Regulation: what, how, who


Regulation today might still be somewhat unclear and uncertain for crypto, especially in the United States. But there has been a huge leap towards clarification of what is about to come, and it is pretty much positive from the perspective of making this market more fair. Good news is that nobody is going to come and reject and make crypto illegal in the United States. So we’re in for a slow regulatory adoption, righting all the wrongs.


What to know

In order to understand the basics of regulation one has to know simple principles of rulemaking in the United States.


Rulemaking bodies:

  • Law is passed in Congress. It is initiated as a bill, endorsed by Congressmen and is usually debated in committees, witnesses are being heard (preferably bipartisan market experts) and then eventually floor votes to pass it and make it the law of Land (or not). We’re talking federal statutes here, what Congress passes is true in Wisconsin and New York.

    • States can pass separate laws and regulations separately, they can differ from state to state and they can be even more stringent than what Congress said.

  • Then there are federal agencies, they have discretion to make regulations and issue guidances.

  • Finally there are courts. Both state and federal courts (depending who you argue against) can be appealed up to writ of certiorari to Supreme Court. Court has a final say on what the law is, if you challenge it.

Rulemaking stages:


Note that when lawmakers are dealing with a new phenomena, it takes them time to understand it, see how general public behaves in new conditions and then act on it. This usually results in following succession of events in the rulemaking:


STAGE 1 -  Guidance

  • State courts issue rulings, because new tech (or whatever it is) brings non-federal disputes early in, States are then the first in bringing up their opinions over these issues. These disputes at the beginning lack federal oversight, so the state courts are usually more flexible to hear them.

  • Almost at the same time (depending on the acuteness of the issue) the Federal agencies issue guidances. This comes in many awkward shapes, such as press releases, speeches, deliberations. They are not per se regulations or laws, but they makes things clear to some. Note that if the new phenomena puts under risk some of the very vital issues: national security, agency will not limit itself with guidance.

STAGE 2 - Lawmaking

  • Congress starts to hear on the issue from experts, companies and consumers involved. Congressmen listen and ask questions. This does not happen once, this is a process. Both chambers (Senate and House) can hold these hearings. It provides Congressmen with information to be knowledgeable in further lawmaking or initiating bills.

  • Federal agencies start to regulate the market. This is where guidances become regulations. After observing the trend, agency will solicit everyone to learn about its vision for regulation and will invite anyone to comment on it. After the review period is over, agency will deliberate and adopt these enforceable regulations. This can happen at the same time as hearings are happening, or before but are definitely done after Congress passes a law.

STAGE 3 - Judicial Review

  • Final stage is court. This is not exactly right though, because a dispute can start at any stage and judge can opine on the issue at any stage. But this tends to be the last stage because this is the arbiter of last resort to any issue. Law passed by congress, regulation adopted by federal agency or prior federal court decision, it all can be challenged by judicial review.

Above-mentioned distills the rulemaking process and clarifies the framework within which one needs to function in new circumstances. It sets standards, rules and enforcement. Once past the 2nd stage, it doesn’t mean that Congress will not pass or change law or that Circuit Judge will rule otherwise, rulemaking will keep adapting to how market and its participants behave.

Objection 1: If issue considers a criminal offense or some considerable harm, whatever the technology is, the full enforcement will happen fairly soon.

Objection 2: You do not invent something that needs new laws,  you invent something that needs to be put within an efficient and working framework. (A duck test)

Currently we have entered the stage 2. This is why the main topic you are going to hear is going to be enforcement, solicitation to comment on agency rules, or some working groups talking about various bills in Congress. Meanwhile you will still hear State courts or Circuit Judges ruling on multiple issues affecting all things crypto.


How to think

Pardon this non-crypto banter, but because the regulatory topic is very broad and usually doesn’t follow a very specific thread, you’re better off by understanding where the market stands in terms of regulation. If you understand how the rulemaking works, what does its stages more or less look alike, then you’re going to better understand various signals. Knowing the difference between State and Federal court ruling, between guidance and regulation, between a bill and statute is required to understand the consequences of each. You will then better anticipate what is about to follow.

You need not to think in terms of  “what is Hester going to say?”, or “How DJ Khaled tweeting about ICO will affect regulations?”. This is not a task for one person, especially for someone who’s main duty includes other things than regulation. You will have answers to any of these questions if you think in terms of stages. Khaled will face enforcement, Paris Hilton too (how they settle is their business), Hester will not be giving cypherpunkish speeches anymore but will be deliberating on what SEC regulation and enforcement should be and who to serve the subpoenas. You will also understand that Congress hearings will have from now on a more specific aim and will not just listen to Nouriel’s banter. Thinking this way gives you consequential answers. To be more precise in your answers you then need to follow the people and have a grasp about ongoing issues.

Shortcut: if you understand that from rulemaker’s perspective nothing is new and that everything exotic just needs to be put in a working framework, then you need to understand how rulemaker will perceive, classify the new phenomena. If you know how, then look no further than how current law is applied to such classification, that is your enforcement during normal course of stage 2. If it were stage 1, then classification would be implied by rulemaker and manifest itself as a guidance. This observation period is used to understand how the future framework might diverge in enforcement compared to the existing applicable law for enforcement.

This is what is going to happen at this stage (spoiler alert: everything):

  1. Crack down on exchanges. Ones that are not registered and that offer potential securities to the U.S. investors. Also the exchanges that are susceptible to manipulation.

  2. USDT is under DOJ investigation, a ruling will make things around it clear.

  3. Ethereum is not a security (although it was during its launch), means more enforcement and crack down is coming from SEC on similar fundraising techniques.

  4. Much of the updates to make crypto regulation clear will come from approval of institutional actors such as Bakkt or Coinbase getting broker-dealer license, or any other big names starting to offer exposure to crypto products.

  5. Fiat based stablecoins will mean  more stability and are gateways for regulated exchanges to the crypto universe.

  6. Custody will still be the hard thing to tackle.

  7. Congress will make up its mind on how it views the Crypto (after January 2019)

  8. Bonus:

    1. Keep an eye on courts

    2. Keep an eye on investigations


Who to read

It is hard, very hard to follow everything verbal that relates to crypto regulation. It is even harder and costlier to build up instant sources of knowing what is about to come. Sources include speeches of agencies’ chairpersons, investigations, subpoenas served (information delivered by news outlets usually), court rulings, Congress hearings or bills, general counsels of big crypto companies and of course tweeting lawyers giving out opinions. This is vast and scattered information, the key is to know the right sources of information. Once you have the information, you get the feeling over it depending on where we stand in regulatory stage.


People to follow:

  1. Marco Santori - General counsel of Blockchain. Knowledgeable, not a nocoiner, always provides a good input into any breaking news stories over regulatory things.

  2. Peter Van Valkenburgh -  Lawyer in the Coincenter, a research house that lobbies good crypto regulations in Congress. Mostly reliable source of information.

  3. Jake Chervinsky - Lawyer with a good grasp over regulatory topics, good threads over ETF can be found over there.

  4. Stephen Palley - Lawyer with cynical but very legal opinions on what is going on. Tweets too much.

  5. Recap of lawsuits blog - In case you want to follow case law in crypto. Recap of what happened recently in court that involved crypto

  6. Katherine Wu -  Lawyer at Messari, good threads over regulations, very opinionated.

  7. Hester Peirce - SEC Commissioner, pro-crypto (read her speeches when you notice)

  8. Chris Giancarlo - CFTC Chairman, crypto-dad

  9. Chris Brummer - Georgetown legal scholar, provides legal input in crypto

  10. Angela Walch - Newly baked crypto lawyer. Radical no coiner

  11. Preston Byrne - Cynical crypto lawyer, in fact very knowledgeable in technology itself

  12. Andrew Glidden - Not a lawyer, just a little bit of fundamentalist in crypto law. If you want to have crypto law fun read his tweets

Agencies to monitor:

  1. Securities and Exchange Commision - SEC
    Commission that oversees exchanges (equities, options), broker-dealers, fundraising, investment advising, investment

  2. Commodities and Futures Trading Commission - CFTC
    Commission that oversees all things leveraged. It does not oversee directly commodities spot market but it oversees commodities futures market and investigates the manipulation in commodities spot market, it also oversees the custody (warehousing) of commodities. Has LAB CFTC - crypto friendly research group

  3. Financial Crimes Enforcement Network - FinCEN
    AML/KYC, all exchanges in the United States are doing this. This is not guidance, this is mandatory or you’re prosecuted today. It involves everything that FinCEN considers “money transmission”

  4. Internal Revenue Service - IRS
    April 15 is the tax filing deadline. IRS demands from certain wallets and exchange to transmit them the data of users. Tax evasion means jail time

  5. Office of Currency Comptroller - OCC
    When crypto will want to become currency, OCC will step in. When banks will need to deal with crypto OCC will step in. OCC also provides and blacklists all foreign sanctioned persons and addresses.

  6. Federal Reserve - FED
    So far Fed didn’t rule anything specific over the crypto. Look for Fed involvement as crypto will start offering deposit-like products aka PoS stacking for example.

  7. CFPB - Consumer Financial Protection Bureau
    Dodd-Frank act created agency that oversees the consumer financial fraud. Not much related at this stage to crypto.

  8. Department of Justice - DoJ and Federal Bureau of Investigation - FBI -  department and agency both in charge of federal investigations. Silk Road went down with their help.

  9. NYDFS and NYAG - These are the state agencies (Department of Financial Services and Attorney General) that have their role in creating regulations. New York State has a strict regulation requirements in regards of financial services (sometimes more strict than federal) because New York state is the home to large number of financial firms. Both of these state agencies have made determination in regards of crypto before.

Giorgi Gurgenidze