EU laws approved but US is top cop

Regulators around the world from Europe to Asia ramped up efforts to bring about formal laws for digital currencies in 2023 — but it was the U.S. that took some of the harshest legal actions against major players in the industry.

In a year that saw crypto heavyweight Binance ordered to pay more than $4 billion to U.S. authorities and its former CEO’s guilty plea, along with high-profile lawsuits against five crypto companies by the Securities and Exchange Commission, regulators overseas have been equally busy both adopting new legislation — and pushing for more — to rein in the sector’s bad actors.

Here’s the state of play globally for crypto regulation and enforcement in 2023 — and a look at what to expect in 2024.

The U.S. has proven to be one of the most active enforcers of penalties and legal action against crypto companies this year, as authorities looked to counter bad practices in the industry following the collapse of Sam Bankman-Fried’s crypto empire — including his FTX exchange and sister firm Alameda Research.

“To be clear, in some cases — like FTX — enforcement was necessary,” said Renato Mariotti, a former prosecutor in the U.S. Justice Department’s Securities and Commodities Fraud Section. “But U.S. enforcement actions against market participants that are more focused on compliance are questionable and the result of the U.S. ‘regulation by enforcement’ approach.”

While many regions have passed laws with potentially tough penalties, the U.S. is still the only country that has actively taken action against large-scale crypto companies and projects. Thus far, the U.S. has led that campaign against crypto firms by enforcement and has, by far, been the most punishing of regulators when it comes to penalties and fines.

“Other countries have a comprehensive regulatory framework in place. We don’t,” Mariotti told CNBC. “As a result, issues that should be determined by legislation or regulation are instead litigated.”

Indeed, in the absence of hard-and-fast rules from Capitol Hill, the SEC, the Commodity Futures Trading Commission, the Department of Justice, and Treasury’s Financial Crimes Enforcement Network (FinCen), have worked in parallel to police the space, in a sort of patch-quilt version of regulation-by-enforcement.

Richard Levin, a partner at Nelson Mullins Riley & Scarborough who has represented clients before the SEC, CFTC, and Congress, tells CNBC that these agencies have been some of the most active enforcers around the world concerning the regulation of digital assets and cryptocurrencies.

“These agencies have provided guidance to the industry on how digital assets and cryptocurrencies must be offered and sold, traded, and held by custodians,” said Levin, who has been involved in the fintech sector for 30 years.

“However, much of their work has involved providing guidance to the industry through enforcement actions,” continued Levin.

Since 2019, Justice’s Market Integrity and Major Frauds Unit has charged cryptocurrency fraud cases involving over $2 billion in intended financial losses to investors worldwide.

In its annual report summing up enforcement actions, the CFTC noted that nearly half of all cases in 2023 involved conduct related to digital asset commodities. Meanwhile, the SEC highlighted that 2023 was notable for its enforcement of “crypto-related misconduct, including fraud schemes, unregistered crypto assets and platforms, and illegal celebrity touting.” Since 2014, the SEC has brought more than 200 actions related to crypto asset and cyber enforcement.

The most stringent cases played out in the first half of the year when the SEC accused Binance and Coinbase of engaging in illegal securities dealing in a pair of lawsuits.

Most notably, the SEC alleges that at least 13 crypto assets available to Coinbase customers — including Solana’s sol, Cardano’s ada, and Protocol Labs’ filecoin — should be considered securities, meaning they’d need to be subject to strict transparency and disclosure requirements.

In Binance’s case, the SEC went a step further. In addition to securities law violations, the company and its co-founder and CEO Changpeng Zhao were also accused of commingling customer assets with company funds.

Concerning criminal enforcement, Damian Williams, the U.S. attorney for the Southern District of New York, has been leading some of Justice’s highest-profile crypto prosecutions, including the monthlong trial of Bankman-Fried, the disgraced FTX founder. In November, a jury found the former FTX chief executive guilty of all seven criminal counts against him following a few hours of deliberation. 

But crypto companies have begun to push back, with some threatening to decamp from the U.S. entirely should this dynamic of policing by enforcement continue.

Coinbase CEO Brian Armstrong condemned the SEC’s actions against the exchange and suggested the company may be forced to move its headquarters overseas. Armstrong later walked back the threat of relocating abroad, but Coinbase and other major crypto firms have still begun to invest more heavily in their international operations.

Crypto market participants nevertheless hope that the spate of legal challenges brought to crypto companies in 2023 will bring clarity in the form of new regulations.

“Clearer regulatory frameworks and stance from regulators globally have provided a sense of legitimacy and security, encouraging more widespread participation in the bitcoin market,” Alyse Killeen, managing partner of Stillmark Capital, told CNBC.

The crypto industry saw the most legislative progress on crypto laws in the U.S. this year, with one of the competing digital asset bills making it past multiple House committees for the first time.

Even as U.S. lawmakers take steps toward crypto legislation, there remains no law in the U.S. tailored specifically for the industry. Nelson Mullins Riley & Scarborough’s Levin tells CNBC it’s unlikely that we’ll see much progress in a presidential election year and with a divided federal government.

He argues that even without rules on crypto from lawmakers, routine complaints that U.S. regulators are not providing guidance to the industry are without merit.

According to Levin, “The SEC, the CFTC and FinCEN routinely provide informal guidance on the regulation of digital assets and cryptocurrencies.”

“The SEC even went so far as to provide a framework for the analysis of digital assets and cryptocurrencies. The SEC also created a fake digital asset (Hosey Coin) that gave advice to the FinTech community on how not to launch a digital asset,” Levin added.

“Some members of the industry forget the SEC is relying on laws that were written when American football players wore leather helmets, and the SEC must apply those laws to the FinTech industry,” he said.

Despite crypto’s recent fading buzz, Killeen of Stillmark Capital doesn’t expect regulators to become fatigued by crypto in 2024. In the same time year that two of crypto’s leading figures were sent to jail, shares of Coinbase — and prices of digital currencies like bitcoin and ether — have rallied sharply.

Since the start of this year, Coinbase’s stock price has surged more than 400%. Bitcoin and ether, meanwhile, have both roughly doubled in price. That’s as investors anticipate that approval for a bitcoin exchange-traded fund by the SEC may be around the corner.

The European Union looks set to apply its Markets in Crypto-Assets legislation, which is aimed at taming the “Wild West” of the crypto industry, in full force starting next year.

The law, initially proposed in 2019 as a response to Meta’s digital currency project Diem, formerly known as Libra, aimed to clean up fraud, money laundering and other illicit financing in the crypto space, and stamp out the sector’s bad actors more broadly.

It also sought to tackle a perceived threat from so-called stablecoins, or blockchain-based tokens that serve as a representation of government money but are backed by private companies. Stablecoins are effectively digital currencies that are pegged to the value of fiat currencies like the dollar.

While tether and Circle’s USDC aren’t perceived as “systemic” assets capable of disrupting financial stability, a private stablecoin from a massive company like Meta, Visa or Mastercard could pose a bigger threat and potentially undermine sovereign currencies, in several EU central bankers’ eyes.

Part of the EU’s framework for crypto is aimed at tackling threats — particularly that of the euro being undermined — by making it impossible for issuers to mint stablecoins backed by currencies other than the euro, like the U.S. dollar, once they meet the threshold of more than 1 million transactions per day.

Meanwhile, the European Union is moving towards a unified regulatory framework for cryptocurrencies with its Markets in Crypto-Assets Regulation (MiCA).

This year, the three main political institutions of the EU-approved MiCA, paving the way for the regulation to become law. MiCA came into force in June 2023, but it’s not expected to apply fully until December 2024.

Companies are already getting ready to take advantage of the new rules, with Coinbase submitting an application for a universal MiCA license in Ireland. If and when it is approved, this would allow Coinbase to “passport” its services into other countries like Germany, France, Italy, and the Netherlands.

Braden Perry, former federal enforcement attorney and current partner at law firm Kennyhertz Perry, said that while the U.S. remains a top enforcer for the crypto industry, its perception as a regulator “may be diminishing,” as other jurisdictions have stepped in with clearer rules.

“This perception stems from the proactive measures taken by U.S. regulatory bodies like the SEC, CFTC, and IRS, especially in addressing fraud and security issues in the crypto market. High-profile legal actions in the U.S. further cement its image as a strict enforcer,” he said.

“However, other regions, including Singapore, Dubai, Hong Kong, and the European Union, are also developing robust regulatory frameworks,” Perry added. “While these regions may not be as visible in international media for enforcement actions, they possess significant and sometimes stringent regulatory mechanisms.”

But while the broader EU has been racing to implement new crypto laws, individual European countries haven’t been resting on their laurels.

France has been tempting crypto companies and traders alike to its shores with the promise of tax cuts on crypto profits and a smoother registration process for digital asset firms.

Starting from Jan 1, 2024, France’s Financial Markets Authority, or AMF, is set to amend its registration requirements for crypto firms to better align with MiCA, according to an August statement from the regulator.

At the same time, French authorities have kept a skeptical eye on fraudulent activity among various crypto players. In September, French regulators added 22 fraudulent websites — including some that market trading in crypto and crypto-linked derivatives — to a blacklist of unauthorized foreign exchange providers.

In Germany, meanwhile, the financial regulator Bafin has said it wants to accelerate its approach to licensing crypto custody services, as part of a broader effort to instill trust and transparency in the crypto market.

The U.K., a non-member of the EU, passed a law in June that gives regulators the ability to oversee stablecoins. But there are no concrete rules for crypto just yet.

The U.K.’s Treasury department released its response to a consultation on new crypto rules earlier this year, confirming that it plans to bring a range of crypto activities, including crypto custody and lending, within existing laws governing financial services firms in the country.

Earlier this year, the Monetary Authority of Singapore, which is recognized for clear fintech and crypto regulations that do not rely heavily on enforcement actions, finalized rules for stablecoins, making it one of the world’s first jurisdictions to do so.

Singapore was notably bruised by the collapse of TerraUSD, a controversial algorithmic stablecoin, in 2022, as well as the fall of Three Arrows Capital, or 3AC. Both Terra Labs, the company behind Terra, and 3AC were headquartered in Singapore.

Singapore’s new framework requires stablecoin issuers to back them with low-risk and highly-liquid assets, which must equal or exceed the value of tokens in circulation at all times, return the par value of the digital currency to holders within five business days of a redemption request, and disclose audit results of reserves to users.

Hong Kong, meanwhile, is undergoing a public consultation on stablecoins and seeks to introduce regulation next year.

The region has been increasingly warming to crypto assets, despite a broader anti-crypto push from China, which banned bitcoin trading and mining in 2021.

The Hong Kong Securities and Futures Commission, or SFC, launched a registration regime for digital asset businesses earlier this year, with clear regulations for crypto exchanges and funds.

So far, only two firms, OSL Digital and Hash Blockchain, have been handed licenses.

The United Arab Emirates has emerged as a popular base for the fintech sector more broadly, given its lack of personal income tax, flexible visa policies, and competitive incentives for international businesses and workers.

In 2022, in a bid to lead the virtual assets sector in the Middle East and Africa, Dubai — the UAE’s most populous city — launched VARA, or the Virtual Asset Regulatory Authority.

“Dubai and the UAE have created favorable conditions for cryptocurrency businesses, offering specific zones and guidelines for crypto trading,” said Perry.

Blockchain analytics firm Chainalysis notes that regulators in the UAE were early to cryptocurrency, with Dubai leading the charge when it launched a blockchain strategy in 2016.

“Since then, UAE regulators have remained at the forefront of the industry,” according to a Chainalysis report.

Two years later, in 2018, Abu Dhabi Global Market created the world’s first regulatory framework for cryptocurrency to foster innovation while safeguarding consumers.

Earlier this year, the UAE passed further crypto regulations at the federal level to make it easier for regulators like VARA to police the sector and run economic-free zones.