Cryptocurrencies represent a class of digital currencies that operate on decentralized computer networks, serving as a means of exchange without the oversight of central authorities, such as banks or governments.
The landscape of digital asset regulation, particularly for cryptocurrencies, has seen a significant uptick in attention from legal entities in recent years. This trend is projected to persist as the sector evolves. Legal experts specializing in blockchain technology are becoming increasingly vital for guiding through the sector’s regulatory intricacies and ensuring adherence to the applicable laws. Since the inception of the cryptocurrency market in 2009, the sector has witnessed a remarkable surge, securing over $55.3 billion in investment by 2019.
Despite this growth, the development of laws governing digital currencies, especially crypto regulations in the US, has not kept pace. According to a 2022 Chainalysis report, only ten countries have shown substantial cryptocurrency adoption levels, with the United States among them. The regulatory scrutiny surrounding digital assets is intensifying and is likely to expand further, including the adoption of crypto-related sanctions.
As digital currencies continue to carve out a significant niche in the financial world, understanding the regulatory environment is crucial for investors and entities involved in this space. This Cryptopolitan guide provides a clear overview of the current regulations, the role of different regulatory bodies, and the implications for those participating in the crypto market.
The Case of Sam Bankman-Fried
Sam Bankman-Fried, once a prominent figure in the cryptocurrency world, founded FTX, a leading global cryptocurrency exchange. With an estimated net worth of $16 billion, he was a billionaire at the zenith of his career before becoming embroiled in controversy.
In December 2022, Bankman-Fried was apprehended on charges of wire fraud, securities fraud, and money laundering in the Bahamas. The U.S. Securities and Exchange Commission accused him of deceiving investors of FTX, amassing $1.8 billion in equity, while secretly funneling funds to Alameda Research. FTX found itself mired in debt, a stark contrast to its public facade as a premier trading entity. Consequently, customer deposits were allegedly misused to cover Alameda’s operational costs and debts, as well as to fund various investments.
As Bankman-Fried faces an uncertain future, his case has prompted a more rigorous approach to cryptocurrency regulation by the government, aiming to fortify the broader financial ecosystem. The United States is also taking strides toward implementing more stringent cryptocurrency regulations.
Navigating Cryptocurrency Regulations in the US
For those looking to dive into the world of cryptocurrencies, understanding the regulatory environment in the United States is a crucial starting point. Investors often grapple with questions about the impact of US cryptocurrency regulations on their investments, the potential influence on cryptocurrency values, and the legality of investing in digital currencies. This section aims to shed light on these concerns.
In the US, cryptocurrency oversight is managed at the federal level by various agencies, including the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Trade Commission (FTC), the Treasury via the Internal Revenue Service (IRS), the Office of the Comptroller of the Currency (OCC), and the Financial Crimes Enforcement Network (FinCEN). These organizations are actively involved in fostering financial stability within the cryptocurrency market, though formal regulations are still in development.
The regulation of cryptocurrency sales hinges on whether the transaction is deemed a security sale under state or federal statutes or classified as money transmission under state laws, which would categorize the seller as a Money Services Business (MSB) at the federal level. Additionally, the CFTC oversees issues of market manipulation for crypto assets that are categorized as commodities.
The direct impact of US cryptocurrency regulations on market prices remains uncertain, largely because the regulatory framework is still in its nascent stages, providing the government with room to either tighten or loosen its control.
Typically, stringent regulations could lead to a downturn in cryptocurrency prices. However, the current stance in the US does not seem to be one of restriction. Instead, there is a movement towards integrating digital currencies within financial institutions, a step that could potentially be favorable for investors.
Cryptocurrency Provisions in the Infrastructure Investment and Jobs Act
The Infrastructure Investment and Jobs Act, passed in November 2021, marked a significant milestone for cryptocurrency in the United States by including digital currencies in federal legislation for the first time. The Act referred to cryptocurrencies as “digital assets” and required that transactions exceeding $10,000 be reported to the IRS.
Under the new rules, anyone facilitating the transfer of digital assets on behalf of another is considered a “broker.” This definition means that centralized cryptocurrency exchanges must issue a Form 1099-B to both their customers and the IRS, detailing each sale or purchase made on their platforms.
This development has dual implications for investors. On the positive side, Form 1099-B will provide clear records of gains or losses from cryptocurrency transactions. On the flip side, since a copy of this form goes to the IRS, it could lead to tax implications on any profits made from crypto investments.
These regulations are slated for enforcement in the 2024 tax season, meaning that all trades in 2023 will be reported to the IRS in the subsequent year.
Additional US Cryptocurrency Regulations
Beyond the Infrastructure and Investment Jobs Act, there have been other significant regulatory actions in the US. In March 2013, FinCEN classified cryptocurrency exchanges as Money Services Businesses, necessitating the collection of customer identity information.
Since then, US-based cryptocurrency exchanges must verify the identities of their users before they can engage in trading. This means investors must provide personal information, including name, address, contact details, photo ID, and a selfie to use these platforms. Failure to provide this information could result in restricted access to the exchange’s services.
Moreover, US citizens or residents are generally required to use domestic exchanges due to FinCEN regulations. Attempts to use international exchanges can lead to a ban on trading or account creation if one is identified as using a US IP address.
Given these regulations and the associated security risks of using foreign exchanges, investors in the US are advised to conduct their cryptocurrency transactions through domestic platforms like Coinbase, Binance US, Gate.io, Kraken, Coinmama, and eToro.
SEC Oversight of Cryptocurrencies
In the United States, the Securities and Exchange Commission (SEC) is the primary regulator of securities markets. The SEC has occasionally posited that certain cryptocurrencies fall under the category of securities and, as such, should be subject to its regulatory framework.
The classification of cryptocurrencies as securities is not universal. For example, cryptocurrencies that are mined and operate on a fully decentralized network may not be classified as securities. On the other hand, certain cryptocurrencies, particularly those that resemble traditional investment assets, could be considered securities and thus fall under the SEC’s jurisdiction.
When a cryptocurrency is classified as a security, the issuing entity is required to register with the SEC. This process involves extensive documentation and can impose additional financial and administrative burdens on both the creators and investors of the cryptocurrency.
Impact and Compliance of Cryptocurrency Regulations in the US
The US Approach to Cryptocurrency Oversight
Cryptocurrency regulations in the United States differ from those in other countries, largely due to the varied nature of digital assets and the multiple regulatory bodies involved based on the assets’ characteristics. Entities considered “financial institutions” under the Bank Secrecy Act (BSA) are subject to Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations. This includes a broad spectrum of businesses such as money services, securities brokers, and mutual funds, all of which must adhere to the BSA’s AML/CFT protocols.
FinCEN’s 2019 Guidance on Digital Assets
In 2019, FinCEN extended the BSA’s reach to include business models engaging in the transmission of digital assets, especially convertible virtual currencies (CVCs). This guidance brought several types of business models under the umbrella of US cryptocurrency regulation, including peer-to-peer exchangers, wallet providers, operators of CVC kiosks, payment processors involving CVC, and decentralized applications (DApps) that perform money transmission, among others.
Expansion of the BSA with the AMLA
The Anti-Money Laundering Act (AMLA) of 2021 further broadened the definition of “financial institutions” to include any business or individual involved in the exchange or transmission of “value that substitutes for currency.” This amendment aimed to encompass a wider range of activities within the regulatory framework, including informal money transfer systems operating outside traditional financial institutions.
Maintaining Regulatory Compliance
Businesses in the digital currency space are required to comply with the BSA and must register with the appropriate federal agencies, such as FinCEN, SEC, or CFTC, depending on their activities. To maintain compliance, these entities must conduct thorough risk assessments to gauge their exposure to money laundering and develop robust AML programs tailored to their risk profiles. These programs should include comprehensive policies, procedures, and controls, along with independent compliance testing, dedicated compliance personnel, and ongoing training.
Recordkeeping and Reporting Requirements
Regulated entities must also establish stringent recordkeeping and reporting mechanisms, including the filing of suspicious activity reports. A critical component of US cryptocurrency regulation is the Customer Identification Program (CIP), introduced by the USA PATRIOT Act. The CIP requires businesses to verify the identities of their customers during account creation and transaction processes to prevent money laundering and terrorism financing.
Conclusion
Navigating the intricate world of cryptocurrency regulations in the US requires a keen understanding of the evolving legal framework. From the SEC’s stance on digital assets to the comprehensive requirements of the Bank Secrecy Act, stakeholders must stay informed and compliant. As the industry matures, staying abreast of these changes is not just beneficial but necessary for the sustained growth and stability of the cryptocurrency market.
