Crypto Regulations in the USA

2010-2014. Crypto & crime

In its early days, Bitcoin was primarily used for illegal markets and illicit transactions.

The Silk Road based in USA became symbolic of illegal marketplaces trading through bitcoin. Launched in 2011, it was an anonymous website dealing in illegal drugs and various other items. By March 2013, the site listed 10,000 products for sale from vendors and generated millions of dollars in revenue, largely untraceable due to bitcoin being the medium of exchange. In 2013 and 2014, the FBI shut down the Silk Road twice, and its founder was sentenced to life in prison.

These black markets attracted money launderers and drug dealers, raising public concerns about the misuse of cryptocurrencies. Regulators began to take action.

As concerns about black markets and money laundering lingered, Bitcoin faced another significant setback with the collapse of Mt. Gox in 2014. At the time, Mt. Gox was the largest Bitcoin exchange platform, handling over 80% of global Bitcoin trading volume.

On February 7, 2014, the Japan-based company announced a halt on all Bitcoin withdrawals after discovering a software bug that allowed a hacker to steal millions of dollars' worth of assets. Later that month, Mt. Gox filed for bankruptcy, revealing it had lost nearly 750,000 of its customers' bitcoins and around 100,000 of its own, amounting to approximately 7% of all bitcoins in existence. The total loss was estimated to be around $473 million at the time of the filing.

2015-2018. DCG, Circle, Blockchain Association

In October 2015 MasterCard advanced its position in the digital currency space by investing in the Digital Currency Group (DCG). DCG, led by Barry Silbert, the founder of SecondMarket, manages a portfolio of Bitcoin and virtual currency companies. This move signaled MasterCard's commitment to exploring and supporting the evolving landscape of digital currencies.

The goal of DCG was to invest in companies within the digital currency and blockchain ecosystem, aiming to accelerate the development of a better financial system. In March 2014, DCG invested in Circle, a peer-to-peer payments company that facilitated the easy exchange, storage, sending, and receiving of bitcoin. By 2016, DCG portfolio companies had raised 70% of the $1.3 billion in funding for the blockchain industry.

Unlike its predecessor Tether (USDT), which faced scrutiny over the adequacy of its reserves, Circle USDC token developers were mandated to maintain full reserves of the corresponding fiat currency. This requirement ensured greater transparency and trust. Additionally, USDC could operate with a variety of financial institutions, providing more flexibility and reliability in its operations.

In 2018, The Blockchain Association was launched, with members including Circle, Coinbase, Protocol Labs, Digital Currency Group, and Polychain Capital. This Washington, DC-based non-profit trade association aimed to engage policymakers in meaningful discussions to drive progress for the blockchain ecosystem.

Venezuela experience

Since 2017, the U.S. has imposed broader economic sanctions and a financial embargo on Venezuela, including a 2018 ban on crude oil exports from Venezuela and the exclusion of the country's financial system from SWIFT. As hyperinflation and U.S. sanctions disrupted Venezuela's economy, cryptocurrency emerged as a vital tool for sending remittances, protecting wages from inflation, and helping businesses manage cash flow in a rapidly depreciating currency. In 2017, Venezuelan President Nicolas Maduro announced the creation of the state-backed petro cryptocurrency, which was used to make small payments to retirees and promoted as a currency for exchanging oil and gold.

Beyond the petro, mainstream cryptocurrencies like bitcoin also became widely used to alleviate the economic crisis, with restaurants and supermarkets accepting them as payment. This marked the first instance of U.S. economic sanctions being circumvented via cryptocurrencies. In response, the U.S. amended its executive order in 2020 to include cryptocurrencies, prohibiting U.S. persons from transacting in any digital currency issued by the Maduro regime. Additionally, businesses paid in bitcoin, Ethereum, or other cryptocurrencies faced potential U.S. sanctions.

Venezuela's situation underscored for the U.S. government that cryptocurrency could be a potent tool not just in business and technology, but also in undermining political power on the global stage.

2019-2022. Binance ban, Bitcoin ETF and UST crush

In July 2019, Binance was banned from operating in the U.S., leading to the creation of Binance.US to comply with local laws. Following this, Binance announced a review of user accounts to ensure adherence to its terms of use and know-your-customer (KYC) procedures, ultimately stating that it could not provide services to any U.S. persons.

At the same time, Bitfinex and Tether, which claimed to hold a dollar in cash for every tether token issued, faced accusations from New York’s attorney general. It was alleged that Bitfinex used at least $700 million from Tether’s cash reserves to cover an $850 million loss.

On April 3, 2019, the SEC released a framework that classified tokens as securities if they met the criteria of the Howey Test, thereby restricting the use of utility tokens. This regulatory pressure underscored the importance of compliance for crypto entrepreneurs in the U.S.

By the end of July 2019, representatives from the crypto industry, finance, and law sectors testified before the Senate Committee about various types of digital currencies, their infrastructure, applications, and the potential benefits and risks associated with each.

In April 2021, Coinbase, the largest crypto exchange in the U.S. at the time, made history by listing on the Nasdaq stock exchange, becoming the first major cryptocurrency company to do so in the U.S.

By October 2021, the SEC approved the first Bitcoin-linked ETF, the Proshares Bitcoin Strategy ETF (BITO), which was listed on the New York Stock Exchange. This marked a significant step towards mainstream acceptance of cryptocurrency.

Meanwhile, Miami Mayor Francis Suarez championed his city as a burgeoning hub for crypto innovation, proposing to pay public employees and accept taxes in cryptocurrency.

Traditional financial giants like Goldman Sachs, Morgan Stanley, and BNY Mellon revived their crypto trading efforts, which had been paused since the 2017 ICO bubble burst. Corporations like Tesla, MicroStrategy, Meitu, PayPal, and Visa also began adopting crypto as part of their treasury reserves.

In 2022, after the crash of stablecoin UST along with LUNA and fluctuations in USDT, the SEC announced plans to double the size of its Crypto Assets and Cyber Unit, emphasizing a push for stricter regulation, particularly for stablecoins.

In 2022, the U.S. introduced a new regulatory framework that expanded the authority of existing market regulators, specifically the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). This move aimed to enhance oversight within the cryptocurrency sector.

In March, President Biden signed an executive order on "Ensuring Responsible Development of Digital Assets," highlighting the strategic importance of cryptocurrency for maintaining U.S. leadership in the global financial system and promoting economic interests.

The SEC has already been actively involved in regulating this space, evidenced by numerous lawsuits and complaints against prominent crypto-focused entities such as Ripple, Coinbase (COIN), and Binance (BNB). These actions highlight the SEC's commitment to addressing compliance issues related to crypto products and services.

In 2023, a significant development occurred when a district court of appeals ruled that Ripple's sale of XRP constituted securities offerings only when sold to institutional investors, not when sold on exchanges. This decision marked a partial victory for the crypto industry. Further progress came in November when the court overturned the SEC's denial of Grayscale's application to convert its Bitcoin ETF Trust to an ETF holding bitcoin. The court mandated the SEC to re-evaluate the application, ultimately leading to the approval of the first Bitcoin Spot ETFs in January 2024.

Despite these advancements, the regulatory landscape in the U.S. remains dynamic and contentious. The ongoing tussle between regulators, broker-dealers, investors, and the crypto industry indicates that regulatory evolution is far from settled.

Gary Gensler (an American government official and former Goldman Sachs investment banker currently serving as the chair of the U.S. Securities and Exchange Commission (SEC)) emphasized the ongoing nature of this regulatory journey, stating that recent approvals do not necessarily reflect the Commission's stance on broader crypto asset regulations. He reiterated that while certain spot bitcoin ETP shares were approved, this does not equate to an endorsement of bitcoin itself or a broader acceptance of crypto assets as compliant with federal securities laws. Gensler maintained that most crypto assets should be considered investment contracts and thus fall under federal securities regulations.

In July 2023, an updated version of the Responsible Financial Innovation Act (RFIA) was introduced to enhance consumer protections amidst a wave of bankruptcies among blockchain firms. Shortly after, House Representatives Patrick McHenry and Glenn Thompson introduced the Financial Innovation and Technology for the 21st Century Act (McHenry-Thompson Bill). This legislation aims to establish a comprehensive statutory framework for regulating digital assets, addressing regulatory uncertainties and ensuring clarity in the evolving digital asset landscape. The bill underscores efforts to balance innovation with robust consumer safeguards, reflecting ongoing legislative efforts to adapt to the complexities of the digital economy.

General regulation

In the United States, cryptocurrencies are governed by a complex framework involving federal and state regulations. Key federal agencies include the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Federal Trade Commission (FTC), and Treasury, through entities like the IRS, OCC, and FinCEN. These agencies oversee various aspects of digital assets, though formal rulemaking has been sparse.

Starting in 2022, U.S. Congress introduced pivotal legislation to clarify regulatory uncertainties. The Responsible Financial Innovation Act (RFIA) and Toomey Stablecoin Bill aimed to establish robust regulatory frameworks for stablecoins and integrate digital assets into existing tax and banking laws. The Digital Commodities Consumer Protection Act (DCCPA) empowered the CFTC to regulate digital commodity platforms, while the Digital Trading Clarity Act provided guidelines for digital assets not deemed securities.

At the state level, Wyoming led progressive efforts to promote blockchain technology with favorable legislation, such as enabling crypto-focused banks and recognizing decentralized autonomous organizations (DAOs). Conversely, other states tightened regulations, requiring money transmitter licenses for blockchain companies.

The McHenry-Thompson Bill proposed a statutory framework to streamline digital asset regulation under existing SEC and CFTC oversight. It aimed to address regulatory gaps and provide clarity amidst a rapidly evolving landscape. This legislative approach reflects efforts to balance innovation with consumer protection and economic stability.

The Biden Administration's Executive Order outlined priorities including consumer protection, financial stability, and U.S. economic competitiveness in the digital asset space. It called for reports on the feasibility of a U.S. central bank digital currency (CBDC) and policy recommendations for digital asset regulation.

In summary, U.S. crypto regulation combines federal oversight by multiple agencies with state-level initiatives, aiming to foster innovation while ensuring compliance and safeguarding economic interests.

Sales regulation

The sale of cryptocurrency in the United States is primarily regulated under two conditions: first, if it qualifies as the sale of a security under state or federal law; and second, if it falls under the definition of money transmission at the state level or if the entity conducting the sale is classified as a money services business (MSB) under federal law. Additionally, derivative contracts such as futures, options, swaps, and other contracts referencing the price of a cryptoasset categorized as a commodity are regulated by the Commodity Futures Trading Commission (CFTC) pursuant to the Commodity Exchange Act (CEA). The CFTC also has authority over attempts to manipulate markets involving commodities like cryptoassets. For instance, the CFTC recently took action against Avraham Eisenberg in the Southern District of New York for unlawfully misappropriating over $110 million in digital assets from Mango Markets using "oracle manipulation," marking its first enforcement action involving fraud or manipulation on a decentralized digital asset exchange and the first case related to "oracle manipulation."

Securities laws

In the United States, the regulation of cryptocurrency sales under securities laws is primarily overseen by the Securities and Exchange Commission (SEC). The SEC's regulatory authority extends to the issuance or resale of any token or digital asset that qualifies as a security under U.S. law. The legal definition of a security encompasses "investment contracts," which the U.S. Supreme Court has defined in the landmark Howey case as an investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others.

The SEC has taken a clear stance that even tokens issued in Initial Coin Offerings (ICOs) claiming to have "utility" must still comply with securities laws if they meet the elements of the Howey test. This position was underscored by the SEC Chairman's testimony to the U.S. Senate Banking Committee in 2018, where he emphasized that labeling a token as a "utility" token or structuring it to provide utility does not exempt it from being classified as a security.

The SEC has enforced these securities laws rigorously, as seen in cases against companies like Telegram, Kik, and Ripple Labs. These cases illustrate the SEC's stance on ensuring compliance with U.S. securities laws in the digital asset space. For example, the SEC's actions against Telegram and Kik resulted in settlements where the companies agreed to pay penalties for conducting unregistered token offerings.

In the case of Ripple Labs, the litigation is ongoing, with significant legal arguments centering on whether XRP tokens constitute securities. A court ruling in July 2023 initially found that XRP sales to retail investors were not securities offerings under the Howey test, but sales to institutional investors were deemed as such. This decision, however, was challenged by another judge, highlighting the complexities and ongoing legal uncertainties in this evolving regulatory landscape.

Overall, the SEC's approach to regulating digital assets under securities laws aims to protect investors while fostering innovation. The agency continues to adapt its regulations and enforcement actions to address the unique challenges posed by cryptocurrencies and blockchain technology in today's financial markets.

The landscape of digital asset regulation in the United States is complex and evolving, involving multiple regulatory bodies such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), each with distinct perspectives and mandates.

SEC's Role in Securities Regulation

- The SEC's primary focus is on tokens or digital assets that qualify as securities under U.S. law. These are defined under the Howey test, which considers whether an investment of money is made in a common enterprise with an expectation of profits derived primarily from the efforts of others.

- In recent cases, such as the insider trading charges against a former Coinbase product manager, the SEC alleged violations of Section 10(b) and Rule 10b-5 of the Exchange Act. These charges were based on the premise that certain digital assets traded on Coinbase were securities, requiring compliance with securities laws.

CFTC's Perspective on Commodities

- The CFTC, on the other hand, focuses on digital assets that qualify as commodities under the Commodity Exchange Act (CEA). Commodities are broadly defined to include goods, services, rights, and interests. The CFTC's jurisdiction covers derivatives contracts referencing digital assets that qualify as commodities.

- The McHenry-Thompson Bill and the updated RFIA aim to provide clarity on which digital assets fall under the CFTC's jurisdiction as commodities. This includes tokens that do not confer financial rights and are associated with functional and decentralized blockchain networks.

Tension and Coordination Between SEC and CFTC

- There has been ongoing tension between the SEC and CFTC regarding the classification of digital assets. Commissioner Caroline Pham of the CFTC has criticized the SEC's approach, particularly regarding utility tokens and tokens related to Decentralized Autonomous Organizations (DAOs), advocating for the CFTC to take a leading role in regulating these assets.

- Efforts to harmonize regulation, such as the proposed Digital Trading Clarity Act, aim to provide clear guidelines on how digital assets should be classified and regulated. This includes provisions for collaboration between the SEC and CFTC in determining the regulatory status of digital assets.

Legislative and Regulatory Developments

- Legislative efforts, such as the McHenry-Thompson Bill, propose frameworks for allocating oversight between the SEC and CFTC based on the characteristics and functionality of digital assets.

- Recent court rulings and regulatory actions, including the Ripple case and the Terraform decision, have highlighted legal ambiguities and complexities in digital asset regulation. These cases underscore the need for legislative clarity and regulatory coordination to address emerging challenges in the digital asset space.

Overall, the regulatory framework for digital assets in the U.S. is rapidly evolving, driven by legislative proposals, regulatory actions, and judicial decisions that seek to balance investor protection with fostering innovation in the digital asset ecosystem.

The landscape of money transmission laws and anti-money laundering (AML) requirements in the context of cryptocurrency and decentralized finance (DeFi) is intricate and constantly evolving, involving both federal and state regulations, as well as enforcement actions by regulatory bodies like the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC).

Federal Regulations and Requirements

FinCEN Regulation of MSBs: FinCEN regulates Money Services Businesses (MSBs) under the Bank Secrecy Act (BSA). Virtual currency exchanges and administrators of centralized repositories of virtual currency are considered MSBs and must comply with FinCEN's regulations. This includes conducting a comprehensive risk assessment of money laundering risks and implementing an AML program.

AML Program Requirements: MSBs, including virtual currency exchanges and administrators, must maintain written AML programs that incorporate policies, procedures, and internal controls designed to prevent money laundering and terrorist financing. This includes designating a compliance officer, providing training for personnel on detecting suspicious transactions, and undergoing independent reviews.

OFAC Sanctions: All U.S. persons, including cryptocurrency services, must comply with OFAC sanctions. This involves blocking transactions and freezing assets of individuals and entities listed on OFAC's Specially Designated Nationals and Blocked Persons List (SDN List). Failure to comply with OFAC regulations can result in civil and criminal penalties.

State Regulations on Money Transmission

States have varying laws governing money transmission activities, which may include activities such as money transmission, issuing payment instruments, and selling stored value. Some states regulate these activities only when "money" is involved, defined as a medium of exchange authorized by a government.

New York offers a unique solution with its limited purpose trust company charter, which exempts cryptocurrency companies from many state money transmission laws while enabling them to offer custody and fiduciary services related to cryptoassets.

Challenges and Developments in DeFi

Decentralized Finance (DeFi): DeFi platforms, such as Uniswap, operate without centralized intermediaries and often lack customer identification processes required by AML laws. This raises challenges for regulatory compliance and enforcement.

OFAC Actions: OFAC's designation of Tornado Cash, a decentralized cryptocurrency mixer, demonstrates that decentralized protocols may be subject to compliance obligations similar to centralized services. This was due to Tornado Cash's role in laundering funds associated with malicious cyber activities.

Enforcement Actions: Recent enforcement actions by OFAC against crypto exchanges like Kraken and Poloniex highlight the importance of implementing effective controls to prevent users from sanctioned jurisdictions from accessing their platforms and engaging in prohibited transactions.

Taxation of cryptocurrencies, as per the guidance provided by the IRS, treats virtual currencies like Bitcoin as property rather than currency. This classification has several implications for individuals and businesses holding or transacting in cryptocurrencies:

Tax Reporting Requirements

- Individuals and businesses holding cryptocurrencies are required to keep detailed records of their transactions, including purchases, sales, and any transactions involving goods or services.

- Gains made upon the sale of cryptocurrency for cash, as well as gains made upon using cryptocurrency to purchase goods or services, are taxable. The tax is based on the fair market value of the cryptocurrency at the time of the transaction.

- Mined cryptocurrencies are also subject to taxation. The fair market value of mined cryptocurrency at the date of receipt needs to be reported as income.

Capital Gains Taxation

- For individuals, gains or losses from the sale of virtual currency held as a capital asset (i.e., for investment purposes) are reported on Schedule D of IRS Form 1040 and Form 8949 (Sales and Other Dispositions of Capital Assets).

- If cryptocurrency is held for more than one year as a capital asset, any realized gains are subject to long-term capital gains tax rates, which are typically lower than ordinary income tax rates.

– If cryptocurrency is held for one year or less, gains are subject to ordinary income tax rates.

Hard Forks and Airdrops

The IRS issued guidance (Rev. Rul. 2019-24) on the tax treatment of digital assets acquired through hard forks and airdrops. Taxpayers generally recognize income at the fair market value of the new cryptocurrency received when they gain "dominion and control" over it.

Infrastructure Investment and Jobs Act (IIJA)

Signed into law by President Biden in November 2021, the IIJA mandates that digital asset brokers report transactions valued at more than $10,000 to the IRS. The definition of "broker" under IIJA is broad and includes parties involved in various aspects of digital asset transactions.

Transition of Ethereum to Proof-of-Stake (PoS)

Ethereum's transition from proof-of-work (PoW) to proof-of-stake (PoS) has implications for how transactions are validated and how new Ether tokens are minted. This shift does not directly affect the taxation of cryptocurrencies but marks a significant change in the underlying technology.

Taxation of Staking Rewards

In Rev. Rul. 2023-14, the IRS clarified that taxpayers must include the fair market value of cryptocurrency staking rewards in their gross income for the taxable year when they gain control over the rewards. Control is typically gained when the rewards can be sold, exchanged, or otherwise disposed of.

The development and regulation of cryptocurrency mining have become significant topics at both the federal and state levels in the United States, reflecting broader concerns about energy consumption, environmental impact, and economic opportunities associated with blockchain technology. Here's an overview of recent developments:

Federal Oversight and Concerns

The U.S. House of Representatives Committee on Energy and Commerce’s Subcommittee on Oversight and Investigations held a hearing on January 20, 2022, titled "Cleaning up Cryptocurrency: The Energy Impacts of Blockchains." This hearing highlighted concerns about the energy-intensive nature of cryptocurrency mining and its potential environmental externalities. It indicates federal interest in understanding and potentially regulating crypto mining at a national level.

State-Level Regulations and Initiatives

New York: In June 2022, the New York State Senate passed Senate Bill S6486D, proposing a two-year moratorium on cryptocurrency mining operations that use proof-of-work (PoW) authentication methods. The bill aims to conduct a comprehensive environmental impact review and suspend blockchain mining operations powered by carbon-based energy sources. This reflects a cautious approach to environmental sustainability in crypto mining.
 
Oklahoma: Conversely, the Oklahoma Senate introduced Bill 590, known as the Commercial Digital Asset Mining Act of 2022. This bill seeks to provide tax exemptions for the sale of certain crypto mining equipment and machinery. Oklahoma's initiative illustrates a pro-business approach, aiming to attract and support digital asset mining operations within the state.
 
Kentucky: Similarly, Kentucky has enacted state-tax exemptions for cryptocurrency miners and mining facilities. This is part of broader efforts by states to create favorable regulatory environments to encourage investment and economic activity related to blockchain technology.

Environmental and Economic Considerations

Cryptocurrency mining, particularly Bitcoin mining, has drawn scrutiny due to its significant energy consumption, often derived from carbon-based sources. The debate around the environmental impact of crypto mining is influencing regulatory actions at both federal and state levels.

States like New York are exploring ways to mitigate the environmental impact by imposing moratoriums and conducting environmental reviews, whereas states like Oklahoma and Kentucky are focusing on economic incentives to attract and support mining activities.

National and Global Perspectives

The U.S. federal government's interest in cryptocurrency mining reflects broader global discussions on the energy consumption of blockchain technologies. Countries worldwide are exploring regulatory frameworks that balance economic opportunities with environmental sustainability.

In conclusion, cryptocurrency regulation in the US has evolved with complexity. Initially viewed with skepticism, it now navigates a labyrinth of state and federal laws. The SEC and CFTC grapple over asset classifications, while FinCEN oversees anti-money laundering efforts. Taxation treats cryptocurrencies as property, not currency. Environmental concerns shape state policies on mining, from New York's moratorium to Oklahoma's incentives. Federal debates on energy use and innovation continue, influencing future regulatory paths. Amidst this, the industry seeks balance: fostering growth, ensuring compliance, and integrating new technologies responsibly into the financial landscape, defining the future of crypto regulation in the US.

What are the primary regulatory bodies overseeing cryptocurrency in the US?

The primary regulatory bodies are the SEC and CFTC, with FinCEN overseeing AML/CFT compliance.

How does the US tax cryptocurrencies?

Cryptocurrencies are taxed as property, requiring reporting of gains and losses on each transaction.

What is the significance of the Infrastructure Investment and Jobs Act for cryptocurrency?

It mandates reporting of digital asset transactions over $10,000, expanding IRS oversight.

What impact do state regulations have on cryptocurrency mining?

States like New York and Oklahoma vary in their approaches, from environmental restrictions to tax exemptions for mining activities.