Crypto Compliance: What Regulators Actually Want

After years in financial services compliance, one thing is clear: regulators want the same things they've always wanted: investor protection, market integrity, and systemic stability.

The Historical Context Matters

The entire securities regulatory framework was created in response to the 1929 crash. The Pecora Investigation exposed that J.P. Morgan paid no income taxes in 1930-1931, that Morgan partners controlled 89 corporations worth $19 billion, and that insiders got preferential deals unavailable to ordinary investors. The resulting Securities Acts of 1933 and 1934 weren't about stopping innovation—they were about ensuring investors had the information to make informed decisions.

That philosophy—disclosure over prohibition—still drives how regulators think. The disconnect isn't about regulation versus innovation. It's about which kind of regulation, and who gets to write it.

To work with the SEC effectively, you need to understand their history and philosophy.

The Howey Test: Why It Still Matters

In 1946, the Supreme Court decided SEC v. W.J. Howey Co. The case involved Florida citrus groves—buyers purchased land and then leased it back to the company to cultivate, with profits remitted to investors. The Court held this was a security because it involved:

1. An investment of money
2. In a common enterprise
3. With a reasonable expectation of profits
4. Derived primarily from the efforts of others

This 1946 test for citrus groves is now applied to tokens. Form is disregarded for substance—the emphasis is on economic reality.

Clayton vs. Gensler: The Enforcement Comparison

| Chair | Crypto Actions | Penalties | |-------|----------------|-----------| | Jay Clayton (2017-2021) | 70 | ~$1.52B | | Gary Gensler (2021-2024) | 125 | ~$6.05B |

Both chairs said the same thing: "Without prejudging any one token, most crypto tokens are investment contracts under the Howey Test." The difference was approach.

Paul Atkins: The New Philosophy

SEC Chair Paul Atkins (confirmed April 2025) promised a "rational regulatory framework" developed through "formal notice and comment rulemaking process rather than relying on enforcement actions."

His May 2025 speech outlined categories that would NOT be considered securities: "Digital Commodities/Network Tokens" and "Digital Collectibles." But he also warned: "Fraud is fraud."

The shift is from enforcement-first to rulemaking-first. That's a significant change in how to approach SEC compliance.

This is the part of recent history that crypto companies need to understand—not just what happened, but how informal pressure can be more powerful than formal rules.

The Mechanism

Between 2021 and 2025, the Federal Reserve, FDIC, and OCC coordinated to pressure banks away from crypto relationships. This wasn't through formal rules—it was through:

• "Pause letters" to approximately 24 banks instructing them to halt crypto activities
• Supervisory guidance labeling crypto "high risk"
• Examination pressure and "offline conversations"
• The January 2023 joint statement listing "key risks" of crypto activities

Marc Andreessen said on Joe Rogan that "over 30 tech founders" were debanked in four years. The House Financial Services Committee documented at least 30 digital asset entities losing banking access between 2022 and 2024.

March 2023: The Bank Collapses

Three crypto-friendly banks failed in one week:

• Silvergate: Voluntary liquidation March 8, 2023
• Silicon Valley Bank: Closed March 10, 2023 (second-largest bank failure in U.S. history)
• Signature Bank: Closed March 12, 2023

The loss of SEN and Signet was devastating—these were the only real-time payment rails for crypto trading outside banking hours.

Why This Matters for Compliance

The lesson: just because something is legal doesn't mean you can get banking for it. Compliance isn't just about following written rules. It's about understanding the regulatory environment, building relationships with examiners, and anticipating where pressure will come from.

The Reversal

In 2025, the Trump administration:

• Withdrew the January 2023 joint statement
• Signed executive order "Guaranteeing Fair Banking for All Americans"
• Retired "reputation risk" from examination programs
• The OCC is now investigating "unlawful debanking"

The environment has shifted dramatically. But bank culture changes slowly, and the next administration could shift it back. Build for regulatory permanence, not the current political moment.

Different regulators care about different things.

NYDFS: The Gold Standard

NYDFS established the BitLicense framework in 2015 and issued stablecoin guidance in June 2022 requiring:

• 100% reserve backing with approved assets
• Monthly attestation by independent CPA
• Redemption rights at par within two business days
• Board approval for reserve management policies

If you can satisfy NYDFS, you can satisfy most regulators. NYDFS examiners are serious but fair. They want to see real systems, not PowerPoint presentations.

State Money Transmission: The Moat

Money transmission is regulated state-by-state. Roughly 49 states plus territories require licenses. Application fees range from $100 to $50,000. Surety bond requirements range from $10,000 to $2,000,000.

Yes, this is painful. Yes, it's necessary. Multi-state licensing becomes a competitive advantage—it's a moat that smaller competitors can't cross.

The Federal Framework Emerging

The GENIUS Act (signed July 2025) creates the first federal stablecoin framework:

• Two-tier system: Large issuers ($10B+) require federal regulation; smaller may choose state
• 100% reserve requirement with liquid assets
• Monthly public disclosure and CPA certification

The CLARITY Act (passed House July 2025, pending Senate) would establish clearer SEC/CFTC jurisdictional lines.

These frameworks are emerging. Build compliance systems that can adapt as they're finalized.

Here's what actually goes wrong:

The "We're Not a Security" Disaster

Projects raise money on tokens they insist aren't securities—and then get enforcement actions. The pattern is predictable: aggressive lawyers tell founders what they want to hear, the token launches, volume grows, and then the SEC shows up.

The SEC under Gensler brought 125 crypto enforcement actions. 66% alleged fraud. 63% alleged unregistered offerings. The penalties totaled $6.05 billion.

The fix is simple but unpopular: get real legal analysis before launching. Not "can we argue we're not a security"—"what's the actual risk, and how do we mitigate it?"

The Compliance Afterthought

Building products first and thinking about compliance later is expensive and often impossible to fix. The architecture decisions you make early—custody, KYC, transaction monitoring—determine what's possible later.

The companies that scale are the ones that invested in compliance infrastructure from day one.

The Adversarial Approach

Fighting regulators rarely works. The crypto industry's adversarial posture was counterproductive. Regulators aren't the enemy—they're people doing their jobs.

The approach that works: be helpful, be transparent, fix issues promptly, and document everything. The approach that fails: be defensive, hide problems, and treat every inquiry as an attack.

The Debanking Surprise

Bank accounts can be frozen with 24-72 hours notice. Banking relationships need redundancy. Don't assume your primary bank will be there tomorrow. Build backup relationships before you need them.

Based on building compliance programs at multiple companies, here's what works:

Legal Analysis That's Real

Know what your product is under securities, commodities, and money transmission law. Document your analysis. Update it as guidance evolves. This isn't a one-time exercise—it's ongoing.

Document everything. When questions come from regulators, have answers that are thoughtful, consistent, and defensible.

KYC/AML That Actually Functions

Identity verification, transaction monitoring, suspicious activity reporting—this isn't optional under the Bank Secrecy Act. Invest in good systems early.

The best KYC/AML programs have:

• Real-time transaction monitoring
• Risk-based customer due diligence
• Clear escalation paths for suspicious activity
• Regular training and testing
• Documentation that auditors can verify

Custody and Segregation That's Auditable

Customer assets separate from company assets. Clear records. Systems that auditors can verify. This is what destroyed FTX—$8 billion in customer funds misappropriated because there was no real segregation.

Incident Response That's Tested

When something goes wrong—and eventually something will—can you respond? Do you have communication plans, regulatory contacts, and remediation procedures?

The regulatory environment has shifted fundamentally.

The Era of Enforcement-First Is Ending

The SEC's Crypto Task Force (established January 2025, led by Commissioner Hester Peirce) is developing comprehensive regulatory frameworks through public engagement, not enforcement actions.

Paul Atkins's approach: "Rational regulatory framework" through rulemaking. This changes the compliance calculus—engage early rather than avoid engagement.

Federal Frameworks Are Arriving

• GENIUS Act (law): Stablecoin federal framework
• CLARITY Act (pending): Market structure and jurisdictional clarity
• BITCOIN Act (proposed): Strategic Bitcoin Reserve purchases

After years of "regulation by enforcement," actual laws are being written. The companies that built for high standards will have an advantage; the ones that built for minimal compliance will struggle to adapt.

Consolidation Around Serious Players

Five entities received conditional OCC trust bank charter approvals in December 2025: BitGo, Circle, Fidelity Digital Assets, Paxos, and Ripple. These are the institutional players being brought inside the federal banking perimeter.

Companies that invested in compliance will acquire or outlast those that didn't. Regulatory moat is real.

The Bottom Line

The question is no longer "will crypto be regulated?" It's "how do you position to thrive under regulation?"