Uncle Sam is taking “internet money” seriously.
As a result, elected officials are spending more time talking about crypto.
Do you know what that means? Regulation will follow the buzz.
In an interview with Yahoo!, U.S. Rep. Jim Himes (D-Conn.) characterized the current crypto climate as a showdown with Securities Exchange Commission Chairman Gary Gensler: “We’re sort of in a vapor lock around this issue of the registration of entities, exchanges, etcetera with Gary Gensler at the SEC saying, ‘I don’t need more statute. I’ve got all the law I need. What I need is for people to comply.’ And, of course, many people are saying, ‘Well, we don’t agree with that, and we are not going to comply’. So that suggests we are going to need to figure out whether additional statute is necessary, and Gary Gensler is wrong or whether Gary Gensler just needs to do a lot more enforcement to get people to see his point of view, that they should be registering under existing law.”
To make things more interesting, former SEC Chair Jay Clayton disagrees with Gensler’s stance, asking the agency to provide guidance on the custody of tokenized assets. In an op-ed piece, Clayton said the SEC should take the next step and present guidelines for crypto assets.
In the meantime, Gensler has embraced regulation through enforcement. He firmly believes the existing security laws on the books are fine for crypto.
So, what’s the play?
Here are three moves that will help small/midsize crypto companies prepare for looming regulation:
Register With The SEC
There remains a cavalier mindset about crypto. And that needs to change.
Crypto is not like going outside and throwing the frisbee, even though there is social media chatter about “going to the moon.” It is not fun and games; Crypto is an actual financial asset that has value. The notion that crypto is a novel, foreign idea wrapped in technology needs to give way to reality.
To protect your company, now is the time to register with the SEC. Long-awaited regulation for cryptocurrency is on the horizon. It is better to prepare now to fit into the current scheme than sit on the sidelines.
Do not wait for the government’s final verdict. Err on the side of caution. It is better to fill out more paperwork and “over-comply” than wait one year later to have the Securities Exchange Commission come knocking. When the agency files a complaint against your company, your reputation could take a hit—along with a hefty legal bill.
Eliminate ‘Dirty’ Money
Part of crypto’s allure is its anonymity, which could make it a prime vehicle for fraudulent activity that includes funding for terrorism. The government will soon introduce regulations that strongly encourage crypto companies to have anti-money laundering programs in place.
No matter how small your company is, you will need to have a designated compliance officer on the payroll. This person can perform other duties, but they must have the title. They also must maintain written policies and procedures. The anti-money laundering plan should be well thought out and detailed, not a two-page report. Ideally, your compliance officer would have the proper credentials, such as the ALMA designation, and appropriate experience. Each organization involved in a chain of transactions involving “dirty money” is accountable.
Sens. Elizabeth Warren (D-Mass.) and Roger Marshall (R-Kan.) have introduced The Digital Asset Anti-Money Laundering Act of 2022, which extends the Bank Secrecy Act. The objective is to subject crypto companies to the same rules as banks and broker-dealers. The bill would address a gap with digital wallets and prohibit financial institutions from transacting with forms of technology that enhances anonymity. Last summer, the currency-mixer Tornado Cash was sanctioned by the U.S. Department of Treasury, alleging money laundering activity with North Korea.
Add A Layer of Governance
Governance is a big part of compliance.
Board members can play a pivotal role. You will need seasoned professionals in many areas, ranging from marketing to technology. Make sure you have board members with deep experience in finance, compliance and internal controls.
Know Your Customer (“KYC”) is a process that identifies your customers and their activities. From a corporate level, do you have the entity’s EIN, articles of incorporation and financial statements? For individual investors, should you recommend a volatile asset to an investor in her 90s? What’s the rest of the story? What are the procedures to address these situations?
Back in 2019, the Commodities Futures Trading Commission, Financial Crimes Enforcement Network and SEC classified crypto exchanges as money service businesses (MSBs), which means they must follow the Bank Secrecy Act of 1970, as well as the anti-money laundering and KYC rules.
While your staff manages the day-to-day operations, your board members can still be part of the mix. Give them oversight of key committees, such as risk and compliance, to provide another layer of review, which would protect the firm.
(Tyler Rutherford is an associate attorney at Pastore with expertise in regulatory compliance, contract law and corporate law. He represents a wide range of clients, including crypto and blockchain companies.)