Earlier this week, the United States Conference of State Bank Supervisors (CSBS) announced that a new, standardized regime for money service businesses (MSBs) will be introduced across 48 states.
At the moment, compliance procedures for MSBs are different from state to state: any MSB that wishes to operate across the country currently needs to meet the unique requirements of each individual state, one at a time — a process that takes large amounts of time and money.
Therefore, the plan has big implications for MSBs in the United States, in particular, for the cryptocurrency industry.
Standardizing compliance procedures across state lines will make it much easier for state-licensed money transmitters, which included crypto platforms like Coinbase, to achieve compliance in multiple states at a time. This will greatly reduce the time and expense involved with getting regulated in each state separately.
“Crypto Companies Can Potentially Become More Competitive”
Caitlin Barnett, Chief Compliance Officer of the US arm of cryptocurrency exchange Bitstamp, told Finance Magnates that “this is an exciting development for crypto exchanges and regulators.
“Being licensed by a number of different states means that the licensed entities are subject to exams by each of the regulators,” Barnet explained. “This often means numerous states examining exchanges throughout the year and often times these regulators can overlap.”
However, Joseph Weinberg, co-founder of Shyft Network, pointed out that while the CSBS’s plan will make the compliance process more efficient, the process will not necessarily be easier.
“Crypto companies in the US now have to deal with more standardized compliance procedures that make the job easier and more cost-efficient,” he said.
“The standards, however, may not mean an easier path towards full compliance, the barrier may still be set high enough to make compliance a challenge, but it will be a single challenge across those 49 states, making it much more manageable.
“Crypto companies can potentially become more competitive and integrate into the larger financial ecosystem; in the end, services offered to users should reflect this improvement.”
Regulating for a New Reality in Financial Technology
However, Jackson Mueller, Director of Policy and Government Relations at Securrency, told Finance Magnates that the new regulations are much bigger than the cryptocurrency industry.
“The focus of the release published by the Conference of State Bank Supervisors (CSBS) – the main trade organization representing and advocating on behalf of state banking regulators – is broader than just crypto-specific firms and encompasses other payments companies that fit under the definition of Money Services Business,” he said.
In fact, “this effort is a long-time coming and further recognition from the states, themselves, that standardizing different and complex state-by-state supervisory frameworks into a more efficient, streamlined process is advantageous for both the state and interested firms in an era where digital finance is inherently borderless.”
In other words, the United States is finally making movements toward regulating for a new reality in financial technology: one that largely exists across state lines.
Mueller explained that this latest move is the most recent development in the CSBS’s ‘Vision 2020’ initiative, which was launched in 2017. The CSBS’s website says that Vision 2020 is “a state-driven initiative to streamline multistate licensing and supervision for nonbanks.”
Indeed, “since the launch of its ‘Vision 2020’ initiative in 2017, the CSBS has spearheaded the difficult task of modernizing and streamlining state regulations applicable to non-banks, including FinTech firms,” Mueller said.
“This week’s announcement is an outgrowth of those efforts and a step in the right direction towards connecting unique and disparate regulatory frameworks and compliance requirements that are incredibly complex and costly to navigate for crypto and other payments firms, alike.”
“There Has Been No Indication, at This Point, on What Led State Banking Regulators to Decide on 40 States as the Arbitrary Threshold.”
Still, there are some apparent shortcomings with the CSBS’s latest announcement.
For example, while a number of reports have stated that the new compliance regime will be implemented in nearly all 50 states, Mueller pointed out that the official press release announcing the new rules will apply to companies “with operations in 40 or more states.”
“There has been no indication, at this point, on what led state banking regulators to decide on 40 states as the arbitrary threshold,” Mueller said.
Therefore, “my questions from this: why 40 states? Why that arbitrary number? And 2. what does that mean for the smaller guys that may not have operations in 40 states? Same supervision applies? If so, are we putting smaller firms at a competitive disadvantage vs their larger peers as a result of the requirements for this initiative?”
And indeed, “how exactly does this promote competition?”
Mueller also pointed out that the press release specifically states that “the initiative will only apply to 78 of the nation’s largest payments and cryptocurrency companies.
“It is difficult to see how this initiative will placate calls for a nationwide payments license or FinTech charter, given that only a handful of payments firms will be addressed by this initiative.”
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Finance Magnates reached out to CSBS for commentary on the language in the press release that said the new rules will apply to “40 or more states” and “78 of the nation’s largest payments and cryptocurrency companies.” Comments will be added as soon as they are received.
Regulatory Ambiguity in the US “Presents Loopholes for Dishonest and Bad Operators”
Even supposing that the CSBS’s new rules will apply in all 50 states and to all regulated MSBs, there is still a lot of regulatory infrastructure that the United States is lacking when it comes to fintech, and particularly when it comes to crypto.
Indeed, Waseem J. Mamlouk, Financial Advisor at fintech crowdfunding firm Nimbus Platform, told Finance Magnates that “there is quite a bit of work to be done.”
Mamlouk explained that the regulatory grey area that cryptocurrency operates in leaves a little too much room for malicious actors to get in the door.
“The ambiguity presents loopholes for dishonest and bad operators to take advantage of investors which in turn leads to a lack of confidence and does not allow the market to develop as it organically should,” he said.
Securrency’s Jackson Mueller also said that in order to create a truly comprehensive set of regulations for the cryptocurrency industry in the United States, “there are a number of areas that need to be addressed, from the taxation of crypto assets, to compliance with AML/KYC requirements, to the taxonomy of certain crypto assets.”
Shyft Network’s Joseph Weinberg echoed this final point: “there needs to be a unified term for what crypto-assets are and what they are not,” he said.
“The multiplicity of different agencies involved, each with its own set of criteria, makes investing in crypto either a dangerous gamble or a costly endeavour that requires counsel from lawyers, accountants and technical experts,” he said.
A ‘National Strategy’ Is Needed in Order to Effectively Regulate Crypto and Establish the US as a Global Leader in the Industry
Of course, there has been some progress some of these regulatory fronts: “several legislative bills have been introduced in this congress and past congresses that would seek to provide some clarity on these issues,” Mueller said.
At the same time, “regulators, themselves, have proposed safe harbors to allow regulators to oversee or be a part of how certain crypto-related innovations and projects function. Certain regulators have also approved various crypto-funds or provided regulatory clarity to industry, such as custody services for crypto assets.”
Still, most of the action that has been taken to create a regulatory structure for the cryptocurrency industry in the United States so far has amounted to piecemeal.
Indeed, there has not been any kind of cohesive national strategy; as such, there has not been much meaningful progress.
What’s Missing from the US’s Regulatory Strategy on Crypto?
In the longer term, this could result in the United States’ loss of an opportunity to establish itself as a global leader in cryptocurrency regulation. This is a fact that could hurt the United States’ cryptocurrency industry in the long run.
“What’s missing, in particular, is any sort of clarity on who regulates what and who will spearhead the development and promotion of US-based standards on these innovations, globally,” Mueller explained.
“What’s needed is a national strategy that defines the US position on several of these innovative areas in a way that not only propels the US into the digital age, but maintains, if not further promotes, US leadership and values at the international level.”
And indeed, the need for international leadership in cryptocurrency regulation is becoming increasingly pressing: “compliance standards and regulations are appearing relatively quickly,” Shyft Network’s, Joseph Weinberg said.
For example, “the Financial Action Task Force (FATF), through its recommendations and reports, has taken great strides towards creating a unified set of criteria for AML and anti-terrorist financing operations that apply to, among others, virtual asset service providers.
“There are roadblocks ahead, however, as privacy standards differ between country to country, and the way Personal Identifiable Information is protected and transmitted between entities, receives somewhat different treatment between the US and countries that are subject to GDPR,” Weinberg said.
Additionally, “US VASPs will have their work cut out for them when complying to AML regulation that requires users’ data to be transmitted, but the European counterparty may be prohibited from sharing the data because of privacy regulation.”
“Regulators Want to Be Sure That Whatever Path They Take…Does Not Negatively Affect Their Mission.”
Despite the ever-more-pressing need for this kind of regulation and international leadership, there is not any real timeline for regulatory action on the crypto in the United States, even when it comes to the CSBS’s tentative plan to standardize compliance for MSBs.
Indeed, “it is difficult to say when lawmakers will be able to pass bills or when regulators will propose and approve of regulations designed to provide for greater legal clarity and certainty in this space,” Securrency’s Jackson Mueller explained.
“Despite increased advocacy efforts on and off Capitol Hill, legislation designed to address several concerns raised by industry have fallen short. Whether that’s due to lawmakers failing to consider certain legislation, stripping out key provisions of the legislation, or the inability to get enough legislative support to move a bill through Congress, the legislative path for bills designed to address industry concerns remains incredibly difficult.”
On the other hand, taking time could ensure that when regulations are eventually put on the books, they are effective: “on the regulatory front, we continue to see several regulators take a slow, methodical approach to addressing how these innovations fit within existing regulatory frameworks and precepts,” Mueller said.
“Importantly, given the everyday headlines of cybersecurity incidents, fraudulent behavior, among other negative headlines in this space, regulators want to be sure that whatever path they take in regards to providing for greater regulatory clarity that will further support institutional involvement in this space does not negatively affect their mission, nor the safety and soundness of the financial services system.”