Hidden Aspects of the Role of Political-Economic Institutions in the United States in Cryptocurrency Market Regulation; From the Securities and Exchange Commission to the Commodity Futures Trading Commission
Cryptocurrency Market Regulation
For over a decade, the cryptocurrency market, led by Bitcoin, has been at the forefront of global economic news. It is a fascinating and volatile industry where one can make thousands of dollars in an instant and lose all wealth in the blink of an eye. What many in this market fail to notice is the behind-the-scenes world of political and financial institutions that weave the fabric of this industry.
In this article, we delve into the dark depths of U.S. policies in the cryptocurrency sphere to illuminate the role of active political-economic institutions.
As we explore this complex network and its impact on the industry, we aim to reveal the hidden facets of each institution in this dynamic landscape by dissecting the operational-regulatory layers of each entity. By the end of this article, I hope you will gain a new understanding of the complex interactions between U.S. political-economic institutions and the cryptocurrency market, preparing you better for navigating this exciting and ever-changing world.
Before beginning, please note two points: first, these institutions are not listed in any specific order. Second, given the significant role of the economy and federal government in cryptocurrency market changes, many institutions influence this market, which we will review in subsequent issues.
Securities and Exchange Commission (SEC)
The U.S. Securities and Exchange Commission, or simply the SEC, is one of the most important American institutions that, whether intentionally or not, has a significant impact on the so-called decentralized cryptocurrency market.
The SEC can be considered one of the most crucial regulatory-supervisory bodies in the United States, established five years after the stock market crash of 1929 as a government response to this financial disorder. The SEC’s mission includes protecting investors, facilitating the formation of market liquidity, and, most importantly, maintaining a fair and orderly financial market structure.
Over the past 30 years, the SEC has taken significant steps to regulate and enforce laws in financial markets, with several key interventions standing out. In 2000, the SEC introduced the “Regulation Fair Disclosure” (Reg FD) which required public companies to share material information simultaneously with all investors. The SEC has also carried out notable enforcement actions against individuals and companies in the U.S. for fraud and market violations.
The role of the American economy and the market crash of 2008 cannot be overlooked in the formation of Bitcoin and other cryptocurrencies. This crisis, which had deep roots in the struggling U.S. economy and was highlighted by the collapse of the housing market, saw a prominent role played by the SEC.
In response to this crisis, the SEC implemented important preventive laws and regulations to strengthen its regulatory framework over financial markets and prevent future similar crises. One of the SEC’s key initiatives was the creation of the “Office of Credit Ratings,” tasked with regulating credit rating agencies and addressing conflicts of interest in the rating process.
Overall, the SEC took measures in response to the 2008 financial crisis to restore trust in financial markets, promote transparency, and increase accountability, although some critics believe that the SEC could have done more to prevent the crisis in the first place.
SEC Declares War on Cryptocurrencies!
With the increasing prominence of cryptocurrencies in recent years and their impact on the U.S. financial industries, the U.S. Securities and Exchange Commission (SEC) has played a significant role in regulating and legislating this market. In 2017, with the surge in Initial Coin Offerings (ICOs), the SEC concluded that many of the tokens issued by Decentralized Autonomous Organizations (DAOs) resembled securities but did not comply with relevant regulations. Since 2017, the SEC has clearly defined its stance on this market.
Since 2017, the SEC has taken numerous enforcement actions against cryptocurrency companies that have violated securities laws during their ICOs. For example, in July 2017, the SEC released a report on a $150 million ICO conducted by DAO. In this report, the tokens sold in the ICO were deemed securities, and due to the failure to comply with SEC regulations, the entire offering was considered a complete legal violation.
This decision had significant consequences for the cryptocurrency market, as it demonstrated the SEC’s active role in regulating ICOs and the extensive application of securities laws in the cryptocurrency market. The SEC’s intervention has led many companies to either avoid ICOs altogether or at least structure their offerings in compliance with securities laws.
The SEC’s actions go beyond just enforcement. A few years ago, the SEC issued guidelines on the application of securities laws to the cryptocurrency market—a framework that, contrary to the libertarian nature of cryptocurrencies, imposes significant restrictions on this market. In 2019, a team from the SEC worked intensively on a framework of requirements. These requirements were communicated to industry participants to analyze whether a digital asset qualifies as a security.
This framework considers factors such as buyers’ expectations, the development team’s actions to create a dynamic and deep market, and the degree of decentralization of the network on which the asset is created and traded. This set of regulations is crucial for market participants developing and issuing digital assets, as it provides a clear framework for understanding how securities laws apply to their offerings. It also helps business owners, investors, and other market participants understand the regulatory landscape of cryptocurrencies.
Howey Test: SEC’s Touchstone
The U.S. Securities and Exchange Commission uses an old method known as the Howey Test to classify an asset or specific offering within a project as a security. This test was established in 1946 during the SEC’s lawsuit against W.J. Howey Co., based on the Securities Act of 1933 and the Securities Exchange Act of 1934, under a U.S. Supreme Court directive. The Howey Test can be applied to any contract, scheme, or transaction and is not limited to securities characteristics.
The Howey Test is based on four fundamental principles to prove an investment contract:
Money or Valuable Assets are Involved:
The investment must be made through money or other valuable assets; this includes both fiat currencies and cryptocurrencies.
Investment in a Common Enterprise:
The investment must be in a common enterprise where the financial success of all investors is interconnected, which can be proven through a pooling of resources or reliance on a third party to manage investments.
Expectation of Profit:
Investors must expect to earn income from their investments. This can be in the form of dividends, participation in company revenue, or an increase in the value of their investment over time. The key aspect of the expectation of profit is that investors anticipate returns and rely on the efforts of others to achieve them.
Efforts of a Third Party or Parties to Generate Expected Profit:
Any profit that the investor expects from this contract must come from the efforts of a third party. In simpler terms, investors’ returns depend on the efforts and success of the project’s managers and entrepreneurs.
If a transaction contains all these elements, it is likely considered an investment contract and, therefore, falls under the regulations of federal securities laws in the U.S. It is important to note that the application of the Howey Test depends on the specific facts and circumstances of each case, and legal interpretations for each asset or project may vary.
The impact of the Howey Test on the cryptocurrency market cannot be ignored; a traditional framework created nearly a century ago for its time’s needs is now being scrutinized for its application to a radically different structure. Whether this traditional framework can provide a suitable structure for cryptocurrencies and determine their legitimacy remains a subject of debate.
If the SEC continues to insist on using this test for the cryptocurrency market, significant consequences for businesses and investors in this industry should be anticipated. Non-compliance with federal securities laws can lead to financial penalties and legal actions against individuals or companies, potentially undermining public trust in this market.
“We are not going to change traditional securities laws and definitions that have been effective for a long time. We have long relied on these laws, which have created a $19 trillion market in the United States. According to these laws, all cryptocurrency offerings can be considered securities.” -Jay Clayton, Chairman of the U.S. Securities and Exchange Commission in 2018
It should be noted that cryptocurrencies not classified as securities by this test are usually considered “Utility Tokens,” which provide investors access to specific products or services. While utility tokens are generally not classified as securities, the regulatory body believes that this category of cryptocurrencies still falls under this framework.
Overall, classifying cryptocurrencies like Bitcoin is very challenging, but cryptocurrencies such as Ripple, which the SEC has publicly stated promise returns to users, fall under the category of investment contracts.
In most cases, whether a cryptocurrency can be considered an investment contract depends on whether there is an “expectation of profit derived from the efforts of others” inherent in the project.
A Major Hurdle for Institutional Transactions
Another area the SEC monitors in the cryptocurrency market is the creation and trading of “Exchange-Traded Funds” (ETFs) on cryptocurrency exchanges. ETFs are investment tools that allow investors to buy and sell a collection of assets, which can include multiple cryptocurrencies in a single fund.
To date, the SEC has declared many of these ETFs illegal and has not allowed their trading. Since 2018, SEC spokespeople have expressed concerns about the lack of transparency in the financial statements of ETF providers and, most importantly, market manipulation by these entities.
According to Forbes, as of early March 2023, only six Bitcoin ETFs have been approved by the SEC, with 25 others waiting for approval.
Typically, ETFs attract many institutional investors due to their specific nature, which, thanks to the SEC, might keep them away from the cryptocurrency market. The entry of such investors into the market would have significant implications: it would bring liquidity to the market and mature it. Whether the SEC’s deterrent actions are aimed at protecting consumers or preventing liquidity from leaving traditional markets and avoiding events like those in 2008 remains an open question.
The Voice of Capitalism
For years, the United States has played a pivotal role as one of the largest and most influential economies in the world, and thus even minor economic and political changes in the country have a significant impact on the global economy. The U.S. economy is characterized by its size, diversity, and technological innovations, making it a major driver of global economic growth and setting the tone for the world economy. As seen in the wake of the 2008 economic crisis, a wave of recession and bewilderment spread across the globe.
Beyond the SEC’s regulatory actions, decisions made by this body are crucial for the cryptocurrency market as they reflect the political-economic direction of the United States. Even small political changes can have substantial effects on the cryptocurrency industry. Given the nascent and immature nature of this market, sudden changes in the decisions of this regulatory-executive body could challenge the entire market.
After Joe Biden was elected as President of the United States, Gary Gensler was appointed as the Chairman of the SEC. This appointment had a positive psychological impact on the market in a short period.
“We don’t need more digital currencies… We already have a digital currency called the U.S. dollar.” -Gary Gensler, Chairman of the U.S. Securities and Exchange Commission
“The rules for this industry are clear and must be followed. If you are an exchange platform, broker, or dealer, you must be registered with us, comply with our regulations, address conflicts of interest, and share important information with us. For 90 years, these rules have helped protect investors like you.” -Gary Gensler, Chairman of the U.S. Securities and Exchange Commission
Gary Gensler, known as a supporter of blockchain technology and Bitcoin, has, alongside his inherent rigor, convinced many market participants that the SEC will play a more active role in regulating the cryptocurrency market, which previously operated outside traditional regulatory frameworks. Since his appointment, Gensler has repeatedly stated that cryptocurrencies and digital assets should be regulated just like other financial markets. Recently, he has claimed that the cryptocurrency market suffers from brokers’ non-compliance with regulations and that there is no lack of regulation in the market.
Following several disasters in the cryptocurrency market, Gensler has recently faced pressure from the media and the U.S. judicial system, leading him to oddly shift his stance on Bitcoin and the cryptocurrency industry.
If we narrow our focus, we find that even political changes within the SEC have had significant impacts on the cryptocurrency market. Gensler’s appointment and his subsequent actions as SEC Chairman have introduced ambiguity and some volatility into the market. Some investors and stakeholders view increased regulation as a threat to innovation and growth in the industry, while others see enhanced oversight as a major deterrent against fraud and scams, potentially leading to new users and market growth. However, it should be noted that Gensler has also somewhat embarrassed both his supporters and opponents with his less-than-stellar performance. Since he took office, two of the largest disasters in cryptocurrency history have occurred. Are you, like some members of Congress, pointing a finger of blame at him? Given the Republican majority in the Senate, we might anticipate major changes at the SEC and, consequently, more stringent market regulation, which could lead to stagnation or even another market crash.
Overall, the impact of changes in senior SEC leadership on the market is politically complex and multifaceted. While increased regulation may lead to uncertainty and short-term volatility, it can also foster long-term trust and stability in the market, ultimately benefiting investors and contributing to a deeper and more mature market.
A Global Model
As previously mentioned, the U.S. economy and its regulatory framework have global repercussions, and this influence is not confined within borders. Allies and followers of this economic giant, which many view as declining, also look to the U.S. for regulatory and economic guidance. Therefore, the decisions and actions of the SEC are of high importance; they could lead to ripple effects in regulatory policies in other jurisdictions, following the butterfly effect theory. Many countries view the U.S. as a model for securities regulation, and the SEC’s decisions regarding cryptocurrencies can significantly impact how other countries approach the regulation of these assets.
The Impact of the SEC in Reality
We’ve discussed the various impacts of the U.S. Securities and Exchange Commission (SEC) on the cryptocurrency market from different angles, but it’s worth taking a closer look at a high-profile case opened by this regulatory body.
In December 2020, the SEC filed a complaint against Ripple Labs, the parent company and creator of the Ripple (XRP) cryptocurrency. The SEC claimed that Ripple had conducted an initial coin offering (ICO) for XRP tokens, essentially implementing a form of securities sale that was not legally registered with the SEC. According to the SEC, Ripple’s token is a security and subject to the same registration requirements as other securities.
The SEC’s complaint against Ripple included several key allegations. The first was that Ripple had raised over $1.3 billion through the sale of its tokens to investors since 2013 without registering with the SEC, thus violating U.S. securities laws.
Furthermore, SEC lawyers admitted that Brad Garlinghouse and Chris Larsen, the founders of Ripple, had personally profited from the sale of these tokens, and Ripple Labs had only used a portion of the revenue to cover its operational expenses.
Ultimately, Ripple was accused of selling XRP as an investment opportunity rather than as a utility token. The SEC alleged that Ripple had made false and misleading statements regarding the use cases and prospects of its cryptocurrency to drive up the token’s price and increase demand among investors.
The SEC’s lawsuit had a significant impact on Ripple and, more broadly, on the cryptocurrency market. Initially, the price of XRP dropped significantly following the public disclosure of the SEC’s complaint in December 2020. At the time of the announcement, XRP was valued around $0.60, which quickly plummeted to $0.20. This lawsuit created regulatory uncertainty for Ripple and, in turn, raised questions among investors: Did Ripple violate U.S. securities laws by selling this cryptocurrency? This uncertainty made it difficult for Ripple to attract new investors or partnerships and even led some exchanges to delist XRP.
This case is still ongoing in U.S. courts, and its outcome could have significant implications for the cryptocurrency industry. Understanding why the result of this case is so important for the entire industry is crucial. If the court rules in favor of the SEC and determines that XRP is a security, it could have widespread consequences for other cryptocurrencies that are currently traded without registration as securities, potentially making the SEC the most significant regulator in the market. Conversely, if Ripple and its executives win the case, it could undermine the clarity and authority of the SEC in future cases.
Many experts believe that the SEC’s interventions and regulations violate the spirit of this market—a market that was created to reduce governmental control and centralization of money. If we disregard the SEC’s political objectives aimed at preserving liquidity in traditional markets, its exercise of power could prevent incidents like the Terra-Luna disaster and the escape of individuals like Sam Bankman-Fried, CEO of FTX.
Commodity Futures Trading Commission (CFTC)
For over 150 years, futures contracts for agricultural commodities have been in use, and since the 1920s, they have been traded under federal oversight. In the 1970s, trading in futures contracts experienced significant growth, extending beyond physical commodities to include other aspects of the U.S. economy such as foreign currencies, government and foreign securities, and domestic and international stock indices.
Recognizing the need for regulation of futures trading, which had largely become unregulated, the U.S. Congress established the Commodity Futures Trading Commission (CFTC) in 1974. This independent commission was created to oversee futures markets and provide regulatory authority, replacing the Agricultural Commodities Exchange Administration with a body that had much broader powers. The establishment of the CFTC brought significant changes to the Commodity Exchange Act (CEA) of 1936, expanding its jurisdiction significantly.
In 2000, at Congress’s direction, the “Commodity Futures Modernization Act” was enacted. This legislation required the SEC and the CFTC to establish a joint regulatory system for single-stock futures. This development further expanded the CFTC’s authority.
Futures Market: A Key Player in the Cryptocurrency Market
Over the years, the CFTC has broadened its jurisdiction to include various financial instruments, such as swaps and certain cryptocurrency transactions. The CFTC has played a prominent role in enforcing anti-manipulation and fraud laws in the market.
The importance of this role becomes evident when considering two key points. First, all derivative market transactions in the U.S., including futures and options on commodities, fall under this agency’s oversight. Notably, as of the time of writing this article, the 24-hour trading volume in the cryptocurrency spot market is approximately $44.7 billion, while futures trading volume on the Binance exchange alone is about $48 billion. Excessive restriction and oversight of these transactions could have two potential effects: either it may lead to a slowdown in the market due to reduced trading volumes, or it might eliminate issues such as market manipulation by whales through stringent oversight.
The CFTC has played a crucial role in regulating the cryptocurrency market in the U.S. and globally. Its first significant action in the cryptocurrency market dates back to 2014 when it classified Bitcoin and other cryptocurrencies as “commodities” and brought these digital assets under its jurisdiction. This decision altered the regulatory definitions in the market, making all cryptocurrency trading platforms in the U.S. subject to regulations and requirements similar to other commodity trading platforms (such as NYMEX and CME Group).
Given the frequent manipulation and fraud in futures trading, the presence of this regulatory body can be key to protecting consumer investments from potential issues. Due to low oversight and market manipulation by major cryptocurrency players, in 2018, the CFTC established a “Virtual Currencies Task Force” to investigate and prosecute fraudulent activities. This task force has since initiated numerous cases against individuals and companies involved in criminal activities in the cryptocurrency sector.
On September 29, 2021, the CFTC announced that it had filed 14 complaints against various cryptocurrency trading platforms. This day is noted as one of the busiest regulatory days in the U.S. cryptocurrency world, with only 19 enforcement actions related to this industry occurring between 2015 and 2020. Furthermore, in 2022, the CFTC had over 80 enforcement cases, 18 of which were related to the cryptocurrency market.
No Exchange is Safe
The Commodity Futures Trading Commission (CFTC) has taken several fundamental actions in the cryptocurrency market, from permitting futures trading on the Chicago exchanges to filing complaints and imposing penalties on cryptocurrency exchanges.
In October 2020, the CFTC filed a complaint against the exchange BitMEX and its owners. The complaint alleged that BitMEX failed to comply with leveraged trading regulations and was not registered with the CFTC. Additionally, the CFTC accused the exchange of violating anti-money laundering (AML) regulations. As a result of this complaint, BitMEX was fined $100 million and required to implement measures to comply with the regulator’s demands.
One of the most positive actions by the CFTC in the cryptocurrency market has been the introduction of several futures contracts on major U.S. derivatives markets. The most significant of these contracts were launched on the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE) in 2017. These contracts have had a significant impact on the cryptocurrency market, particularly Bitcoin.
The Chicago Mercantile Exchange, as the largest derivatives market in the U.S., significantly influences Bitcoin prices, with many experts incorporating its opening and closing times into their analyses. Generally, the introduction of any product on the Chicago Mercantile Exchange helps stabilize prices and reduce risk in other markets for that product.
From Federal Overseer to Disclaiming Responsibility
Since Bloomberg labeled the CFTC as “The Federal Overseer of Digital Currencies” in 2018, there have been significant political changes in the United States. The impacts of both the SEC and the CFTC on the U.S. economy are undeniable, to the extent that Dawn DeBerry Stump, a Republican member of the CFTC board, referred to the two agencies as the “regulatory siblings” of the U.S. economy.
“We can have a peaceful approach to the cryptocurrency market so that the United States can lead in this field. America is lagging behind other countries. Awakening and leading in this industry will benefit the United States.” — Rastin Behnam, Chairman of the CFTC
Given the previous explanations, it can be inferred that regulation and oversight of the cryptocurrency market by the CFTC lead to legitimizing the market, increasing institutional investor access, deepening the market, and boosting trading volumes, which in turn brings stability and reduces volatility.
Federal Reserve System
The “Federal Reserve System,” commonly known as the “Federal Reserve,” is the central banking system of the United States. Established in 1913 by Congress, the Federal Reserve was created to ensure a stable and flexible financial system in the country. Its functions can briefly be summarized as formulating monetary policy, supervising and regulating banks and financial institutions, and providing payment services to the U.S. government and other financial institutions.
The history of the Federal Reserve dates back to the late 19th century when bank failures and financial instability were common. In response to these crises, Congress passed the Federal Reserve Act in 1913, establishing the Federal Reserve as a quasi-governmental entity. In addition to the functions mentioned earlier, the Federal Reserve acts as a “lender of last resort” to American banks, providing necessary liquidity during economic stresses.
Over the years, the Federal Reserve has played a crucial role in the U.S. economy. During the Great Depression of the 1930s, it implemented an expansionary monetary policy to stimulate the economy and prevent deflation. In the 1940s, it began using open market operations to control the money supply, a practice that continues today. In the 1970s, facing high inflation after the Vietnam War, the Federal Reserve adjusted its monetary policies to control prices. To this day, the Federal Reserve’s monetary policy adjustments have significantly contributed to stabilizing and growing the U.S. economy.
As previously mentioned regarding other institutions, it is unnecessary to reiterate the Federal Reserve’s impact on the global economy, but it is undoubtedly one of the most influential entities in the U.S. economy. Decisions made by the Federal Reserve regarding interest rates, monetary policies, and regulatory perspectives can have significant effects on the economy, financial markets, and even the global financial system. The main goals of this quasi-governmental entity are to maximize employment, stabilize prices, and maintain moderate long-term interest rates.
Interest Rates: The Sorrow and Hope of Investors
“Interest rate” is the cost of borrowing money or the amount charged by the lender to the borrower to receive a percentage above the principal amount at repayment. In simpler terms, if interest rates are high, you will need to pay more for your loan.
In the United States, the Federal Reserve is responsible for setting interest rates through control of the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight. By adjusting the federal funds rate, the Federal Reserve can influence borrowing costs and, consequently, the entire economy. The impact of interest rates on the U.S. economy is so significant that news of changes can lead to immediate volatility in many financial markets.
The relationship between interest rates and inflation or economic recession is somewhat complex and based on several factors, and it cannot be considered linear. However, to simplify, when interest rates decrease, consumers and businesses are more likely to borrow and use that money. This can lead to increased economic activity, job creation, higher liquidity, and consequently, rising inflation. Conversely, high interest rates can deter borrowing and money circulation, potentially leading to economic recession. It is important to note that inflation or recession may occur with a delay relative to changes in interest rates and do not have immediate effects on the market.
Interest rates impact the global economy and, consequently, the cryptocurrency market, because the U.S. dollar is considered the primary global reserve currency. Changes in U.S. interest rates, by affecting the exchange rate of the U.S. dollar, have significant repercussions on the economies of other countries. For example, an increase in interest rates by the Federal Reserve strengthens the global dollar index, which can reduce economic activities in dollar-dependent countries.
But what is the effect of interest rates on the cryptocurrency market? As mentioned earlier, interest rates affect the entire U.S. economy and many financial markets. Currently, a significant portion of transactions in this market is conducted with stablecoins directly linked to the U.S. dollar, so changes in the dollar index directly impact the performance of these assets.
Higher interest rates equate to reduced purchasing power for speculators in the cryptocurrency market, who form a large portion of transactions. Additionally, higher interest rates can increase the opportunity cost of investing in this market. If alternative investments like stocks, bonds, or savings accounts offer higher returns due to increased interest rates, investors may choose to allocate their money to these markets instead of cryptocurrencies.
On the other hand, if traditional investment opportunities such as savings accounts or bonds offer lower returns due to low interest rates compared to the cryptocurrency market, institutional investors might find it advantageous to diversify their portfolios and invest in cryptocurrencies, leading to increased liquidity and potential market growth.
One factor that should not be overlooked, especially at the time of interest rate announcements, is its impact on investor sentiment and risk tolerance, which has been evident in recent years. For instance, in 2022, Bitcoin’s value experienced sudden changes five times following interest rate announcements, with each increase being accompanied by a decrease in the cryptocurrency market’s value.
CBDC: The Central Bank Solution of the United States
In recent years, the Federal Reserve has not directly engaged in the cryptocurrency battlefield and has limited its activities to issuing warnings to investors. However, the Federal Reserve has shown interest in the development of digital currencies and is currently exploring the potential benefits and drawbacks of creating “Central Bank Digital Currencies“ (CBDCs).
“Cryptocurrencies are highly volatile and cannot be considered a useful store of value because they lack backing. We are currently exploring the creation of a CBDC in the United States, but this asset should enter the market as a complement rather than a replacement for cash and current forms of digital dollars.” — Jerome Powell, Chairman of the Federal Reserve
The decisions made by the U.S. Federal Reserve regarding central bank digital currencies could have significant impacts on the cryptocurrency market and subsequently on newer financial instruments. Imagine if a U.S. central bank CBDC were to enter the field as a competitor to Bitcoin. Could we witness traditional governments dominating this market? Currently, there is no precise answer to this question, and we must wait to see how the market responds to such assets.
United States Department of the Treasury
The “United States Department of the Treasury,” unlike the previous institutions, is a cabinet-level department responsible for managing the federal government’s finances and monetary policies.
The U.S. Department of the Treasury dates back to 1789 when it was first established by Congress under the leadership of Alexander Hamilton, one of the Founding Fathers of the United States. The primary goal of creating this department was to manage the finances of the newly established government and establish a tax system to pay off debts incurred from the American Revolutionary War.
In its early years, the Department of the Treasury had numerous responsibilities, including managing national finances, maintaining the monetary system, and regulating the banking industry. Over time, the department’s mission expanded to include overseeing tax collection, enforcing economic sanctions (such as those frequently observed in Iran), and managing federal government debt.
Throughout U.S. economic history, the crucial role of the Department of the Treasury in the development and stability of the U.S. economy and in creating institutions such as the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation (FDIC) cannot be overlooked.
Today, the Department of the Treasury is one of the most effective entities in managing the U.S. economy and financial system. Its sub-agencies, including the Internal Revenue Service (IRS), the Office of the Comptroller of the Currency (OCC), and the Financial Crimes Enforcement Network (FinCEN), carry out economic policies, manage federal finances, enforce economic sanctions, and regulate financial institutions.
The Puppet Master of the Federal Government in the U.S. Economy
As previously mentioned, this department plays a vital role in the U.S. economy from several angles, which undeniably affects the cryptocurrency market as well.
Many independent entities influence the U.S. financial markets and policies, but the Department of the Treasury’s role is crucial due to its direct involvement in these decisions. The department’s influence is significant due to its direct role in tax collection, issuing government debt, and adjusting federal financial policies based on national expenditures. This influence has a direct impact on economic growth, inflation, and employment, which in turn affects the cryptocurrency market.
We have previously discussed the impact of financial policies on the cryptocurrency market, but tax regulations overseen by this department can potentially lead the market into a heavy recession.
Government Oversight and Limitations
Regulating financial policies and setting federal oversight laws are also the responsibilities of the United States Department of the Treasury. This includes overseeing and regulating banks, credit unions, and financial institutions to prevent issues such as money laundering and terrorist financing while protecting consumer rights.
In this context, Janet Yellen, U.S. Secretary of the Treasury, recently stated during a press conference at the annual meetings of the International Monetary Fund (IMF) and World Bank in Washington that the cryptocurrency market suffers from a lack of regulation. She suggested that direct government intervention in legislating this market could prevent disasters similar to the one that occurred with the FTX exchange.
“Recent problems with a major cryptocurrency exchange and the devastating impact on cryptocurrency investors demonstrate the need for more effective regulation of the cryptocurrency industry.” — Janet Yellen, U.S. Secretary of the Treasury
Some experts have noted that any new regulations or executive actions by the Treasury Department might impose compliance costs on businesses or reduce investor confidence, potentially casting the market further into the shadow of the U.S. economy.
Regulations that are either ambiguous, incomplete (such as Yellen’s statements), or overly stringent could undermine investor trust in the market, leading to reduced supply and demand, and ultimately a market collapse.
Sanctions: An American Tool
In addition to the aforementioned roles, the Department of the Treasury plays a key role in managing U.S. relations with other countries on economic and financial matters. This includes participation in international organizations like the IMF and World Bank, negotiating trade agreements, and managing international economic sanctions. The impact of sanctions on the cryptocurrency market is particularly significant.
Compared to the previous three entities, the Treasury Department has a higher influence, being able to impose economic sanctions on individuals, companies, or even countries. These sanctions could include freezing assets or prohibiting financial transactions with specified individuals or entities. Imagine if the Treasury Department were to impose sanctions on a major player in the cryptocurrency market; what impact would this have on the market?
Stablecoins: A Competitor to the U.S. Dollar
In December 2020, the U.S. Department of the Treasury issued a statement on stablecoins, expressing concern about their potential impact on financial stability and the strength of the dollar. The department noted that stablecoins have grown significantly in market value and importance in transactions, making them an undeniable presence in the market. The result of these concerns was extensive regulation and restriction of stablecoins to ensure they do not threaten the stability of the U.S. dollar.
The statement requested that stablecoin issuers and service providers comply with all applicable laws and regulations, including anti-money laundering and counter-terrorism financing requirements.
In November 2021, the Treasury Department further clarified its position by releasing a 23-page report on stablecoins, detailing their background, risks, and recommendations for addressing these risks, thus solidifying its stance against the cryptocurrency market.
Department officials believe that stablecoins not only destabilize the financial system but also facilitate money laundering and terrorist financing, posing significant risks to consumers and investors. Experts have responded to these concerns by pointing out the lack of physical backing for stablecoins.
Additionally, the Treasury has proposed new regulations requiring banks and financial institutions to verify the identities of customers using stablecoins or other cryptocurrencies. This could undermine the essence of the cryptocurrency market and infringe on user privacy, potentially driving many investors away. However, it is important to note that while these interventions may go against the nature of the cryptocurrency market, they could ultimately increase public trust and attract more small-scale investment into the market.
Overall, the Treasury Department’s statements and proposed regulations regarding stablecoins and cryptocurrencies reflect a growing concern among regulators about the potential risks and challenges associated with these assets. While stablecoins attract many investors due to their efficiency and speed in transactions compared to the dollar, their rapid growth and potential impact on financial stability and the strength of the U.S. dollar have made closer scrutiny and regulation a crucial priority for the government.
Direct Executive Actions in the Market
The U.S. Department of the Treasury has not directly intervened in the operational aspects of the cryptocurrency market; rather, actions have mostly been carried out by agencies under this governmental entity. For example, in 2013, the Financial Crimes Enforcement Network (FinCEN) mandated the registration of financial businesses dealing with cryptocurrencies.
Additionally, in December 2020, the Treasury Department proposed a new law requiring cryptocurrency exchanges and other Virtual Asset Service Providers (VASPs) to collect and report identification information for users conducting transactions over $3,000. This proposal faced significant opposition from cryptocurrency industry participants, as it was seen to fundamentally undermine user privacy and ultimately stifle innovation.
Many experts and critics of the U.S. government view the Treasury Department’s approach as an effort to eliminate competitors to the U.S. dollar rather than protecting consumer investments and rights. Given their history in this market, this criticism can be considered somewhat valid.
Summary
The relationship between U.S. entities and the cryptocurrency market is complex and multifaceted, but the significant role of the government in this market is undeniable. The Securities and Exchange Commission (SEC), the Federal Reserve, the Commodity Futures Trading Commission (CFTC), the Treasury Department, and its sub-agencies play crucial roles in shaping the cryptocurrency market through their policies and actions. These effects are evident in market fluctuations, liquidity, and overall growth. In the next issue, we will explore other entities that impact this emerging industry.
