Regulations are important for digital assets investors to keep up with because they make handling cryptocurrency easier and help know the dos and don’ts. However, the bad and good of regulations are an issue of debate among investors. Some believe crypto shouldn’t be regulated, while others think rules can help bring orderliness to the already messy crypto market.
The need for regulation increases as crypto gains more popularity by the day. This is because the higher the activities in the crypto market, the rowdier it gets, and it is easy for many things to go haywire due to no laws. Different countries and regional bodies like the European Union have taken matters into their hands to prepare legislation governing cryptocurrency use. The US is one of the countries that have set its laws regarding crypto regulation.
While the US laws can be complicated because different states also have the autonomy of making adjustments or adding their state laws, there are rules generally followed for regulating cryptocurrency in the US.
Regulation & Prices
Crypto regulations are generally good, as they’re poised to bring stability and orderliness to a raucous market. While some investors fear that regulations mean prices will crash, others seem to think otherwise. In fact, the likelihood of that happening is low. This is because crypto regulations will only negatively affect prices if operations are heavily infringed.
If a regulation restricts crypto activities heavily, then prices will be negatively affected as trading volume reduces and price drops. However, moderate rules that improve the security of digital assets are bound to bring more good. The crypto market has experienced high volatility since 2021, and 2022 saw the biggest crashes to ever happen in the crypto market— the Terra crash and the FTX crash— reducing the market cap to less than $1 trillion.
With regulations, the probability of unexpected crashes and losses like these are bound to minimize because there would be a law to hold them accountable. A solid system in place ensures that crypto investments are safer. This will motivate investors to invest more, which could positively affect the market and lead to stability/increase in prices. In turn, more investors will want to invest in more crypto assets, knowing it’s safe to do so, and the market will have a good chance of maintaining stability/experiencing a price boom.
Another importance of regulation is that crypto will most likely last forever, so the faster the government can implement laws for its safe use, the better for crypto investors.
Crypto Regulation in the US
September 2022 saw a regulatory framework drafted by the US government containing proposed cryptocurrency regulations. These regulations contain rules concerning digital assets acquisition, trading, taxes, etc.
Why is this necessary? The crypto market has needed regulations for a long time, mainly because it is used to support cybercrime. However, the government hopes to prevent more of that by setting policies to make it harder for criminals to navigate and crack down on them when caught. In a country where over 16% (approx. 40 million) of people have interacted with cryptocurrency, these regulations are essential and will help protect them from harsh market conditions.
Some of the key goals the US hopes to achieve from this regulation are;
- Maintaining financial stability.
- Preventing the illegal use of crypto.
- Maintaining US leadership in global financial affairs.
- Focusing on responsible tech innovation.
There are many issues the regulation is looking to solve. For example, issues like crypto mining have been discussed and considered harmful to the environment due to adverse effects on the climate. As such, the US has ruled that each miner be tracked and monitored on their energy use to regulate the impact of mining on the environment.
NFTs and unlicensed crypto exchanges have been classified as illegal following the proposed amendments to the Bank Secrecy Act and other related laws like anti-tip-off statutes, laws against unlicensed money transmitting, and more. The US government also discussed stablecoins as they’re now crucial to the economy due to their ability to disrupt the economy when not properly stabilized (case in point; TerraUSD, which saw over $600B wiped off the economy). As such, it was decreed that the US treasury would work with financial institutions to curb the risks of certain digital assets.
The issue of Defi is still unclear, but it has been decreed that the US treasury will hold an illicit finance risk assessment to determine if Defi is a threat to the growing digital finance industry. Furthermore, the U.S. government is poised to create its Central Bank Digital Currency (CBDC) to promote access to financial services, but it still needs to be determined how they want to go about it. More research is still required to know the technology that will support the CBDC, though it is said that using the CBDC may support international sanctions.
The reactions from the crypto community to these regulations have been mixed so far. Some think it’s the next best thing after sliced bread and will help regulate the market. Still, others think it’s regressive and restrictive, especially the part that states that those caught in unlawful practices will face “aggressive investigations and enforcement actions.”
People have also said that these regulations might make companies leave the US to escape the control and accountability that comes with regulations and operate more flexibly. It is unclear what further changes the US crypto regulatory framework will undergo, but these basics have already been laid out. It is the duty of the US government to provide a balance so that crypto-related businesses can work freely and maintain a level of customer protection.
Under US law, security is an investment contract defined as an investment of money in a joint enterprise expected to yield profits. Generally, digital assets are viewed as securities when judged by the substance of the transaction, not form. However, in 1943, the Supreme Court concluded that a security’s reach goes beyond its typical forms. It could be irregular or uncommon, but as long as they’re offered as an investment contract with possible interests, they’re classified as a security.
That being said, cryptocurrency is classified as a security under US laws, and the SEC (Security and Exchange Commission) regulates stocks and securities in the US While cryptocurrencies are generally classified as securities, not all of them are recognized as such. For example, coins obtained through mining aren’t regarded as securities because they’re entirely decentralized.
However, if the cryptocurrency is offered as an investment for fundraising and the cryptocurrency is bound to have a value attached to it, it is considered a security. Utility tokens, however, are not considered securities because they serve as “access” to a product/service.
You can determine if a cryptocurrency is a security by using “the Howey test.” The Howey test is a court case (SEC vs. W.J. Howey Co.) where the SEC reached the criteria for determining security.
This test says that an asset is a security if it is;
- An investment of money
- A common enterprise
- Has profit attached
- Derived from other people’s efforts.
If a cryptocurrency is determined to be a security, its developers must undergo a registration and verification process with the SEC. They must also explain how they intend to give the token value. This can be a costly process.
Suppose the developers do not want to register. In that case, they must file a small business exemption, which allows them to sell to “accredited investors” within the U.S. It will not be listed on U.S. exchanges because most exchanges don’t like the hassle of verifying that an investor is accredited. If the developers refuse to register, then no exchanges will list them, and they must leave U.S. soil and not sell at all to Americans. This means that most cryptocurrencies available to American investors are limited.
The IRS classified Bitcoin and other virtual currency under “property” in 2014. Cryptocurrency is mainly taxed as “capital gains.” This means that you’re supposed to report trade profits and losses. Your tax liabilities could be more if you have more profits than losses, thus being a capital gain. On the other hand, recording more losses than gains could lead to lower tax liabilities, which makes it a capital loss.
It is mandated that American crypto investors do the following:
- First, maintain a record of cryptocurrency purchases and sales.
- Second, pay taxes on gains made from crypto sales to cash.
- Third, pay taxes based on purchase gains.
- Finally, pay taxes based on the value of mined cryptocurrencies.
It is worth noting that airdrops are also taxed based on their market value when you receive them. Then, they are taxed as ordinary income.
Future regulations are laws the federal government has discussed but hasn’t fully considered or implemented.
If you sell an asset (stocks, mutual funds, securities, etc.) at a loss and immediately buy back at that lower price, you cannot claim tax losses— this act is known as a wash sale. Note that the IRS considers crypto a property, not an investment. This means that you can not use the wash sale rule in crypto. So, if your crypto dumps and you sell and re-buy, you can claim a tax loss.
Many politicians are displeased that some crypto investors use this method to bypass taxes, so they want to ban it altogether. While it didn’t pass the Senate in 2021, this loophole is still available, but it is unclear if this will be banned sooner or later.
Crypto Banking And Exchange Regulations
In January 2022, a roadmap was released after a “crypto sprint” exercise was created to determine whether cryptocurrencies need further regulations. This roadmap contains areas where further research and possible regulations might be needed. They are:
- Custody/sales of crypto assets by banks
- Issuance of stablecoins
- Cryptocurrency collateral for bank loans, etc.
Further insight shows that the US government may be looking at the legalization of crypto sales by banks and might make more rules limiting crypto exchanges. While it could make crypto more readily available and lead to a price increase, it could also lead to a price crash as it becomes more centralized, thus making crypto decentralization useless.
Final Notes on Crypto Regulation in US
Crypto regulations can either be a blessing or a curse, depending on how each governing body goes about it. In the case of the US, it could either make crypto accessible and cause a massive boom or crash it due to stricter policies. Whatever the case may be, knowing the crypto regulations of your country goes a long way in helping you make crypto investment decisions.
Founder & CEO of Vestinda.
Compacting years of investment portfolio building into just a few minutes.