amount of control they have.
1) Cryptocurrency Enforcement Framework (PDF)