In the United States, trading of crypto-assets is regulated by many different agencies at both the federal and state levels. Crypto-assets that meet the definition of a security are subject to regulation by the Securities and Exchange Commission (SEC) under U.S. securities laws.
To the extent a crypto-exchange permits certain regulated commodities transactions or swaps in crypto-assets, it will be subject to regulation by the Commodity Futures Trading Commission (CFTC). The U.S. anti-money laundering agency, the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) deems businesses involved in buying and selling of cryptocurrency to customers or transferring cryptocurrency on behalf of customers to be money services businesses required to register with FinCEN and maintain AML compliance programs and follow other U.S. federal AML requirements.
With respect to applicable state law, New York State views the buying and selling of cryptocurrency as money transmission and has promulgated regulations requiring licensing of persons engaged in the virtual currency business. The New York Department of Financial Services (DFS) has chartered two limited purpose trust companies, which are a form of banking organization, to act as virtual currency exchanges: Paxos Trust Company, LLC and Gemini Trust Company, LLC, both of which can offer exchange and custody services for various virtual currencies.
The DFS also has issued special "bitlicenses" to engage in certain virtual currency activities such as buying and selling specified virtual currencies and providing payment processing services for merchants accepting bitcoin in payment to several businesses.
The SEC regulates securities transactions, broker-dealers, investment advisers and other securities market participants. If a cryptocurrency or a product that is linked to a cryptocurrency is determined to be a security, the offer and sale of such cryptocurrency or product must comply with the U.S. federal securities laws, including registration as a security under the U.S. Securities Act or compliance with an exemption from such registration.
These obligations on sellers generally apply regardless of whether the crypt-asset is traded through a regulated exchange. Additionally, a crypto-exchange needs to understand the various broker-dealer rules, registration requirements and exemptions under the U.S. Securities Exchange Act to determine whether it would need to register as an exchange with the SEC and the Financial Industry Regulatory Authority (FINRA) or qualify as something else, such as an alternative trading system or a bulletin board.
Those who advise on the trading of crypto-assets that constitute securities, whether through an exchange or not, may need to register with the SEC under the U.S. Investment Advisers Act. Applications have been made to the SEC for approval of cryptocurrency-linked exchange-traded funds (ETFs), but as of August 2018, the SEC had yet to approve any such ETFs.
The CFTC's regulatory jurisdiction includes commodity futures contracts, options on futures and swaps, but generally excludes spot contracts and forward transactions unless they are leveraged or financed. The CFTC also has anti-fraud jurisdiction over the commodity spot and forward markets. In 2015, the CFTC determined that bitcoin was properly defined as a commodity.
To the extent another cryptocurrency falls under the definition of commodity, then futures, options, swaps and leveraged products involving such cryptocurrency are subject to regulation under the US Commodity Exchange Act.
Anyone brokering or dealing in such transactions may be required to register with the National Futures Association (NFA), for example as a futures commission merchant, introducing broker or swap dealer. Moreover, certain products may only be sold to "eligible contract participants" even if traded on a regulated commodity crypto-exchange.
Those who advise on the trading of crypto-assets that constitute commodities, whether through an exchange or not, may need to register with the NFA as a commodity trading adviser or a commodity pool operator.
There are approved cryptocurrency futures products being traded on different commodities exchanges such as the Chicago Mercantile Exchange and the CBOE Futures Exchange and through swap execution facilities such as LedgerX and TeraExchange.
Both the SEC and the CFTC have issued numerous statements and advisories to the public to urge caution in investing in cryptocurrencies and take into consideration the various risks involved in investing in cryptocurrencies, including the fact that many of the systems and platforms on which trading occurs are not registered (but perhaps should be) or are located outside the United States and thus potentially outside the jurisdiction of U.S. regulators and protections of U.S. law.
Simon Lovegrove is head of financial services knowledge – global, based in London. Albert Weatherill is an associate in the financial services group. The views expressed are their own.