Cryptocurrency Regulations and Banking in 2022

Michael Magrath, December 15, 2021

The coming year may be the most crucial yet in solidifying crypto standards in the U.S., which could bring significant benefits to banking institutions.

According to a recent survey sponsored by OneSpan, 50% of bank executives and leaders in the U.S. are principally concerned about digital currency going into 2022.

Although the U.S. is lagging in developing a central bank digital currency, regulators are increasingly seeking to bring regulatory clarity to the cryptocurrency industry. This includes cracking down on crypto’s use in fraud, money laundering, and other illegal activity, and imposing tax requirements on crypto assets.

The research found that 41% of respondents in the U.S. agree that more effective regulation of crypto will make that market more attractive for participation by banks. Indeed, greater regulatory clarity and risk mitigation – especially the application of anti-money laundering (AML) requirements, such as “know your customer,” to crypto transactions, will allow banks to more readily tap into the emerging industry.

By harnessing the power of crypto and other blockchain-based technologies, banks can offer more efficient and transparent services to customers, better compete with fintech and boost profits.
The Biden administration has been eager to establish oversight mechanisms and reporting requirements on crypto without imposing outright bans or otherwise harsh regulations. The infrastructure law signed by President Biden in mid-November extends reporting requirements to a broadly defined “digital assets” category that includes cryptocurrencies and non-fungible tokens (NFTs).

In expanding the AML cash-reporting requirement, recipients of digital asset transactions greater than $10,000 must file an IRS Form 8300 in a trade or business context. This requirement will not go into effect until 2024 to allow the Treasury Department and the IRS to make further clarifications, including the definition of digital assets.

High-profile ransomware schemes, which have become more prevalent and sophisticated during the pandemic, have been a major driving force in the crypto regulatory landscape.

FinCEN’s AML/CFT National Priorities, issued June 2021, includes “cybercrime, including relevant cybersecurity and virtual currency considerations.” The agency notes that “enabling rapid tracing and interdiction of virtual currency proceeds” is a critical goal in cracking down on ransomware payments, which are often demanded in cryptocurrency. In October, the Justice Department launched a National

Cryptocurrency Enforcement Team to investigate and prosecute cases of cryptocurrency in illegal activity.

Several pieces of legislation introduced this year aim at providing regulatory clarity and cracking down on crypto’s role in crime.

The Sanction and Stop Ransomware Act, introduced in Congress in August, seeks to strengthen national cybersecurity through the development of mandatory cybersecurity requirements and the regulation of crypto exchanges. Under the bill, which is currently in committee in the Senate, the Treasury Secretary would have 180 days after passage to develop and institute regulations to reduce the anonymity of crypto exchanges.

The Eliminate Barriers to Innovation Act, passed the House in April, would require the Securities and Exchange Commission and the Commodity Futures Trading Commission to establish a joint working group on digital assets to promote regulatory clarity and encourage innovation. The Token Taxonomy Act further seeks to foster regulatory transparency by defining “digital tokens,” which would be exempted from the definition of a security.

Heading into 2022, a significant challenge will be developing a more cohesive approach to regulating the crypto industry. Various states and national agencies have charged forward in issuing sometimes disparate rules, standards and definitions. This has created a fragmented regulatory landscape: the SEC, IRS and CFTC all have varying definitions of cryptocurrency, and each agency wants a hand in crafting further regulation.

Due to the transnational nature of cryptocurrency, the US must also look to engage in international AML/CFT efforts and the formulation of international standards. A key priority should be establishing an internationally accepted definition for digital assets and cryptocurrency.

In a move to address these regulatory inconsistencies, President Biden is reportedly considering issuing an executive order to direct federal agencies to study and develop recommendations on crypto, including its implications for national security and innovation. Consumer protection, research and development, and competition policy will also be key topics for consideration, and a national crypto czar might even be on the agenda.

Even if the executive order does not come to fruition, the president will still look to create a more robust and targeted approach to crypto regulation. 2022 is slated to be the most crucial year yet in solidifying crypto standards in the U.S., and banks stand to benefit significantly from regulatory clarity and innovation opportunities.

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This article, written by Michael Magrath, VP of Global Regulations and Standards at OneSpan, was first published on Bai.org on December 13th, 2021.

Michael Magrath is responsible for aligning OneSpan’s solution roadmap with standards and regulatory requirements globally. He is Co-Chair of the FIDO Alliance’s Government Deployment Working Group and is on the Board of Directors of the Electronic Signature and Records Association (ESRA).