The April 7 "Regulation And Compliance" panel at Bitcoin 2022 in Miami featured insiders from cryptocurrency investing platforms as well as the advisors who help them navigate the minefield of government compliance.

Moderator Preston Byrne welcomed law partner Hailey Lennon from the Anderson Kill firm, which specializes in clients involved in the crypto industry. Also on hand was John Melican, a former head of compliance at American Express who is now the chief of external affairs for blockchain analytics company Elliptic; Jeff Howard, the head of North American business development at digital asset trading platform OSL; and Simon Douyer, the COO at cryptocurrency trading firm SheeldMarket.

Lennon, Howard and Douyer at the Bitcoin 2022 conference.

The discussion focused on three main topics:

  1. Efforts to root out illicit finance
  2. Consumer protections in the cryptocurrency space
  3. The U.S. position in the world in regards to cryptocurrency regulation

Melican spoke most about the first topic, given his background and work in helping clients detect and prevent fraudulent transactions on their platforms. One challenge Melican sees is that clients want to know, "Can you scale? Can you add new asset classes?"

The space is developing so rapidly that it is tough for these firms to keep up with evolution in the industry and at the same time monitor changing government regulations.

Another emerging challenge in the cryptocurrency space is the way that Bitcoiners have reacted to emergencies on the world stage. Russia's war on Ukraine has brought about massive support from around the world in the form of bitcoin donations being sent to Ukranians. It has also prompted the suspected use of cryptocurrency by Russia in order to avoid economic sanctions imposed by many nations around the world. This presents a unique challenge for firms to determine if funds leaving their platforms are being used for illicit activity.

Regarding the Federal Reserve's focus on illicit Bitcoin transactions, Melican provided this thought, aimed at regulators: "Crypto is the worst way in the world to launder money."

Douyer, Melican and Byrne at the Bitcoin 2022 conference.

Howard's overriding thoughts on the issue of consumer protection had to do with current U.S. Securities And Exchange Commission (SEC) Chairman Gary Gensler. He feels that Gensler, though he has taught blockchain technology at MIT, has a "very expansive view on regulation." Howard stated more than once that Gensler is a "very aggressive" regulator. He pointed to the SEC chair's desire to regulate stablecoins in much the same way as money market accounts as an example.

Lennon pointed out that state regulations can be even more onerous than some federal regulations, citing the New York State "BitLicense" as an impediment to innovation there. Lennon, the former associate general counsel at Coinbase, sees Washington currently focusing more on altcoins, given the amount of fraud that has already taken place in that area, with less attention being paid to Bitcoin.

How Does U.S. Bitcoin Regulation Position It In The World?

Douyer echoed a thought that each of the panelists seemed to agree on: The United States currently has major gaps in Bitcoin regulations, in two main ways. First, the major regulatory agencies are not united as to which has authority to regulate various areas of the cryptocurrency space. This includes the SEC, U.S. Department Of The Treasury, Financial Industry Regulatory Authority (FINRA) and others.

The other area promoting confusion among tech innovators is the disjointed relationship between federal and state regulators. This picked up on a theme that Lennon discussed as well.

Howard weighed in extensively on this area. Howard cited perhaps the main takeaway from this panel: Regulatory uncertainties in Washington are keeping the big institutions somewhat on the sidelines at this point. As cryptocurrency matures, it is becoming "more institutional," as Howard put it, yet it can't really scale without guidance from Washington.

Citing a frustration that many money managers have already faced, Howard pointed to the SEC's failure so far to approve a bitcoin spot exchange-traded fund (ETF). Similar innovations are happening elsewhere in the world, particularly in Germany. Lennon even cited that clients sometimes ask how they can stay out of the U.S., which certainly doesn't sound promising.

So, is there any reason to be hopeful about the regulatory environment in the U.S.? Well, Melican feels that President Biden's recent executive order is a good start toward common sense regulation in the cryptocurrency space. The order directs federal agencies to coordinate their efforts and work toward creating a regulatory framework for digital asset markets. Other panelists seemed to agree, though all felt that the efforts will take time.

In summary, Byrne said, "As far as advising clients on Bitcoin and crypto regulations, I'm very comfortable with my future job security."