Crypto wallets and certain digital asset transactions are predicted to be the next target of enforcement actions by regulators, according to lawyers from Troutman Pepper.

The U.S. Securities and Exchange Commission (SEC), along with the Commodities and Futures Trading Commission (CFTC) and the Department of Justice (DOJ), have increasingly focused on regulating cryptocurrencies. Enforcement actions have been brought against leading crypto players, including celebrities, who are believed to have misled investors or promoted cryptocurrencies illegally. Surprisingly, these actions have been based on existing laws, some of which are nearly a century old.

The lawyers anticipate that the regulation of crypto wallets as brokers will expand. The SEC has already alleged that Coinbase Wallet, a self-custody product, operated as an unregistered broker in violation of the Exchange Act.

Coinbase argued that its wallet is simply software and does not perform traditional brokerage activities. However, the SEC sued both Coinbase and Binance, claiming that their wallet services function as unregistered broker-dealers.

The second area of predicted expansion involves heightened regulation of traditional financial institutions engaged in digital asset transactions. Compliance with Anti-Money Laundering and Know Your Customer laws (AML/KYC) in the digital asset space is expected to pose significant challenges for these institutions.

Designing and maintaining compliance systems will require reliance on external information, making compliance costly and time-consuming.

The landscape of crypto enforcement is rapidly evolving, leaving some institutions feeling uncertain due to a lack of regulatory clarity.

Coinbase CEO Brian Armstrong has even mentioned the possibility of relocating the company to ensure compliance. Instead of creating clear rules specifically for the crypto space, regulators have relied on novel interpretations of outdated laws that did not anticipate the technology behind digital assets.