In recent years, the general opinion on cryptocurrencies has shifted. What was once viewed as an unreliable asset reserved for tech enthusiasts is now seen as a trusted digital asset available on most modern brokerages.
That mainstream acceptance has come with greater regulatory scrutiny. Many countries are starting to collect taxes on capital gains and crack down on financial crimes in the cryptocurrency space. Moreover, the idiosyncrasies of cryptocurrencies have regulators asking questions.
Cryptocurrency regulation in the United States
Most of the discussions around cryptocurrency regulations are at the agency level. United States agencies including the Department of Treasury, Securities and Exchange Commission (SEC), Internal Revenue Service (IRS), and Financial Crimes Enforcement Network (FinCEN) have discussed how to govern the digital asset.
In early 2020, the U.S. Treasury Department announced that it would be taking a more aggressive stance in dealing with cryptocurrencies to reduce financial crime and bring transparency to an otherwise complicated asset class.
Why is crypto being regulated?
The SEC, on the other hand, views cryptocurrencies as a security like any other stock or ETF on a stock exchange.
What’s more, the IRS treats cryptocurrencies as property and thus charges capital gains taxes. Short-term capital gains — equal to the ordinary tax rate — are charged when investors hold the asset for less than a year. For assets held more than one year, the IRS applies friendlier long-term capital gains taxes. Investors should consider the tax implications of using cryptocurrencies for gifts, donations, or payments.
Cryptocurrency owners are also required to maintain records of their positions for tax purposes. That includes receipts, sales, exchanges or other dispositions with the transaction’s fair market value.
What are the regulatory issues of cryptocurrency?
At the same time, FinCEN does not consider cryptocurrencies as legal tender, but in 2012, they began to recognize digital assets as a substitute for currency. This lumped them in with traditional money transmitters, which accept currencies, funds, or other stores of value for a currency controlled by another person. The Bank Secrecy Act (BSA) has traditionally regulated money transmitters.
The Commodities Futures Trading Commission (CFTC) classifies cryptocurrencies as a commodity that allows them to trade on public derivatives markets. Since making this assertion, the CFTC has ramped up cryptocurrency regulation, taking action against unregistered Bitcoin futures exchanges, enforcing laws prohibiting wash trading and prearranged trades and addressing a Bitcoin-related Ponzi Scheme.
The CFTC believes the appropriate response to digital assets involves consumer education, market intelligence, robust enforcement and government-wide coordination.
Cryptocurrency regulation in the European Union
Like the U.S., the European Union (EU) has accepted blockchain and digital assets as part of the investable universe. In January 2020, the governing bodies signed the 5th Anti-Money Laundering Directive (5AMLD) into law, marking the first time cryptocurrency providers will fall under regulatory purview. The law states that member states must document the identities and addresses of all digital asset owners.
Unlike the U.S., where the SEC imposes a standard capital gains tax, EU member states have different tax rules for cryptocurrencies. Some European countries collect 0 to 50% on derived profits while others take nothing.
On the other hand, exchanges are not regulated by the EU, but some must register with their regional authority.
As cryptocurrency continues to gain prominence, regulations are likely to get stronger, especially in light of issues such as crypto based financial services, money laundering and digital currency.
