Cryptocurrency and digital asset businesses operate in a rapidly evolving regulatory environment where compliance requirements continue to develop and enforcement actions increase in frequency. Multiple federal agencies claim jurisdiction over various aspects of the crypto industry, creating a complex landscape that businesses must navigate carefully. Understanding the regulatory framework helps crypto businesses develop compliance programs that satisfy legal requirements while enabling continued innovation and growth.
The Multi-Regulator Landscape
Unlike traditional financial services that have relatively clear regulatory structures, cryptocurrency faces oversight from multiple agencies with overlapping and sometimes conflicting jurisdictions. The Securities and Exchange Commission treats many digital assets as securities subject to registration and disclosure requirements. The Commodity Futures Trading Commission regulates crypto derivatives and considers certain cryptocurrencies to be commodities.
The Financial Crimes Enforcement Network requires anti-money laundering compliance from crypto businesses it classifies as money services businesses. State regulators impose money transmitter licensing requirements. The Internal Revenue Service treats crypto as property for tax purposes. Banking regulators oversee crypto activities by banks and their relationships with crypto businesses. Navigating this patchwork requires understanding each regulator's jurisdiction and requirements.
Securities Law Compliance
The SEC has taken the position that many token offerings constitute securities that must either be registered or qualify for an exemption. The Howey test, which determines whether an investment contract exists, applies to token sales and ongoing trading platforms. Factors indicating a security include investment of money in a common enterprise with expectation of profits derived from the efforts of others.
Token projects that qualify as securities face registration requirements, disclosure obligations, and restrictions on trading. Exchanges listing such tokens may need to register as securities exchanges or alternative trading systems. Broker-dealer and investment adviser registration may be required for intermediaries. Understanding when tokens cross the line into securities is essential for structuring compliant offerings and avoiding enforcement action.
Anti-Money Laundering Requirements
Crypto businesses engaged in exchange, transmission, or custodial activities typically must comply with Bank Secrecy Act requirements. This includes registering with FinCEN as a money services business, implementing anti-money laundering programs, and filing suspicious activity reports. Know-your-customer procedures must verify customer identities before providing services.
AML compliance requires ongoing transaction monitoring to detect suspicious patterns, recordkeeping of transactions and customer information, and training employees on compliance obligations. Enhanced due diligence applies to higher-risk customers and transactions. Travel rule requirements mandate sharing customer information when transferring funds above certain thresholds. Failures in AML compliance have resulted in significant enforcement actions against crypto businesses.
State Money Transmitter Licensing
Most states require money transmitter licenses for businesses that transfer value on behalf of customers, including crypto exchanges and payment services. Licensing requirements typically include minimum net worth or bonding, background checks for principals, and demonstration of compliance capabilities. Some states have created specialized crypto licenses like New York's BitLicense.
Operating without required licenses exposes businesses to enforcement action, including potential criminal penalties. The licensing process can take months or longer in each state. Some businesses limit their service offerings or geographic reach to manage licensing burdens. Others partner with licensed entities rather than obtaining their own licenses. Understanding each state's requirements is essential for lawful nationwide operation.
Tax Compliance
The IRS treats cryptocurrency as property, meaning transactions can trigger taxable events. Selling crypto for fiat currency, exchanging one cryptocurrency for another, and using crypto to purchase goods or services all may generate capital gains or losses. Businesses must track cost basis and holding periods for accurate tax reporting.
Information reporting requirements apply to crypto businesses. Form 1099 reporting for payments to U.S. persons, broker reporting rules, and proposed regulations requiring reporting of substantial transactions all create compliance obligations. Tax compliance requires robust systems for tracking transactions, calculating gains and losses, and generating required reports. Failure to comply can result in penalties and criminal prosecution.
Custody and Consumer Protection
Businesses that hold customer crypto assets face custody obligations that vary by regulatory regime. SEC custody rules apply to investment advisers and broker-dealers handling crypto securities. State regulations may impose custody requirements on money transmitters and crypto-specific licensees. Consumer protection laws prohibit deceptive practices and may require specific disclosures.
Best practices for custody include segregating customer assets, maintaining adequate insurance or reserves, implementing strong cybersecurity measures, and providing clear disclosure about risks and protections. Failures in custody arrangements have resulted in significant customer losses and enforcement actions. Building trust through responsible custody practices is essential for sustainable crypto businesses.
Building a Compliance Program
Effective compliance programs address all applicable regulatory requirements through policies, procedures, and controls. Key elements include designated compliance personnel, written policies and procedures, training programs, transaction monitoring systems, and regular audits and testing. The program should evolve as regulations change and the business grows.
Risk assessment identifies the specific compliance risks the business faces based on its products, customers, and geographic reach. Controls should be tailored to address identified risks. Documentation of compliance activities provides evidence of good faith efforts if questions arise. Investing in compliance infrastructure before problems arise is far less costly than responding to enforcement actions.
Working With Regulatory Counsel
The complexity of crypto regulation makes legal guidance essential for building compliant businesses. Experienced regulatory counsel can help analyze how existing laws apply to specific products and services, structure offerings to minimize regulatory risk, and develop compliance programs that satisfy applicable requirements. Ongoing counsel helps navigate the constantly changing regulatory landscape and respond appropriately to enforcement trends.
When enforcement issues arise, having established relationships with counsel enables rapid response. Regulatory investigations require careful handling to protect the business while cooperating appropriately. The investment in regulatory compliance and counsel protects the business and positions it for sustainable growth in an industry facing increasing regulatory scrutiny.