Crypto regulations are imminent, but will regulators fall in line?

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 the so-called 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 can be considered a security, meaning it falls within the regulatory jurisdiction of the state. Securities and Exchange Commission (SEC ).

The Howey test is almost 80 years old. Apply 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 could be an exception, as the SEC has suggested that BTC looks more like a commodity. This reasoning is part of what led to the approval of spot Bitcoin ETFs in the United States in January 2024.

A Timeline of Cryptocurrency Regulation

Between 2009, the year Bitcoin was invented, and 2013, only a few significant developments took place. cryptocurrency regulation. These included:

• The stopping of Silk Road Market and seizure of his Bitcoin by the Federal Bureau of Investigation (FBI), and
• A seizure order being issued against Dwolla, a subsidiary of Mount Gox Crypto Exchangeby 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 classify cryptocurrency as a form of property, which makes 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 subpoena was issued against Coinbase, the largest US-based crypto exchange. 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.

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.

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.

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 the so-called 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 can be considered a security, meaning it falls within the regulatory jurisdiction of the state. Securities and Exchange Commission (SEC ).

The Howey test is almost 80 years old. Apply 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 could be an exception, as the SEC has suggested that BTC looks more like a commodity. This reasoning is part of what led to the approval of spot Bitcoin ETFs in the United States in January 2024.

A Timeline of Cryptocurrency Regulation

Between 2009, the year Bitcoin was invented, and 2013, only a few significant developments took place. cryptocurrency regulation. These included:

• The stopping of Silk Road Market and seizure of his Bitcoin by the Federal Bureau of Investigation (FBI), and
• A seizure order being issued against Dwolla, a subsidiary of Mount Gox Crypto Exchangeby 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 classify cryptocurrency as a form of property, which makes 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 subpoena was issued against Coinbase, the largest US-based crypto exchange. 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.

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.

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.

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