Who and how do regulate cryptocurrency in the US?

Ekaterina Koretnikova, a graduate of the program of additional education, Blockchain Lawyers, said that you need to know about the legal regulation of cryptocurrency in the United States.

The American legal system is multi-level, due to the federal form of state-territorial organization, the regulatory framework is a federal and separate state regulation.

In accordance with the US Constitution, the issues of blockchain and cryptocurrency regulation are not exclusively attributed to Congress. Some states exercised their rights and introduced their own regulation, for example, Arizona, Vermont, Delaware.

At the federal level, a unified regulation of the Uniform Regulation of the Virtual Currency Business Act (URVCBA) has been adopted. This document is advisory in nature, but serves as a guideline for the adoption of legislation and the development of uniform practice.

The Financial Crimes Enforcement Network (FinCEN)

The Financial Crimes Enforcement Network (FinCEN) is responsible for monitoring compliance with money-laundering legislation (AML and CTF legislation), namely the Bank Secrecy Act (BSA), which sets requirements for banks and non-banking financial institutions, such as casinos, businesses associated with the maintenance of cash flow. FinCEN has released a guide clarifying the applicability of the BSA requirements for cryptocurrency and virtual money relations.

The document states that if a user receives a convertible virtual currency and uses it to purchase real or virtual goods or services, then this operation is not considered to be a cash business (MSB) and is not regulated.

However, according to FinCEN, administrators or exchangers of centralized and decentralized virtual currencies are recognized as money intermediaries, and their activities fall under BSA regulation. This means that the exchange of cryptocurrencies requires a special registration procedure in FinCEN and compliance with the established rules.

In this regard, noteworthy criminal case The US v. Faiella, considered in January 2013 – is one of the first cases in which the question of the status of cryptocurrency and the status of an intermediary in the exchange of cryptocurrency was raised. The defendants Robert Faiella and Charlie Schrem took cash, exchanged them for Bitcoins and transferred them to the accounts of users of the Silk Road anonymous online trading platform.

The defendants argued that they could not be recognized as money intermediaries, since Bitcoin is not money. However, the judge proceeded from the general concept of money as a medium of exchange, a measure of value, a method of payment. Thus, Bitcoin was classified as money, and Robert Fayell and Charlie Shrem were brought to justice.

Because of the complexity of the concept of cryptocurrency, judicial practice is ambiguous, an example is the case The US vs. Petrix, in which Richard Petriks was accused of conducting brokering activities related to money transfers without a license. The judge admitted that bitcoins are not money, and Richard Petriks managed to escape punishment.

As for the mining of cryptocurrencies, FinCEN released a document in January 2014 that  explain the application of BSA rules to mining. As long as the user extracts bitcoins exclusively in his own needs, his activity does not fall under the regulation of FinCEN, since these actions are not connected either with the “acceptance” or with the “transfer” of convertible virtual currency and are not the transfer of funds in the sense stipulated by the norms.

Regulation of cryptocurrency involves two different areas of legislative regulation, investments acquired through cryptocurrency and investing in cryptocurrency (in Bitcoin, for example).

Matters related to the regulation of securities are regulated in the Securities Act of 1993. The Securities and Exchange Commission (SEC) regulates securities and their derivatives in their respective markets.

The first dispute that arose in court practice is the SEC v. Shavers. Defendant Trendon T. Shavers founded Bitcoin Savings and Trust, where he attracted investment in Bitcoins, promising a high percentage (up to 7% per week). The defendant stated that bitcoins are not money or anything that is regulated by US law. The court ruled that such investments are securities, and it does not matter what form they are cryptocurrency or fiat.

The Securities Commission also publishes reports, reminders for investors and legal positions on issues related to cryptocurrency and ICO. In particular, it is stated that before launching a cryptocurrency or a corresponding product, its promoters must be able to

The answer to the question, in which case tokens are considered investment and are subject to SEC regulation, was formulated by the US Supreme Court in the case of SEC v. Howey (1946) called Howie test.

However, securities laws (registration requirements) in each state have their own characteristics, in particular, in California, a capital risk test is common to define a financial instrument as a security and it focuses on the reasons why money or assets were invested and what risks does the investor bear.

CFTC considers cryptocurrency to be a commodity since 2015, the Commission’s activities are normalized by The Commodity Exchange Act of 1936, which regulates trading on commodity exchanges with financial instruments such as futures, options, derivatives, regardless of whether they are expressed in virtual currency or not. The division of powers between the Securities Commission and the Commodity Futures Trading Commission depends on the specifics of each case, however, both bodies work on a single approach to cryptocurrencies.

The United States Internal Revenue Service (IRS) issued guidance on the application of basic tax principles to virtual currencies in March 2014, such as Bitcoin. In particular, it is noted that the sale or exchange of convertible virtual currency or its use to pay for goods, works and services has tax consequences and the offender may be liable. The office has defined Bitcoin as “property” for tax purposes.

It is also noted that when selling goods for virtual currency for tax purposes, the value of virtual currency is determined in US dollars at the date when it was received. The cost of virtual currency mined during mining is also subject to inclusion in revenues.

The characteristic of profit or loss is based on whether the seller is an investor who owns virtual currency as the main asset (capital gains and capital losses) or a financial instrument or other property (income or loss from the sale of investments).

According to the official position of the IRS, the exchange of one cryptocurrency for another will be considered a basis for taxation. In fact, every time the American taxpayer uses a cryptocurrency to buy goods, works, or services, the IRS views this as a “asset management,” and the user must pay a capital gains tax.

The case of requesting IRS user data to Coinbase cryptographic business is remarkable. The IRS appealed to the court with the so-called John Doe summons – a court request regarding an indefinite number of Coinbase users, but specified on their activities (no need to specify a specific person, the reasons for the request).

The IRS required Coinbase to disclose information about all users who exchanged cryptocurrencies for the amount of more than 20 thousand dollars from 2013 to 2015. The IRS requirements were partially met by the court, Coinbase is required to provide the following customer information

Thus, despite the absence of legislative regulation at the national level, the practice of the US federal authorities is actively developing and is aimed at incorporating new concepts into the existing legal regulation. First of all, it touched areas affecting public interests, in particular, legislation on securities, tax legislation and criminal law.