Alphabet Soup
For over a decade, cryptocurrency has captured the imagination of investors, entrepreneurs, and technologists alike, presenting new opportunities and challenges in the world of finance. And if the financial world has taught us anything, it’s that where consumer interest journeys, regulators are quick to follow.
The cryptocurrency craze is no exception. In a stunning display of bureaucratic synchrony, nearly every agency in the United States government has attempted to get their hand in the pot, leaving those operating in the space with an indecipherable alphabet soup. From the SEC and the CFTC’s never ending battle over whether various tokens are securities or commodities, to the myriad of money transmitter laws that exist between the state and federal levels, to the IRS enacting a rule they immediately announced they wouldn’t enforce, maintaining compliance in the U.S. crypto space can often be a whirlwind.
For individuals and businesses involved in cryptocurrency, understanding the tangled web of regulations the United States continues expanding is essential to successfully navigating this ever-evolving landscape. In this article, we will provide an overview of some of the key regulatory ambiguities surrounding cryptocurrency in the United States, shedding light on the complexities that demand expert legal counsel.
SEC v. CFTC
The most salient variability comes from the jurisdictional battle between the SEC and the CFTC over which will govern cryptocurrency transactions. On the one hand is the SEC, led by Chairman Gary Gensler, arguing that many cryptocurrencies should be classified as investment contracts, subjecting them to federal securities laws and regulations. According to the SEC, most cryptocurrencies classify as investment contracts because they involve an investment of money in a common enterprise with a reasonable expectation of profits to come from the efforts of others.
On the other hand is the CFTC, arguing that many cryptocurrencies are either sufficiently decentralized so as to foreclose the existence of an Active Participant (“AP”)—a necessary component of an investment contract—or contain so much utility that purchasers are not purchasing with the expectation of a profit, but rather for consumptive purposes. Unfortunately, however, it remains unclear what constitutes “sufficient” decentralization, or how much utility is needed before a token becomes a utility token rather than one based on speculation.
The battle between these agencies is more than a theoretical debate—it has practical and far-reaching implications for the cryptocurrency industry and those operating within it. For example, whether a particular cryptocurrency classifies as a security or a commodity determines whether those advising as to the value of or the advisability of buying a certain crypto product must register as investment advisers with the SEC or as commodity trading advisors with the CFTC, or those acting as intermediaries in the purchase and sale of various crypto products must register as broker-dealers with the SEC or as futures commission merchants with the CFTC.
The tug-of-war between the SEC and the CFTC over crypto regulation underscores the challenges posed by this rapidly expanding industry. Achieving the right balance between investor protection and innovation will be crucial to fostering a healthy and thriving cryptocurrency ecosystem in the United States.
To help alleviate the pain, there has been an increasing call for Congress to step in and provide a comprehensive legal framework that defines the regulatory jurisdiction of both the SEC and the CFTC in the crypto space.
Such legislation would provide much-needed clarity and promote responsible innovation while safeguarding investors. In the meantime, hiring counsel that is well-educated in the legal and technical developments of the crypto industry is the best way to maintain compliance in this ambiguous environment.
FinCEN v. the States
While not necessarily always at odds with each other, further complicating compliance in the United States are the scores of definitions applying to money transmitters at both the federal and state level.
On the one hand is FinCEN, who has its own definition of money transmission and regulations to abide by. FinCEN has released a complex, 30-page guidance covering the application of its regulations to various cryptocurrency business models, attempting to cover as many areas of crypto as possible in just a handful of examples. This leaves those operating in the space with the undesirable task of playing a game of analogy, with the potential for jail time if they lose.
In addition to FinCEN, each state has its own set of regulations and accompanying definitions of what it means to be a money transmitter, with some states offering specific guidance for virtual currencies, and others having not updated their money transmitter laws in decades. Rationalizing all 50 states’ regulations with FinCEN’s is a formidable endeavor that is bound to drown anyone not familiar with the regulations.
IRS v. Itself
One of the IRS’s most prominent revisions of the tax code occurred in 2018, when the IRS required, from that point forward, taxpayers to recognize a taxable event at the time they convert any cryptocurrency into another cryptocurrency. One of the most salient controversies at the time was whether past conversions between cryptocurrencies were covered, which turned on whether converting between cryptocurrencies was converting between “property of like kind.”
Ultimately, investors were advised to err on the side of caution, and treat any swap between cryptocurrencies as a taxable event. Lawyers and accountants based this precaution on the fact that the IRS had previously refused to recognize gold and silver as “property of like kind.” In the same manner by which the IRS argued that “[a]lthough the metals have some similar qualities and uses, silver and gold are intrinsically different metals and primarily [] used in different ways,” those seeking to stay off IRS’s naughty list figured any two cryptocurrencies could be considered “intrinsically different.”
Fast forward six years and a new question has emerged that was certainly not on anyone’s bingo card: whether the IRS will actually enforce its rules. In 2021, President Biden signed into law a federal infrastructure law providing that beginning in 2024, key details surrounding crypto payments over $10,000—such as the name, address, and social security number of the payer—were required to be reported to the IRS.
As one would expect from an industry based on anonymity and privacy, the crypto industry revolted. Facing severe backlash from all aspects of the crypto community, and genuine concern over how to enforce compliance with such a regulation in a nameless world, the IRS made clear that businesses “do not have to report the receipt of digital assets the same way as they must report the receipt of cash until Treasury and IRS issue regulations.” Thus, until the Treasury and IRS can decipher a way to carry out laws that were intended to apply to face-to-face transactions to those occurring anonymously via wires across the globe, the $10,000 reporting requirements will remain cash-only.
Conclusion
Navigating the intricate web of cryptocurrency regulations in the United States is undoubtedly a daunting task, and the dynamic nature of this space underscores the need for ongoing vigilance and legal counsel to avoid potential pitfalls and ensure that businesses and investors can thrive within the bounds of the law.
As attorneys operating exclusively in the digital asset space, we understand the importance of staying informed on the latest developments and helping clients stay compliant as cryptocurrency’s future in the United States continues to be shaped by regulatory developments. Whether you are an investor, entrepreneur, or business involved in cryptocurrency, our team is here to provide the legal counsel needed to maneuver this complex landscape. If you believe we can be of assistance, schedule a consultation here.