Gensler’s comments, particularly his interpretation that securities laws apply to the bulk of the crypto space, and that, hence, the majority of companies have failed in their registration duties, also put new pressure on banks holding crypto firm accounts.
“Of the nearly 10,000 tokens in the crypto market, I believe the vast majority are securities,” he said. “Offers and sales of these thousands of crypto security tokens are covered under the securities laws.”
“Some tokens may not meet the definition of a security — what I’ll call crypto non-security tokens,” he said. “These likely represent only a small number of tokens, even though they may represent a significant portion of the crypto market’s aggregate value.”
This interpretation could put banks in a quandary.
Banks are the nexus point of the fiat and crypto value worlds, the on-ramp and off-ramp for trades and transactions to become tangible, real world currencies.
What does this mean for fincrime compliance officers on the ground?
While they are not responsible for the customers of their virtual exchange clients, a compliance team may want to query crypto firms to ask if they have registered with the SEC or Commodities Futures Trading Commission (CFTC).
Such a line of questioning is a balancing act of how much does an AML officer want to pester, or alienate, a crypto exchange customer by asking if it has reviewed its own operations, gauged its similarity to securities firms and voluntarily sought registration guidance from the SEC.
The reason: Currently, Congress hasn’t passed a pending bill into law stating that, yes, crypto firms are securities or, more specifically, that individual firms have been analyzed and judged as passing the historic and seminal “Howey Test.”
The Howey Test refers to the U.S. Supreme Court case for determining whether a transaction qualifies as an “investment contract,” and therefore would be considered a security and subject to disclosure and registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934, according to online definitions.
Under the Howey Test, an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Currently, one of the main compliance and registration requirements for crypto exchanges, at least in the United States, is that they must be registered with the U.S. Treasury’s Financial Crimes Enforcement Network (FINCEN) and are subject to the full panoply of AML program duties.
But that could change.
Lawmakers in June released what they called a landmark bill to create a complete regulatory framework for digital assets.
The Responsible Financial Innovation Act (RFIA), from U.S. Senators Kirsten Gillibrand (D-NY), a member of the Senate Agriculture Committee, and Cynthia Lummis (R-WY), a member of the Senate Banking Committee, encourages responsible financial innovation, flexibility, transparency and robust consumer protections while integrating digital assets into existing law.
Central to the bill is regulatory enforcement, oversight and financial crime compliance.
The bill directs the appropriate regulators to study the “potential for sanctions avoidance, money laundering, and terrorist financing and to develop rules around appropriate cybersecurity standards” along with how newer, more innovative technologies could improve regulatory compliance and risk management.
If passed, the CFTC would have jurisdiction over the largest exchanges by market cap, based on definitions of assets as commodities, with SEC having the smaller exchanges and therefore the most by number as classified as securities.
The bill also sets out duties for examiners at the state and federal levels to scrutinize for “appropriate operational, compliance and information technology risk management,” a nod to recent high-profile hacks that have hit virtual value exchanges and any operation, entity and even individuals with hefty stores of digital assets.
To read the original press release by lawmakers about the bill, click here.