Cryptocurrencies have become an increasingly popular means of payment, investment and value, and as a result, they have come under increased scrutiny from governments around the world. Some countries like China have outlawed or made cryptos illegal. Law’s and regulations surrounding cryptocurrency are constantly evolving as lawmakers attempt to keep up with this rapidly growing and complex market.
In recent years, we have seen numerous changes to laws that affect cryptocurrency use, trade, and taxation. Multiple government agencies even here in the United States are forming regulations to control these new currencies. Though we still expect to see the future as cryptocurrency continue to gain widespread adoption.
Regulation of Cryptocurrency
In recent years, there has been an increasing push for regulation of cryptocurrencies, particularly by governments concerned about their potential for money laundering and other illegal activities. In the United States, the Financial Crimes Enforcement Network (FinCEN) has been particularly active in this area, issuing guidance to financial institutions on how to comply with anti-money laundering (AML) and know-your-customer (KYC) regulations.
In 2020, FinCEN proposed a rule that would require banks and money services businesses to verify the identity of customers who transact with self-hosted wallets. The proposed rule sparked a wave of opposition from the cryptocurrency industry, which argued that it would be difficult to comply with and would stifle innovation. Ultimately, the rule was never implemented, but it highlighted the tension between the cryptocurrency industry and government regulators.
In addition to FinCEN, the Securities and Exchange Commission (SEC) has also been active in regulating cryptocurrencies. In 2019, the SEC issued guidance on when cryptocurrencies and initial coin offerings (ICOs) would be considered securities, subject to the same laws and regulations as traditional securities. This guidance has led to increased scrutiny of ICOs and other cryptocurrency offerings. With the downfall of FTX these calls for regulation have only increased.
Taxation of Cryptocurrency
One of the most significant changes in recent years has been the increased attention paid to cryptocurrency taxation. In the past, many cryptocurrency holders were unsure about how to report their holdings to the IRS, leading to widespread non-compliance.
In 2019, the IRS issued new guidance on cryptocurrency taxation, stating that cryptocurrency would be treated as property for tax purposes. This means that cryptocurrency gains and losses are subject to capital gains tax, just like traditional investments. The guidance also clarified that cryptocurrency holders must report all transactions, including trades between cryptocurrencies, to the IRS.
The IRS has also been increasing its enforcement efforts in this area, sending warning letters to cryptocurrency holders who may have failed to report their holdings correctly. In 2020, the IRS added a question to the front page of the 1040 tax form asking taxpayers if they had engaged in any cryptocurrency transactions during the tax year.
Trade and Legal Consequences
As cryptocurrency gains in popularity, it is also becoming more widely used for trade, both domestically and internationally. However, the legal consequences of using cryptocurrency for trade can be complex and are still evolving.
One area of particular concern is the use of cryptocurrency for illegal activities, such as money laundering and terrorist financing. Because of the perceived anonymity of cryptocurrency transactions, it can be difficult for law enforcement agencies to trace and prevent such activities.
Another concern is the potential for cryptocurrency to be used to circumvent international sanctions. For example, in 2020, the US Treasury Department sanctioned two individuals for their involvement in a scheme to launder money using cryptocurrency in violation of US sanctions against North Korea.
As a result of these concerns, we may see increased regulation and enforcement efforts to prevent the use of cryptocurrency for illegal purposes. This could include increased AML and KYC requirements for cryptocurrency exchanges and other financial institutions that deal with cryptocurrency.
Looking to the future, we can expect to see continued efforts by governments and regulators to keep up with the changing cryptocurrency market. One area of particular concern is the potential for stablecoins, which are cryptocurrencies that are designed to maintain a stable value relative to a traditional currency such as the US dollar. Stablecoins have become increasingly popular as a means of payment and as a store of value, but their potential impact on financial stability and monetary policy has raised concerns among regulators. In response to this the United States government is exploring options of a crypto backed and based currency to replace the standard ledger of current the current dollar.
In December 2020, the US Treasury Department’s Office of the Comptroller of the Currency issued guidance allowing national banks and federal savings associations to hold stablecoin reserves as a service to customers. However, the OCC’s also stated that stablecoin issuers must ensure that their reserves are always sufficient to cover the outstanding value of the stablecoins they have issued.
In addition to stablecoins, there is also increasing interest in central bank digital currencies (CBDCs), which are digital versions of traditional fiat currencies that are issued and backed by central banks. CBDCs have the potential to offer many of the benefits of cryptocurrency, such as fast and cheap transactions, while also providing greater stability and regulatory oversight.
Several central banks around the world are currently exploring the possibility of issuing CBDCs, including the People’s Bank of China, the European Central Bank, and the US Federal Reserve. However, the regulatory and technological challenges of implementing CBDCs on a large scale are significant, and it may be several years before we see widespread adoption.
The cryptocurrency market is constantly evolving, and laws and regulations surrounding cryptocurrency are also changing rapidly. Governments and regulators around the world are struggling to keep up with the pace of innovation, while also trying to balance the potential benefits of cryptocurrency with the risks of illegal activities and financial instability.
In recent years, we have seen significant changes in laws and regulations surrounding cryptocurrency, particularly in the areas of AML and KYC compliance, taxation, and securities regulation. We have also seen increased attention paid to the potential risks of cryptocurrency use, particularly in relation to money laundering and terrorism financing.
Looking to the future, we can expect to see continued efforts by governments and regulators to keep up with the changing cryptocurrency market, particularly in the areas of stablecoins, CBDCs, and DeFi. However, any efforts to regulate cryptocurrency must be carefully balanced against the potential benefits of innovation and accessibility that cryptocurrency offers. We can expect to see ongoing debates and discussions about the appropriate role of government regulation in this rapidly changing market. It will be important for all stakeholders, including governments, regulators, industry participants, and consumers, to work together to ensure that the cryptocurrency market continues to evolve in a safe, responsible, and sustainable way.