Although cryptocurrencies started operating without any prior government acceptance, it soon became necessary for official bodies to establish some form of legal guidance around them. A legal framework surrounding digital assets should protect investors from fraud and market manipulation, prevent and manage activities such as money laundering, and clarify tax rules.
Without proper legal frameworks, financial instability and market manipulation may arise. Moreover, the development of startup projects may slow down in the event of a ban on digital assets. The necessity of regulations is also evident in how governments approach these digital establishments. In 2020, the SEC sued Ripple, alleging that the decentralized company sold unregistered XRP tokens. The lawsuit has only recently been resolved with Ripple paying a substantial penalty. Along with this payment, the coin’s value has suffered throughout the case, as the negative outlook on the brand affected the XRP price prediction from 2020 to 2025.
The case has also come to an end due to the change in the SEC organization, as it’s now a more pro-crypto establishment. This small aspect can change the future of crypto worldwide, which is why the US stepped in and developed the following pivotal regulations.
The GENIUS Act
The Genius Act, also known as the Guiding and Establishing National Innovation for U.S. Stablecoins, is one of the most important frameworks for dollar-backed stablecoins. It requires stablecoin issuers to provide high-quality liquid assets, conduct an annual audit, and obtain a federal charter or operate under a qualified state regulator.
The act provides the foundation for further and more complex regulations that will be introduced in the future. For now, it provides sufficient customer protection due to oversight by financial institutions, but it’s an important first step. Just like Richard Teng, CEO at Binance.com, stated, “Global adoption often starts with a single domino. Now that crypto is being recognized as a legitimate financial instrument within one of the world’s largest retirement systems, the question is no longer what – but when.”
Stablecoins are currently considered the safest investments among digital assets, as they’re pegged to fiat money. This means they’re not as volatile as regular cryptocurrencies, which experience rapid fluctuations in value following every significant financial news event.
The CLARITY Act
The Digital Asset Market CLARITY Act addresses when a cryptocurrency should be considered a security or a commodity. This issue was long-discussed in the case of Bitcoin, for example, until the Commodity Exchange Act (CEA) determined that it is a commodity, as it represents value in the form of exchange or a store of value. Ethereum falls into the same category, according to the Commodity Futures Trading Commission (CFTC).
The bill addresses the challenge by coining the term “digital commodity,” which refers to a token that operates on a decentralized network or blockchain with no central authority. This allows the CFTC to cover digital assets that can be considered commodities, while those with characteristics of securities are to be monitored under Rule 204A-1.
The importance of labelling a cryptocurrency as either a commodity or a security lies in how the market structure evolves, with fewer barriers to entry. While commodities might benefit from fewer restrictions, the nature of securities requires specific regulations on registration and compliance.
The Anti-CBDC Act
Finally, the Anti-CBDC Surveillance State Act will prevent the development of a US central bank digital currency (CBDC) unless accompanied by a congressional statement. It addresses government overreach and financial privacy in the case of a digital currency issued by such an institution, which can impact the relationship between customers and the monetary system.
The legislative package is still in development, as different parties argue that such a token would actually bring numerous benefits to individuals, including faster payments and greater financial inclusion. On the other hand, others consider that the act will only contribute to financial loopholes.
Regardless of how the act is finalized, there’s a growing consensus around the usefulness and potential of cryptocurrencies. In addition, more and more experts are recognizing the need to act rather than ignore or ban these trending digital assets, so we’re moving in the right direction.
How do other places in the world address crypto regulations?
While the US has advanced its legal framework for decentralized assets, the global approach is similar, but with several distinct aspects. In Europe, for example, the regulation on markets in crypto-assets (MiCA) is the leading approach targeting the following assets:
- Asset-referenced tokens that are used as an official means of payment;
- E-money tokens that are alternatives to banknotes and coins;
- Other crypto assets, like utility tokens;
The regulation is built on the pillars of supervision, transparency, and disclosure of the environmental impact of cryptocurrencies. The framework should provide legal certainty for digital assets, nurture innovation, and protect consumers and investors.
Other countries and their approaches to crypto
The UK leverages cryptocurrencies as regulated financial instruments within the Financial Services and Markets Bill. The act addresses key points, including Know Your Client (KYC) standards, anti-money laundering (AML) processes, and combating the financing of terrorism (CFT).
In Japan, cryptocurrencies are the legal property under the Payment Services Act (PSA), whereas crypto exchanges are required to register with the Financial Services Agency (FSA). The country is also working on an efficient taxation process, while the Act on Prevention of Transfer of Criminal Proceeds is already in place.
Australia considers crypto assets as legal property, making them subject to capital gains tax. Decentralized exchanges operate freely here, but they have to register with the Australian Transaction Reports and Analysis Centre (AUSTRAC). With plans to establish a specific regulatory framework, Australia is one of the best countries for crypto investors and traders.
Final considerations
The US is moving forward fast with its regulations focused on cryptocurrency. The GENIUS and CLARITY acts are currently the most important in protecting users and allowing safe and efficient assets, like stablecoins, to be accessible to regular users. Future projects in development can also address issues related to government assets, while the rest of the world closely follows developments in stablecoins, crypto taxation, and registered exchanges.
Also Read: Women Who Are Changing The Crypto Scene
