Regulation
Crypto regulations are imminent, but will regulators fall in line? — TradingView News
Regulatory changes in crypto have been the subject of heated debate for many years. The general philosophy of cryptocurrency is that of anarchism or anarcho-capitalism. Proponents of technology tend to be adamantly opposed to any type of government intervention in markets or technology.
However, as digital assets and blockchain technology become mainstream, governments must respond. They must either integrate these assets into existing regulations or create a new regulatory framework.
Let’s take a look at how crypto regulation has evolved over the years, with a focus on US regulations.
Background: crypto regulation in the United States
Much of the discussion around the regulation of cryptocurrencies in the United States has focused on what is known as the Howey Test. Originating from a landmark Supreme Court case from 1946, the Howey test provides the criteria used to determine whether or not something can be considered a security, that is, an investment contract.
The test has four parts and indicates that a title is:
1. An investment of money;
2. In a joint enterprise;
3. Expecting profit; And
4. These benefits come from the efforts of others.
If an investment aligns with these four precepts, then it may be considered a security, meaning it falls within the regulatory jurisdiction of the Securities and Exchange Commission (SEC).
The Howey test is almost 80 years old. Applying it to new technologies like cryptocurrencies can be difficult. However, many argue that most cryptocurrencies constitute investment contracts that meet the criteria of the Howey test.
Bitcoin might be an exception, as the SEC has suggested that BTC is more like a commodity. This reasoning is part of what led to the approval of Bitcoin spot ETFs in the United States in January 2024.
Let’s get this straight.
Crypto is now part of the global financial ecosystem. No government can wish this away.
That being said, if we don’t want to undo years of work to clean up our financial system, we absolutely must adopt good regulation.
While… pic.twitter.com/sgDMnG0YSn
A Timeline of Cryptocurrency Regulation
Between 2009, when Bitcoin was invented, and 2013, there were only a few significant developments in the regulation of cryptocurrencies. These included:
- The closure of the Silk Road market and the seizure of its Bitcoin by the Federal Bureau of Investigation (FBI), and
- A seizure order has been issued to Dwolla, a subsidiary of crypto exchange Mt. Gox, by the Department of Homeland Security (DHS).
Silk Road was a Bitcoin marketplace used in part for the sale of illicit substances. Its founder, Ross Ulbricht, was sentenced to two life sentences without parole. On the other hand, Mt. Gox was an exchange responsible for 70% of Bitcoin trading at the time.
These two coercive measures were the first known measures taken against cryptocurrencies by the authorities.
In 2014, the Internal Revenue Service (IRS) issued guidance classifying cryptocurrency as a form of property, making it subject to capital gains tax. Until now, no type of cryptocurrency gain or loss had any tax implications.
Interestingly, while the IRS considers crypto to be property, other agencies like the FBI consider it to be a form of currency. This illustrates the lack of clear regulatory guidance and the resulting compliance difficulties for consumers, businesses and institutions.
Later, in 2020, the IRS would add a question to U.S. tax returns asking taxpayers if they had sold cryptocurrencies in the past year.
In 2016, John Doe’s first summons was issued to Coinbase, the largest crypto exchange based in the United States. A John Doe Summons is a request from the IRS to acquire information about a group of anonymous taxpayers. Coinbase ultimately turned over information on approximately 14,000 U.S. taxpayers who made transactions totaling $20,000 or more. The IRS then informed these individuals that they needed to amend their prior tax returns to avoid penalties and fines.
FBI calls crypto money so they can arrest you for money laundering
the IRS calls it property so it can tax your capital gains
the SEC calls it a security so it can sue every trade
the CFTC calls it a commodity so it can govern how you deal with it
h/t @CryptoTea_
In March 2022, US President Joe Biden signed an executive order aimed at “ensuring the responsible development of digital assets”. Although not a direct regulatory bill, the order served as a recognition of digital assets from the government of the world’s largest economy. Additionally, this EO called on the U.S. government to take certain specific actions regarding cryptocurrency, including:
- Creating new protections for consumers
- Introduce measures to prevent risks in cryptocurrency markets from leading to broader systemic risks across the U.S. and global economies.
- Mitigating the use of cryptocurrency in illicit activities
- Promote U.S. leadership and dominance in technology and economics
- Supporting technological advances
- Explore the development of a US central bank digital currency (CBDC)
Although the above list is not an exhaustive list of regulatory activities in the United States, it covers many of the most important steps.
Ranking #ETH as security contradicts previous statements by the SEC and Chairman Gensler.
Republicans will continue to hold the SEC accountable for its regulatory excesses that stifle innovation, leave consumers unprotected, and endanger our national security. https://t.co/XohLYtp7EF
Where is crypto regulation going?
Cryptocurrency regulation in 2024 has come a long way since the birth of Bitcoin. Much progress remains to be made and regulations differ from one country to another. The United States and the European Union (EU) have led the way in crypto regulation so far. Time will tell whether these regulations will become too restrictive, as some fear, or whether they will take a more productive form.