If you were to grant one wish to virtually anyone doing business in the cryptocurrency world, and especially those making payments and transferring money, they would likely be asking for regulatory certainty.
Along with the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Office of the Comptroller of the Currency (OCC), Internal Revenue Service (IRS), and a whole alphabet soup of other federal agencies and states claiming at least some control over cryptocurrencies and cryptocurrency transactions, crypto companies often find themselves in limbo as to which rules apply.
The sheer number of players in the regulatory arena leaves companies wondering where the guardrails really are, said Stephen Gardnerlegal director of Zero hasha B2B2C infrastructure provider for companies that want to offer crypto to their end users.
“Without guardrails,” Gardner told PYMNTS, companies just want to know “which consumer laws apply — and when — and who is going to enforce them. to respond to each of the different regulatory bodies.
However, he said there were signs clarity could be coming, with lawmakers like Sens. Cynthia Lummis of Wyoming and Kristen Gillibrand of New York pushing legislation to clarify both the rules of the road and who enforces them.
See also: Bill giving CFTC regulatory control would reshape crypto
For now, however, one of the three biggest legal challenges facing the crypto asset industry is “clearly defining which assets are securities, which assets are commodities,” he said.
The problem is that there are no rules set by the SEC and the Financial Industry Regulatory Authority (FINRA) that specifically address the custody of crypto assets.
While nearly every crypto firm issues or supports cryptocurrencies that are securities, as the SEC claims, “It’s one thing to say, ‘OK, everybody’s going to be a broker,'” a said Gardner. “Well, after that, how can we legally and properly retain the assets?”
Decentralized finance (DeFi) may be another pitfall in this regard, Gardner said.
“I think people who aren’t really in the industry don’t really understand the difference” between centralized and decentralized finance, Gardner said. “Suppose the SEC says that these DeFi exchanges should be regulated exchanges. What interaction with it [technology] would require an additional license? If I can allow a client to withdraw into a DeFi wallet, am I facilitating that trading activity? »
Another big issue – probably the biggest one from a payments perspective – is taxes. Specifically, the IRS now treats any sale of cryptocurrency as a realized gain that must be reported, Gardner said.
“People want to see tax rules that recognize that if I use crypto to buy gum from CVS, having a tax event realized at that time is pretty heavy, and it hurts the industry as a whole. “, did he declare. “It’s been kind of a hot issue for a while.”
Read more: When it comes to accepting crypto as payment, taxes are hefty
The problem, he said, is that a cryptocurrency “can be a payment, it can be an investment, it can be a [non-fungible token (NFT)] – sometimes all three at the same time.
As a result, he added, “payments really can’t take off.”
Finally, there’s bankruptcy, which became a major concern when Nasdaq-listed cryptocurrency exchange Coinbase was forced to add a warning to its 10-Q filing that client assets it holds could leave customers treated as unsecured creditors in the event of bankruptcy.
See more : Crypto exchanges may be required to segregate client funds, report says
“There are established bankruptcy rules and procedures and precedents,” he said. “I think people want to see how the crypto fits in. Will it be a UCC asset that protects the client’s assets in the event of bankruptcy?”
Get a specialist
That’s why working with a company purpose-built for crypto is so important, he said.
While there are basics that any compliance department can handle – the Anti-Money Laundering (AML) requirements of the Bank Secrecy Act, for example – “identify that red flag and track what it means” , or what blockchain intelligence firm alerts mean, “takes a bit of expert knowledge,” Gardner said.
But even putting AML compliance aside, there are other considerations, like “Is your balance sheet designed to be able to handle the volatility of crypto assets?” he said. “Do you want crypto assets on your balance sheet? Will your regulators allow you to do that?”
Using a regulated firm that specializes “in crypto and only crypto allows you to avoid some of those governance pitfalls that companies aren’t really prepared for,” Gardner said.
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