Regulatory news mirrored the rapid crypto bull market pace in Q3, and we’ll break down the following highlights: Wyoming Blockchain Bill and DAOs, FATF Guidance - Part 2, Regulatory Turf Wars, and the US Infrastructure Bill.

On July 1, 2021, Wyoming’s Decentralized Autonomous Organizations (DAO) Bill came into effect recognizing DAOs as a type of Limited Liability Company. DAOs are entities owned and managed by their collective membership with no central authority and operating through smart contracts that automatically execute whenever a specific set of criteria are met. The bill created a supplement to Wyoming’s existing Limited Liability Company Act providing rules for the creation and management of a DAO. Special provisions allow the company to be althorigamically managed (either in whole or in part) by smart contracts and also provides definitions and baseline requirements for DAO formation, management, voting rights, membership interests, operating agreements, member withdrawal, and dissolution. This type of legislation makes it easier, more cost-effective, and provides legitimacy to such DAO projects.  Within days of the bill going into effect, Wyoming approved legal status for a DAO — the first in the United States.

The Financial Action Task Force (FATF) issued its second 12-month review of Virtual Asset Service Provider-related standards in which it analyzed trends relating to crypto middlemen (i.e. centralized exchanges) and P2P transfers. Using data provided by blockchain analytics firms, FATF concluded that the percentage of P2P transactions is not going up relative to middleman-enabled transactions in any meaningful sense. This meant that there has not been a “strong move towards P2P transactions” over the last five years, but that observation focused more on how bitcoin and tether were transferred, as opposed to ether. In fact, the report noted that “there are significant differences” between how the three tokens are used in relation to VASPs and P2P transactions, and predicted that “future virtual assets may have different profiles in terms of their P2P usage.” The FATF’s final report is expected in October, in which it may focus its guidance on VASP middlemen as opposed to P2P transfers. This guidance is expected to be adopted by financial crime enforcement agencies around the world in the next year or two.
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US regulators continued focus on crypto. SEC Chairman Gary Gensler said the cryptocurrency space can only exist within a public policy framework, not outside of one. Gensler’s position is that, while not all tokens would qualify as a security, hosting the trading of many tokens means it is very likely that at least one if not more are securities. Any securities on a trading platform requires that platform to register with the SEC. Meanwhile, before resigning his post, CFTC Commissioner Brian Quintenz took exception to the SEC’s calls for broader authority by stating on Twitter, “Just so we’re all clear here, the SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil….or #crypto assets.” The CFTC also saw an update in its commission leadership, with Rostin Behnam nominated as Chairman, as well as two additional commissioners, one of whom has taught a law school course on cryptocurrency. In addition to a growing turf battle between the SEC and CFTC over jurisdiction, the Biden Administration has taken aim at ransomware in part by adding “specific targets” to the list of sanctioned entities with which any US-related person or entity cannot legally conduct any transactions. The Office of Foreign Assets Control sanctioned a crypto exchange for the first time for facilitating crypto currency transactions in ransomware attacks.

In late July, the Senate considered and ultimately passed an amendment to the US tax code that would require “brokers” of digital tokens to report to the IRS the crypto trading transactions that they facilitate. The amendment was included in a massive infrastructure spending bill that had broad bipartisan support. Given the breadth of the term “broker,” the crypto industry mobilized and demonstrated its political strength, but ultimately was unable to prevent the measure from passing the Senate. The bill remains in the House where it has yet to come to a vote. In addition to the problematic broker reporting requirement, the amendment includes a general reporting requirement which would obligate anyone receiving digital assets to verify the sender’s personal information and reporting that information to the government within 15 days of the transactions, under the penalty of perjury that the information was correct. Crypto advocates and allies in Congress have been lobbying hard to remove both amendments from the final infrastructure bill. Moreover, there remains a chance that the House will vote down the infrastructure bill altogether.

2021 has already proved to be the most pivotal year in DeFi and crypto regulatory news yet, and we anticipate that trend to continue. We have seen a shift in regulatory approach, in conjunction with mainstream adoption, from an educational exploration about the technology and the instruments to an effort to establish regulatory authority with various agencies jostling for position.