The current regulatory landscape for both crypto and fintech in the United States can be likened to a paradoxical situation, reminiscent of Joseph Heller's Catch-22. In this regulatory Catch-22, the SEC's insistence on crypto registration appears welcoming at first glance, with Chair Gary Gensler portraying it as a simple process on their website. However, the seemingly straightforward registration leads to a dead end, as registered crypto tokens face limitations in trading on approved exchanges, creating a circular problem.
Even if all crypto tokens were considered securities and registered, the lack of approval for registered exchanges and broker-dealers to deal with these tokens creates a barrier. This regulatory deadlock is exacerbated by FINRA's limited approval of institutions dealing with crypto tokens, leaving very few options, and the SEC's reluctance to permit currently registered entities to handle these assets.
In the fintech arena, the dependence on banking partnerships, known as banking-as-a-service (BaaS), adds another layer to the Catch-22. Fintech firms, even with state-level licenses, must collaborate with banks for payment transactions, turning banks into gatekeepers for financial innovation. The regulatory skepticism surrounding BaaS arrangements, coupled with the potential risks, leads to banks "derisking" and reducing fintech collaborations.
The regulatory conundrum extends to state-level efforts, such as the BitLicense in New York and the SPDI charter in Wyoming, which, while providing tailored regulations, do not alleviate federal-level challenges. State-compliant institutions like Coinbase face federal scrutiny, highlighting the need for Congress to intervene.
In essence, Congress holds the key to resolving these regulatory puzzles. Crafting specific federal frameworks for both crypto and fintech is imperative to foster innovation, competition, and inclusivity in the U.S. capital and financial markets. To echo Heller, crypto and fintech companies must confront the notion that they will either "live forever or die in the attempt" and advocate for regulatory changes to ensure their sustained existence and growth.