As cryptocurrency investments progress from speculation into an asset class, regulators are scrambling to find an appropriate way of overseeing them. Debate over whether crypto should be considered a commodity or security persists while efforts to reduce money laundering and other illicit activity continue apace.
Companies operating within the US that purchase and sell cryptocurrency must conduct risk analyses, identify customers and file reports in accordance with Anti-Money Laundering (AML) regulations.
Legality
Cryptocurrency’s popularity cannot be denied, yet it does present serious risks to investors. Market fluctuations may cause losses for traders while its anonymity makes tracking fraudulent activities difficult. To protect investors’ best interests, New York State Attorney General Letitia James introduced legislation regulating crypto trading companies; her bill will increase transparency while imposing similar rules as other financial services providers.
The US has an uncertain regulatory environment surrounding cryptocurrency. Multiple agencies exist that oversee different aspects of it – for instance, the Securities Exchange Commission focuses on cryptocurrency trading platforms and coins to ensure that they comply with securities laws; while the Commodity Futures Trading Commission regulates them as commodities to ensure fair transactions.
Cryptocurrency regulation is complex and evolving rapidly, leaving much uncertainty within the industry. One major challenge stems from digital currencies being borderless; therefore they require international collaboration in order to avoid regulatory arbitrage.
Regulators from across the world, including the European Union and World Economic Forum, are spearheading efforts to regulate cryptocurrency. Both institutions are working toward creating an international standard for this space that will serve to clarify how regulators interpret cryptocurrency trading rules while helping prevent illicit uses for these assets.
Regulations
In the United States, regulatory authorities hold diverging views on how best to regulate cryptocurrency. While the Securities and Exchange Commission (SEC) takes an expansive view of this industry, Commodity Futures Trading Commission (CFTC) takes a narrower view. These differences highlight just how difficult it can be regulating digital assets.
SEC Chairman Jay Clayton has advocated that certain digital assets be classified as securities and registered with his agency, while the Commodity Futures Trading Commission believes they should be treated as commodities instead. These two agencies have engaged in an intense tug-of-war over this matter, with Rostin Benham of CFTC advocating during a Senate Agriculture Committee hearing for Congress to grant his agency expanded powers over digital assets.
Criminals’ use of cryptocurrency for illicit purposes has also caused concern, and this is why some governments have adopted tightened regulations for cryptocurrency exchanges while others take a more measured approach. For instance, FinCEN requires crypto exchanges in the US to establish protocols for recordkeeping and submit suspicious activity reports as well as wallets verify user identities before operating.
State regulators are also working hard to bring clarity into the crypto industry. Canada treats cryptocurrency as a commodity for taxation purposes and requires investors to report gains. Furthermore, Canada has enforced stringent banking regulations against cryptocurrency firms operating within its territory.
Taxes
With cryptocurrency’s rise to fame, the Internal Revenue Service (IRS) is tightening enforcement of tax laws pertaining to them. Crypto traders – particularly those trading on centralized exchanges – should take note of these new rules, so as not to run afoul of any laws. For instance, November 2021 legislation mandates any company or individual who transfers digital assets for someone else be considered brokers and must file Form 1099-B with the IRS for tax reporting purposes. Furthermore, FinCEN now mandates cryptocurrency exchanges must verify customer identities before trading can occur.
FinCEN is working hard to ensure that cryptocurrencies sold for sale in the U.S. are subject to taxes like other forms of investment income – this is essential as cryptocurrency does not qualify for coverage by the Federal Deposit Insurance Corp or Securities Investor Protection Corporation, two key protection mechanisms against brokerage firm failure.
Wash Sale Rule does not currently apply to cryptocurrency trading, meaning if you sell at a loss and immediately repurchase at a cheaper price you cannot deduct that loss from taxes – another reason many policymakers want tighter regulations regarding cryptocurrency sales.
Security
Cryptocurrency regulations offer various security measures intended to thwart money laundering, terrorist financing and other forms of cybercrime. Furthermore, these regulations can enhance transparency and eliminate conflicts of interest; however they may not provide enough protection from risks inherent to cryptocurrency use – leading many people to avoid them altogether.
As the United States works toward cryptocurrency regulations, it has sought a balance between encouraging entrepreneurial cryptocurrency ventures and discouraging criminal activities using virtual currencies. The Biden administration has attempted to address these concerns by supporting new regulations development as well as sanctioning or recovering payments made to criminals using cryptocurrency payments.
Multiple regulatory bodies have taken part in creating these regulations, including the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC). The former oversees cryptocurrency derivative trading while the latter oversees other aspects of industry including initial coin offerings (ICOs) and decentralized finance platforms (DeFi).
European Union regulators are actively exploring cryptocurrencies. One proposal under consideration would establish a licensing system for cryptocurrency exchanges and new rules for crypto service providers; additionally, higher technology risk management requirements will likely be enforced at financial institutions. It is anticipated that this proposal will be finalized by 2022.