- Analysts predict that the next target of enforcement actions could be crypto wallets and traditional financial institutions under the AML/KYC laws.
- According to the SEC, there is so much non-compliance in the space, forcing them to change their strategy.
The US Securities and Exchange Commission (SEC) has been actively cracking down on crypto-related firms and assets for breaching securities laws. Months ago, the Commission came under intense criticism for its law enforcement actions against the industry. However, SEC enforcement director Gurbir Grewal responded that they “have worked thoughtfully and incrementally in this space.” According to him, the lack of compliance in the space forced them to change their strategy.
SEC has mounted enforcement actions against industry heavyweights like Binance, Coinbase, Ripple Labs, etc. Some crypto forums are now filled with discussions of the next possible target.
According to experts, crypto wallets and certain digital asset transactions could be the next target. Based on hints received from the SEC, the Commodities and Futures Trading Commission (CFTC), and the Department of Justice (DOJ), it can be deduced that enforcement of digital assets could be done in two main ways.
Firstly, it is likely that the Securities Exchange Act of 1934 (“Exchange Act”) would be interpreted to include regulations of Bitcoin and Ethereum wallets as brokers.
Secondly, traditional institutions that are under the Anti-Money Laundering and Know Your Customer laws (AML/KYC) could likely face issues with compliance in the crypto ecosystem with regard to services such as mixers.
Why SEC Could Target Crypto Wallets and Traditional Financial Institutions
The idea of regulations of crypto wallets as brokers emanated from the SEC’s Wells Notice to Coinbase. Among the several allegations on the exchange included the use of Coinbase wallet as an unregistered broker.
According to them, this violated the Exchange Act. Coinbase also responded that the wallet is not more than just software. It is important to note that the Exchange Act defines a broker as “any person engaged in the business of effecting transactions in securities for the account of others.”
To Coinbase, the wallet is only used to interface with secondary market transactions that do not involve investment contracts. The response to the Wells Notice did not convince the Commission, hence, suing the exchange.
Traditional financial institutions engaged in crypto asset transactions could be the next target for enforcement actions with a focus on new tools and services. According to the experts, designing, implementing, and maintaining compliance systems to comply with AML/KYC laws would be a huge mountain to climb for these institutions.
Enforcing AML/KYC laws could put institutions in a tight corner where they would have to rely on information outside their reach. An example was made from the “proposed internal policy of flagging transactions” where over 10 percent of the value is traced back to proceeds of theft. This, certainly, needs the cooperation of third parties and could be a challenge to the institutions. The work of relying on third parties to generate inputs makes compliance costly in terms of both time and money.
Coinbase CEO Brian Armstrong recently called for a “clearer rulebook” to regulate the space.
Anything is on the table, including relocating or whatever is necessary.
A similar statement was made by Ripple’s Brad Garlinghouse, claiming that 80 percent of its hirings would be done outside the US.
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