Cryptocurrency — How Do Governments Around The World Regulate Crypto Assets?

Cryptocurrencies such as Bitcoin, Litecoin, and Monero are now firmly on the radar of the world’s financial regulators. Hardly surprising when we consider the sheer volume and value of cryptocurrency and the increasing number of people who own cryptocurrency or invest regularly in it. Ownership and trading in cryptocurrency are no longer the preserve of the sophisticated investor. In 2024, the investment website Investopedia indicated that the total value of cryptocurrency was roughly $2.6 trillion. That was about 0.56% of the value of all money.

At ParrisWhittaker we regularly encounter Bitcoin and other cryptocurrencies in our everyday work, for example:

• when handling the estate of someone who has left behind cryptocurrency and other digital assets in significant amounts
• dealing with divorce where crypto-assets are part of the matrimonial pot
• advising businesses on the regulation of crypto-assets and how they may attract regulatory scrutiny
• when a client is buying or selling residential or commercial property and cryptocurrency is being used to fund the transaction

ParrisWhittaker is a team of award-winning lawyers headquartered in the Bahamas with strategically located offices across the region and overseas. We advise on all aspects of commercial law, including regulatory matters.

We’re available on 1-242-352-6110 and 1-242-352-6112 or you can always contact us online.

The Crypto Conundrum

The evolution of cryptocurrency raises a fundamental question: Is it the kind of asset that should be regulated in the same way as other securities?

In the US, the Securities and Exchange Commission (SEC) has, in a limited way, recognized and approved the listing and trading of several Bitcoin exchange-traded product shares. But at the same time, the SEC describes crypto-assets as ‘speculative’ and ‘volatile,’ adding that they are sometimes used for illegal activities including ransomware and terrorist financing.

Since 2023, the SEC has launched more than 40 crypto-related enforcement actions, including the claim against Coinbase we discuss below.

On the opposite side of the coin (so to speak), it is significant that former President Trump has vowed to end what he sees as the persecution of cryptocurrency providers if he gets re-elected in November 2024.

So the pressure is on to find a way to regulate a complex asset class in a way that is proportionate – while adequately protecting consumers and businesses. With crypto-assets each day becoming more accessible to the public, an answer to the crypto conundrum – how to regulate crypto-assets – is becoming increasingly urgent.

SEC Takes On Coinbase

The SEC’s mission is to protect investors. One of the ways it fulfills this objective is to take action against those it believes are breaking securities laws.

In June 2023, the Commission started proceedings against the Coinbase platform for numerous violations of federal securities laws. It argued that Coinbase was effectively playing roles equivalent to a national securities exchange, a broker, and a clearing agency in relation to certain crypto-assets. The SEC argued these assets were ‘securities’ as understood under federal securities law.

In essence the SEC case was that Coinbase has the luxury or acting as a traditional securities intermediary without any of the responsibilities that other intermediaries have in terms of regulation and legal scrutiny.

Coinbase argued that it does not perform any kind of managerial role in terms of the investments available on its platform. Instead it carries out purely technical and administrative functions.

By way of background and for a sense of the scale of the Coinbase operation, from a launch in 2012, by 2024 it had become the largest crypto-asset trading platform in the US, with 108 million customers, trading billions of dollars’ worth of crypto assets daily.

In a very detailed judgment in what was a preliminary motion in the case, the court found the crypto transactions identified by the SEC in its claim were ‘investment contracts’ under the long established Hewey Test from 1946. That’s because the transactions involved

1. Investment of money
2. In a common enterprise
3. With profits derived solely from the efforts of others

As a result of this determination it followed that in principle the crypto currency transactions identified in the SEC’s claim came under the SEC’s remit. They could potentially be subject to federal securities laws and subject to regulation and enforcement by the SEC.

Comment

This decision is being viewed as a big deal in the world of cryptocurrency because of the effect it may have on the future worldwide regulation of crypto-assets.

The SEC may be a domestic US government agency but the approach it takes to regulating certain investments has a wide international impact. It seeks to promote regulatory and enforcement cooperation, encouraging the adoption of high regulatory standards worldwide.

The decision in Coinbase therefore has ramifications both for investors who wish to enter the US crypto market and for investors overseas who may be considering investing in securities regulated by the SEC. The decision we have discussed may be a preliminary ruling only in what will be long running litigation between Coinbase and the SEC. But it is being interpreted as a boost for the SEC as it seeks to assert authority over emerging forms of investment such as cryptocurrency.

Anyone investing in Bitcoin and other crypto-assets should be alert to the possibility that such instruments may face greater regulatory intervention in future. For advice on investment regulations that could apply to your personal or corporate investments please get in touch.

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