In July 2019, U.S. Treasury Secretary Steven Mnuchin held a press conference on Bitcoin, Facebook’s Libra, and other digital assets.
While Mnuchin was cautious around Bitcoin as an investment due to its volatile nature, most of the press conference was focused on making sure the U.S. financial system was protected from fraud, along with punishing bad actors using cryptocurrencies for illicit purposes.
When asked what he would tell Americans who wanted to invest in Bitcoin, Mnuchin replied:
One thing I would tell them to be careful and be clear why they’re investing in them. There’s a lot of good things to invest in, obviously, that we know about. But our number one issue is that we don’t want bad actors using cryptocurrencies.
In other words, Mnuchin was cautioning investors to do their own research into Bitcoin and saying that the government’s focus would primarily be on regulation and preventing illegal activity. As Morgan Creek founder Anthony Pompliano remarked, Mnuchin’s stance “Sounds like a green light for those who want to do things in the right way.”
For the cryptocurrency industry, both the implicit endorsement of cryptocurrency for legal uses and the prospect of regulatory clarity are net positives for the space. Current crypto regulations can be extremely confusing. Much of the difficulty has to do with the number of different regulatory bodies involved. The U.S. Internal Revenue Service (IRS), for example, classifies digital assets as property for tax purposes, while the U.S. Commodity Futures Trading Commission (CFTC) treats them as a commodity.
Despite the confusion, in recent years we’ve seen each of these agencies refine and clarify the guidance they offer for digital assets. In this article, we’ll walk through a timeline of important regulatory milestones in the United States over the course of Bitcoin’s lifetime. Then, we’ll dig into key developments in the regulatory landscape of Bitcoin across different financial jurisdictions in the United States.
A Timeline of Bitcoin Regulation in the United States
Over the years, as Bitcoin has matured from Satoshi’s Nakamoto’s nine-page white paper to a decentralized, digital currency with a market cap of over $140 billion, U.S. regulations around Bitcoin and other digital assets have similarly matured.
Here’s a timeline of the major regulatory events in Bitcoin’s history:
- March 2013: The Treasury Department and the Financial Crimes Enforcement Network (FinCEN) releases guidelines for compliance around virtual currency and money-laundering regulations.
- July 2013: The Winklevoss twins file the first application for a Bitcoin ETF with the SEC.
- November 2013: The U.S. Senate holds hearings on Bitcoin and discusses some of the regulatory challenges around digital assets.
- April 2014: IRS issues guidance around how to apply existing tax principles to cryptocurrency.
- August 2015: The state of New York requires cryptocurrency companies to apply for a business license called a BitLicense.
- March 2016: The Japanese cabinet recognizes Bitcoin as real money.
- March 2017: The SEC rejects the Winklevoss ETF application for the first time.
- December 2017: Two U.S. exchanges, the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE), are approved to list Bitcoin futures contracts.
- April 2018: In a senate hearing, SEC Jay Clayton says Bitcoin has ”been determined by most people not to be a security.”
- April 2019: The SEC releases a framework for evaluating initial coin offerings (ICOs).
- May 2019: The IRS announces that it will release new crypto tax guidance “soon.” FinCEN releases new guidelines for cryptocurrency and anti-money-laundering (AML) compliance.
- June 2019: The SEC files a lawsuit against Kik over their token sale. The CFTC approves Ledger X for Bitcoin derivative contracts.
- July 2019: The SEC intends to run Bitcoin nodes to support efforts to monitor risk, improve compliance, and inform commission with policy regarding digital assets. Congress holds hearings around Facebook’s proposed Libra cryptocurrency.
- September 2019: The ICE launches Bakkt, a physically-backed Bitcoin futures exchange.
- October 2019: The SEC rejects the Bitwise proposal for a Bitcoin ETF.
- November 2019: Fidelity receives a license for Bitcoin trading and custody in the state of New York. The U.S. Federal Reserve looks into potential benefits of a digital dollar.
Below, we’ll dig deeper into regulatory stances on crypto in the United States across various government agencies.
The Regulatory Bodies That Matter for Crypto
As we discussed, one central reason for the regulatory confusion about cryptocurrency is the complex web of government agencies and bodies involved in its regulation.
In the U.S., regulation around spot exchanges largely falls upon state regulators. Meanwhile, the IRS is responsible for tax guidance, FinCEN for ensuring anti-money-laundering (AML) and know-your-customer (KYC) compliance, the CFTC for derivatives and levered spot trading, and the SEC has jurisdiction over securities.
Let’s dive in.
The Securities and Exchange Commission (SEC), an agency of the U.S. government, is responsible for regulating securities and enforcing laws pertaining to them.
For digital currencies and Bitcoin, the SEC has primarily been focused on determining the legality of ICOs, as well as approving any ETFs related to virtual currency.
According to the SEC, ICOs should be evaluated under the Howey Test at a minimum to determine whether they qualify as securities:
The U.S. Supreme Court’s Howey case and subsequent case law have found that an “investment contract” exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.
The Howey Test determines that an offering qualifies as a security if it is made with the expectation of making money based on someone else’s work.
In an unofficial public statement in June 2018, SEC Director of Corporate Finance William Hinman stated:
Based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.
While Ethereum may have once failed the Howey Test, Director Hinman commented that it did not qualify today due to the decentralized state of Ethereum’s network. This is encouraging for decentralized projects such as Bitcoin and Ethereum.
The IRS first released guidance on taxation and cryptocurrency back in April 2014. According to the IRS, cryptocurrency holdings should be treated as property for tax purposes.
According to Notice 2014–21, the IRS states:
For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
This means that the exchange or sale of digital assets is taxable at nearly 40% of the gain on short-term holdings.
It appears that the IRS is cracking down on cryptocurrency holders to ensure that they’re properly paying taxes. In July, it was reported that the IRS sent letters to more than 10,000 cryptocurrency investors, telling them to pay any back taxes owed to the government.
The Financial Crimes Enforcement Network (FinCEN) is a branch of the Treasury Department that has a mandate to collect and analyze financial transactions to deter money laundering, terrorist financing, and other financial crimes.
When it comes to cryptocurrency, FinCEN is primarily concerned with making sure virtual-currency businesses are compliant with AML and KYC regulations, along with determining whether individuals or businesses operate as money transmitters. This is intended to limit the possibility of fraudulent activity enabled through cryptocurrency.
Over the years, FinCEN has taken a number of actions in the cryptocurrency space pursuant to this mandate. In May 2013, the U.S. seized assets from Mt. Gox for failing to register as a money transmitter.
The Commodity and Futures Trading Commission (CFTC) is a U.S. government agency responsible for regulating trading in commodities derivatives.
In the virtual currency space, that means that the CFTC has been responsible for approving and regulating the trading of Bitcoin futures, options, and certain levered spot trading activities. In December 2017, both the CBOE and the CME launched Bitcoin futures trading, which made them the first institutions approved by the CFTC to do so. More recently, CFTC has authorized LedgerX and Bakkt to launch Bitcoin options platforms. The CFTC also has jurisdiction over fraud and manipulation around virtual currencies that cross interstate lines.
Decentralized, peer-to-peer currencies such as Bitcoin are radically new innovations that are hard to regulate because they don’t rely on any one centralized party to continue operating. But while many early Bitcoin advocates endorsed a libertarian, anti-regulatory stance, we’re starting to see regulators provide clarity as the space matures.
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