With the cryptocurrency industry having become as mammoth as it is, financial institutions and governments worldwide are looking to put a leash on this market to control it more easily and keep it in check. The case is no different within the U.S., with the Securities and Exchange Commission (SEC) and U.S. government making various plans to regulate cryptocurrency.

So, will the SEC and U.S. government regulate cryptocurrency, and if so, how?

The Need for Crypto Regulation

crypto coins being held in hands

Public doubt of governments and financial institutions fuel the acceleration of the cryptocurrency market. Many dislike how centralized banks handle money and don't feel they can trust them to keep their money safe and offer the best options for financial growth.

But during the crypto boom of late 2020, crypto regulation became widely discussed.

Whether cryptocurrency needs to be regulated is a huge point of contention among traders and enthusiasts. While some believe crypto should remain separate from traditional financial parameters, others think crypto regulation is the best route forward.

In reality, regulating cryptocurrency to some degree can help to mitigate crypto-related crimes and better protect investors. It could be a great way to safeguard the crypto market and lower the chances of huge financial losses (as we've seen repeatedly occur to thousands of investors).

Existing Crypto Regulations

Currently, cryptocurrencies exist within the U.S. under the Bank Secrecy Act (BSA). However, cryptocurrencies also fall under the SEC's jurisdiction, and exchanges must register with this financial body to trade certain assets. On top of this, the Commodity Futures Trading Commission (CTFC) and Internal Revenue Service (IRS) also play a role in dealing with crypto taxation and crimes.

It is clear that the SEC has a focus on regulating cryptocurrency. In May 2022, the agency changed the name of its Cyber Unit to the Crypto Assets and Cyber Unit while also increasing the number of staff in this department. We've also seen the SEC's name crop up again and again in various legal proceedings associated with cryptocurrency.

Why Is the SEC Regulating Cryptocurrencies?

bitcoin on top of exchange app on phone screen

One of the main thrusts behind the SEC's move to regulate cryptocurrencies is that most crypto exchanges are likely trading in securities. Securities are tradable assets that represent some financial value. This sounds somewhat similar to certain cryptocurrencies, which is why the SEC urges crypto exchanges to register as securities exchanges—but registering as a security exchange makes you subject to certain laws and parameters, which not everyone likes.

The SEC has already seemingly identified various crypto assets as securities, such as Amp, Rari Governance Token, XYO, and Kromatika. On top of this, the agency stated in 2017 that decentralized autonomous organization (DAO) tokens were to be considered investment securities. So, there's an evident push to register and regulate cryptocurrencies as securities.

An array of crypto exchanges have also been scolded by the SEC in the past, which has fueled the agency's bid for regulation. For example, in 2022, the SEC probed the hugely popular exchange Coinbase amid suspicions of unregistered securities trading. Coinbase pushed back against this allegation, and the SEC has not yet announced an official investigation. But such actions highlight that this agency is now geared towards keeping crypto companies in check.

The SEC also sued Ripple Labs for the illegal sale of XRP. When Ripple Labs began raising funds in 2013, it did so via the sale of XRP, the company's crypto. But the SEC has claimed that XRP is, in fact, a security and should have been registered as such before any sales took place. Because of the company's failure to do so, the SEC stated that it had violated "the registration provisions of the federal securities laws."

Ripple was also sued for illegally exchanging XRP for non-cash consideration. Though many speculate that the SEC will not win this lawsuit, it is again representative of the agency's aim to get a tighter grip on crypto trading.

There has also been a lot of talk about stablecoin regulation. This was largely ignited by Binance's decision to convert some of its listed stablecoins to its stablecoin, BUSD. The exchange announced in Autumn 2022 that it would automatically convert a range of stablecoins to Binance USD (BUSD), including USD Coin (USDC) and Pax Dollar (USDP). The move triggered discussions around whether more rules should be enforced on stablecoin cryptos.

Government Crypto Plans

The Biden administration has also been working on cryptocurrency regulation. In September 2022, a framework was released by the White House on how cryptocurrencies should be handled. The framework explored a range of elements and largely focused on fighting crypto-related crimes and protecting investors. For example, laws against unlicensed trading, fraud, and financial instability are all possible, though official financial bodies such as the SEC are yet to enforce such legislation.

President Biden has previously spoken about the dangers surrounding the crypto space and signed an order in March 2022 to examine the growing industry's risks. The order was partially caused by concerns that Russia was using cryptocurrency to avoid financial sanctions, though this has not been confirmed.

On top of this, President Biden has also proposed a rule that requires crypto exchanges and other businesses to report any cryptocurrency transactions with a market value of $10,000 or more to the IRS. This has not yet been enforced, but it could be in the near future.

Will the SEC and Government Regulate Cryptocurrencies Further?

At the moment, no concrete legislation has been passed for the regulation of cryptocurrencies, but it is likely that this will soon change. In all likelihood, we will see more and more cryptocurrencies listed as securities, therefore requiring exchanges to register with the SEC if they wish to trade them. In addition, Crypto taxation laws may also become tighter for investors.

The U.S. government and SEC's additional focus on mitigating financial crimes, such as money laundering and tax evasion, also play a role in this pending regulatory wave. While there is no guarantee these bodies will regulate crypto further, it certainly seems that they are keen to do so.

As the Crypto Industry Grows, Regulatory Bodies Draw Closer

It's no surprise that the crypto industry is facing tighter regulations at the hands of the U.S government and SEC. As more individuals and companies invest in the crypto space, official bodies must work to fight crime, protect the public, and mitigate financial loss. So, we may see various regulations imposed on the cryptocurrency industry in the near future.