3 big regulatory trends that will impact cryptocurrency in 2021

November 16, 2020
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The cryptocurrency regulatory landscape continues to shift rapidly, and next year will show no signs of slowing down.

Here are the 3 biggest trends that BitAML is keeping an eye on as we head into 2021.

A little over a year ago, we wrote here that regulators had finally begun “waking up” to cryptocurrency.

It seemed as though 2019 was the year when regulators across the states came to understand that crypto wouldn’t be a passing fad. They realized:

1) that crypto was in fact a fast-growing industry,

2) it was popular and increasingly adopted by consumers, and,

3) that traditional financial regulations don’t fit crypto’s unique technology or user profile, and new, unique regulations would be required.

Since that time, a number of new rules and guidance has been handed down by federal and state regulations. While the process has been messy, and we’re not all the way there yet, it’s safe to say that the trend of regulators at every level of government learning more about cryptocurrency and working to create regulatory frameworks specific to the industry is continuing its upward swing.

Where does this leave business owners?

Unfortunately, in a spot where you are solely responsible for keeping up with new guidelines coming down the pike, and for making sure your business complies with them as they come.

If you’ve been a long-time reader of the blog, you know that we often say that regulations change quickly, and often without warning. As such, we’ve endeavored to make the BitAML blog a resource, both of news of new regulatory changes on the horizon, as well as tips for modifying BSA/AML compliance programs to comply with new changes.

We know that this much is certain:

Regulatory interest in cryptocurrency will continue to increase.

Regulatory compliance can be difficult, time-consuming, and costly. 

But compliance in cryptocurrency is not impossible.

As long as businesses that care about their compliance are keeping a watchful eye on regulatory trends, they will be better equipped to respond to new changes being handed down.

In that spirit, we are taking some time to look forward. Here are three of the top regulatory trends to keep an eye on in 2021. We’ll provide links to previous blog posts throughout to help you better understand the scope of each issue and what you can be doing now to prepare for possible regulatory changes ahead.

1: More state involvement

A quick overview: Cryptocurrency (and other financial) regulation can largely be broken down into two camps: federal and state.

Thus far, the federal government expects cryptocurrency businesses to comply with the Bank Secrecy Act (BSA), along with a handful of other rules and guidance unique to cryptocurrency. The expectations for crypto businesses are largely in concert with other non-crypto money services businesses and money transmitters.

The state regulatory picture to date has been largely unclarified. While certain states, most notably New York, moved quickly to adopt cryptocurrency regulations, most states observe what’s often referred to as a “no action” or “no opinion” stance, meaning that they do not require crypto businesses to comply with any state-specific regulations.

Expect this to change.

We’ve long held the opinion that “no action” is not going to last, and the tea leaves are suggesting that state regulators are increasingly concerned with cryptocurrency.

States such as Nevada, New Jersey, and Massachusetts have either openly debated state-level requirements for cryptocurrency, or have been more proactively doing their research on fintech markets, including cryptocurrency, and how consumers interact with them.

California recently announced a massive overhaul and rebranding of their Department of Business Oversight, have allocated more resources to the department, and have expanded its scope to include “innovative financial technology” (read: crypto).

Despite being somewhat stalled by the COVID-19 pandemic, the state has shown that it considers this initiative a priority, and is moving forward.

We expect that more states will engage in similar “background” work in the coming year, and that formal requirements for state licensure will replace “no action” status.

2: More regulatory inquiries

Consumer protection emerged as a major regulatory theme this year. So much so that BitAML dedicated nearly a dozen blog posts to the topic over the past several months.
The time to start building consumer protection policies and procedures into your AML compliance regime is now.
We expect to see regulatory inquiries increase in 2021. The topics they will be concerned about will include consumer disclosures, fair business dealings, notice of risks, and more.
There’s a lot that businesses can do to get ahead of these inquiries. We always recommend that businesses develop and maintain good dialogs with their state regulators. If current trends hold, 2021 will be the year that this becomes more important than ever. Start building those relationships posthaste.

3: More scrutiny on international transactions

It’s a recent story you might have missed, but it has huge implications, especially for any crypto businesses with exposure to international customers.
The Federal Reserve and FinCEN proposed lowering the international transaction threshold for funds transfer information gathering from $3,000 to $250. Additionally, though cryptocurrency is not considered by regulators to be legal tender, they propose that tokens be treated more or less like money anyway.
This is, quite honestly, earth-shattering.
The Funds Travel and Transfer rules were subjects of extreme controversy in cryptocurrency over the past year, with many critics arguing that the rules were technically impossible to follow.
While we didn’t take such a scorched earth position on the rules ourselves, the technical feasibility and adaptation to these rules have been a continuing source of confusion and doubt for the crypto space.
The new proposal is just that — a proposal. And in fact, FinCEN is seeking input and feedback on this change.
But the proposal itself is revealing. It shows that FinCEN is less concerned with clarifying the Transfer and Travel Rule to better adapt to cryptocurrency, and more concerned with the flow of crypto from the U.S. abroad.
It’s difficult to say for sure what will come of this, but that it is a priority of regulators to keep an eye on and possibly set limits on sending crypto overseas is a key trend that we expect will have implications for businesses in the coming year.

Key takeaways for businesses

No matter what form it comes in, regulatory oversight in crypto will increase in 2021.
If you run a business, establish an open line of dialog with your state regulators sooner than later. Expect to potentially hear from state regulators curious about what you are doing to increase consumer protection in the space.
Lastly, the Travel and Transfer Rule controversy will continue. Your business doesn’t even necessarily have to be doing business abroad for this potential change to impact your compliance.
As always, if you have questions, or need help and guidance preparing your business to be in the best possible position to respond nimbly to new regulations, reach out to BitAML today and we will help you put together a plan.

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