In an ever-changing crypto world, the buzz around crypto regulation is omnipresent. This article will look at areas where legislation is lacking and others where the law has set out well-defined rules.
Cryptocurrency Crime and Tax Evasion
Recently, U.S. legislators have included cryptocurrency in bipartisan infrastructure bill talks.
There is an increased need to expand the definition of brokerage to include companies that facilitate digital asset trades. Change is required to help the IRS better compile transactions occurring on the blockchain to identify tax evasion. It is believed that crypto poses a significant detection problem by facilitating illegal activity. To avoid this, a new law will require companies that facilitate crypto trades to report tax information about those trades to the IRS starting in the 2024 tax season.
The proposed law would make crypto tax compliance easier for investors because exchanges will have to issue tax forms. It will provide a record of taxable transactions that a user made, so it is vital to keep records of gains or losses on crypto markets to report federal tax returns.
The Biden Administration has recently proposed legislation that would classify stablecoin issuers as banks. Under this new regulation, issuers would have similar oversight as banks in terms of protecting consumers.
Stablecoins are a type of cryptocurrency that continuously exist as a currency. An example is USDT which is tied to the price of the U.S. dollar, making its value $1. It is crucial for this to be regulated to decrease the amount of crime since most of what happens are crypto to crypto transactions. By eliminating the use of U.S. dollars and using an unregulated system, such as stablecoins, users can more easily evade public policy measures aimed at preventing money laundering.
It is recommended that users choose a cryptocurrency exchange that maintains compliance with federal and state regulators in the U.S. as these new policies develop to avoid problems. These include exchanges such as Coinbase and Gemini.
Potential for Investment Vehicles
Recently there has been talk of an approved cryptocurrency EFT, or exchange-traded fund, in order to pool money and invest in all investments owned by the EFT.
It is suspected that there will be introductions of EFTs under the Investment Companies Act, which requires companies to disclose information about their finances and investments regularly.
EFTs would offer investors the ability to get involved with crypto without buying directly from an exchange. These funds could help diversify holding across different coins. Investors should look to the SEC for protection as regulation becomes more defined.
Regulations in Europe: Decentralized Finance
Decentralized Finance refers to platforms that allow users to perform financial transactions. It is referred to as DeFi and uses blockchain, cryptocurrencies, and smart contracts to manage financial transactions outside of the control of traditional institutions, such as banks. Users interact through unhosted wallets, which are digital wallets managed by the users themselves.
How does it work?
DeFi uses smart contracts to provide fundamental components for the functioning of dApps. Smart contracts control digital assets, automate agreement terms between buyers and sellers on the blockchain, and reduce conflict and costs. Applications called dApps are used to handle transactions and run the blockchain. These applications allow financial services to be simplified for consumer use.
The European Commission adopted the Markets in Crypt-Assets Regulation proposal in 2020. The MiCA proposal aims to increase legislation associated with how tokens are being regulated and supervision of the users that qualify as CryptoAsset Service Providers (CASPs). MiCA aims to provide legal certainty and ensure that consumers and investors are protected. MICA will apply to persons engaged in issuing crypto-assets and CASps within the EU-27.
The European Commission defines electronic money as a type of crypto asset whose primary purpose is to be used as a means of exchange, and that aims to maintain a stable value by being denominated in a currency. This subjects crypto, including stablecoins, to legislation. The European Central Bank is in favor of MiCAs views and contributions but suggests clarifications to improve which tokens will be regulated by MiCA.
US Laws by State
In the U.S., Congress has left the task of addressing issues created by digital assets to regulatory agencies. A congressional Blockchain Caucus was created in 2016, and house and Senate members introduced bills addressing digital assets in 2018.
Specific cryptocurrency laws and regulations vary by state within the U.S. Here are a few examples:
California: The Department of Financial Protection and Innovation has not decided if they will regulate digital currency transmission. Digital currency businesses are often not regulated, and peer-to-peer digital currency transaction platforms are exempt from transmission licensing.
Florida: Digital currency was deemed a “currency, monetary value, or payment instrument for the purpose of transmitting the same by any means” in the State v. Espinoza court case. This subjected cryptocurrencies to money transmitter laws.
New York: New York’s Department of Financial Services has a unique “BitLicense” for virtual currency businesses. Any commercial transfer, sale, purchase, or issuance of virtual currency requires a license. Businesses require a BitLicense and standard transmitter license per N.Y. Banking Law.
Ohio: The Ohio Department of Commerce requires a dealer of virtual currency to provide a third-party audit of the licensee’s computer systems. The definition of money transmission encompasses nearly all types of currency.
Texas: Texas Department of Banking determined that the exchange of virtual currencies is not money transmission requiring a license, but trade in stablecoins must be licensed as money transmission.
Overall, lawmakers are working hard to find ways to regulate and ensure the safety of cryptocurrency users in order to oversee a variety of activities. New laws are coming out by the day and the entire ecosystem is constantly changing.
Thanks for your time — Juanbug