The US has been leading the way in crypto adoption, having almost 60 million crypto holders (with the global number of crypto owners reaching 220 million).
But how is it regulated and what legal challenges do businesses and crypto enthusiasts face?
The short answer – it’s complicated. The US regulatory framework for fintech is extremely fragmented, with many controlling bodies being responsible for different financial areas.
When it comes to crypto, there’s much more uncertainty than with any other financial entity, as a universal definition that would fit all potential regulations, it isn’t even agreed on.
Let’s work through the major legal aspects of the US crypto market, provided by Kyrrex team.
(Disclaimer: The author of this story is the CEO at Kyrrex)
Crypto regulations in the US
The US government started taking action toward crypto regulation in 2013. Officially, cryptocurrency is recognized as decentralized money that operates similarly to fiat currencies. The major legal bodies define cryptocurrency a bit differently: for instance, the FinCEN states that crypto tokens are the “value that substitutes for currency,” while the IRS claims crypto to be “a digital representation of value.”
Registration of crypto-related businesses and taxation of crypto profits have national-level rules, although there are many state-level adjustments, as well as many nuances overall.
We’re going to cover the major things to consider: how crypto is being regulated as security and commodity, what policies should be in place with any crypto exchange business, how crypto profits are taxed, and what privacy issues surround the world of crypto.
1. Cryptocurrencies as securities
The Securities and Exchange Commission (SEC) that, as the name suggests, handles securities, defines cryptocurrencies as such and plans on imposing more regulations in this sector.
1. Cryptocurrencies as securities
The Securities and Exchange Commission (SEC) that, as the name suggests, handles securities, defines cryptocurrencies as such and plans on imposing more regulations in this sector.
However, due to classification uncertainties, the SEC doesn’t have the power to regulate all digital currencies. It doesn’t define Bitcoin and Ethereum as securities but leaves it up to any market player to decide if any crypto they own or operate is indeed a security.
At the moment, SEC regulations are rather applicable to DeFi (decentralized finance) platforms where cryptocurrencies are traded.
The SEC aims to monitor illicit activity on such platforms, but it’s only recently that it has started this initiative.
The SEC aims to monitor illicit activity on such platforms, but it’s only recently that it has started this initiative.
2. Cryptocurrencies as commodities
Somehow contradictory to the SEC, the Commodities Futures Trading Commission (CFTC) defines major cryptocurrencies as commodities
and oversees legal crypto trades. When there are standardized commodity futures contracts with cryptocurrencies involved, they need to be supervised by the CFTC. In general, these regulations are not as harsh as the ones imposed by the SEC because, when we deal with cryptocurrencies as securities, they are subject to price transparency rules and quite stringent overall market oversight.
As if it wasn’t too complicated enough, CFTC’s Commissioner has recently tweeted that a crypto futures contract on a security should comply with both the SEC and the CFTC but a futures contract on a pure, non-security commodity—like ETH—falls under CFTC regulation.
Somehow contradictory to the SEC, the Commodities Futures Trading Commission (CFTC) defines major cryptocurrencies as commodities
and oversees legal crypto trades. When there are standardized commodity futures contracts with cryptocurrencies involved, they need to be supervised by the CFTC. In general, these regulations are not as harsh as the ones imposed by the SEC because, when we deal with cryptocurrencies as securities, they are subject to price transparency rules and quite stringent overall market oversight.
As if it wasn’t too complicated enough, CFTC’s Commissioner has recently tweeted that a crypto futures contract on a security should comply with both the SEC and the CFTC but a futures contract on a pure, non-security commodity—like ETH—falls under CFTC regulation.
Just as with anything concerning crypto, the commodity regulations have their gaps. Since cash commodities markets are controlled by separate regulatory bodies, there’s no organization that would handle digital assets and there are discussions around providing additional rules for the crypto industry.
3. KYC/AML requirements
Cryptocurrency exchanges should comply with the Bank Secrecy Act, which requires the implementation of AML (Anti-Money Laundering) and KYC (Know-Your-Customer) programs. The FinCEN’s Final Rule also obliges virtual currencies to adopt AML policies.
Cryptocurrency exchanges should comply with the Bank Secrecy Act, which requires the implementation of AML (Anti-Money Laundering) and KYC (Know-Your-Customer) programs. The FinCEN’s Final Rule also obliges virtual currencies to adopt AML policies.
These are typical measures applicable to all fintechs that help financial businesses avoid money frauds and personal data leaks. Crypto platforms need to pay state-regulated transmitter licenses and report any suspicious activity to regulators.
What do AML/KYC policies involve:
● AML requirements revolve around conducting due diligence on customers to identify suspicious activities (illegal trades, tax evasion, etc.), and reporting any of those
● KYC requirements imply identifying each particular customer and verifying them against official databases to assign a level of risk value to them
Any crypto-related platform should implement effective AML/KYC policies, continuously monitor transactions, and have a risk management plan in place. We are among those transparent and fully compliant exchanges that pay close attention to KYC/AML. For instance, it relies on the transaction history check against fraud, money laundering, or financing terrorism.
4. Taxation rules
The tax laws are controlled by the IRS, and in line with the general US government’s initiatives to harshen regulation of crypto, it asks for stricter compliance. Apart from basic income tax, the IRS requires property taxes because it sees the major digital currencies as property. As a person receiving an income in cryptocurrencies, you need to do the following:
● Declare your income with regard to its fair market value. Since it’s not an easy task given the market’s fluctuations, there are a number of tax software solutions to help with that.
● In the event of selling crypto, pay capital gains on the profit. When holding crypto for less than a year, pay short-term capital gains.
If you lose on crypto trading, there’s a silver lining in the taxation system: you can reduce your taxable income in the event of selling crypto at a loss.
5. Privacy concerns
The Federal Trade Commission (FTC) is the major body regulating data privacy and protection issues in fintech and crypto in particular. It has formed a separate initiative called the FTC Blockchain Working Group that is aimed to enforce actions on crypto-related activities and monitor potential frauds and scams.
The Federal Trade Commission (FTC) is the major body regulating data privacy and protection issues in fintech and crypto in particular. It has formed a separate initiative called the FTC Blockchain Working Group that is aimed to enforce actions on crypto-related activities and monitor potential frauds and scams.
When it comes to cryptocurrencies, the FTC regulates ransomware cases, mining schemes, crypto obtained through misconduct, etc. The regulatory body also checks how cryptocurrencies and blockchain-powered innovations can assist in compliance and personal data protection.
The usage of crypto expands and diversifies, and so does the number of crypto-related frauds. In the US alone, there have been over 80,000 crypto scams and thefts in 2020.
While the industry is still relatively new and has many vulnerabilities to exploit, one of the problems is the lack of proper regulation.
The US government is taking action to incorporate more rules and requirements for crypto platforms and owners and take control over how digital assets are being kept and sold.
To play safely and protect your earnings, you need to learn the regulations that might concern you and comply with them. It won’t hurt to build a practice of regularly checking on what’s new with crypto laws, as well as having a solid risk assessment and management plan in place.
(Disclaimer: The author of this story is the CEO at Kyrrex)