This Year in Crypto Regulations: The United States

The cryptocurrency boom of 2017 brought the attention of regulators the world around. Suddenly, Bitcoin and other cryptocurrencies transitioned from a largely unregulated libertarian fantasy into a legal target.

Despite the seeming urgency of the situation, many regulators were unsure about how to approach the matter. Indeed, Braden Perry, a former enforcement attorney at a federal agency and Chief Compliance Officer of a financial firm, told Finance Magnates that the most notable thing about the changes in the United States’ cryptocurrency regulations is that, well, nothing has really changed--most likely due to this confusion.

How has regulation changed in the US throughout 2018?

“The major takeaway is the regulatory treatment is (still) unclear for cryptocurrency,” he told Finance Magnates. “It seems as if every federal regulatory agency has chimed in on cryptocurrency, but none have taken the lead. The CFPB, SEC, and CFTC have all taken some action, but the legal space is still very confusing and this appears to be the SEC’s attempt to lead in the ICO state.”

Do we want regulation in crypto? pic.twitter.com/MKttbRjxv3

— John McAfee (@officialmcafee) May 30, 2018

“I don’t think it’s aimed to quell cryptocurrency, but reign in the wild west nature of ICOs in the past. The SEC appears to take a traditional initial offer standard and is attempting to apply it to ICOs,” he continued.

Mike Minihan, Partner at BX3 Capital, echoed Perry’s sentiments. “The year 2018 saw the US regulatory landscape change negligibly, although there were heightened reminders, if not guidance, around cryptocurrency transactions, including ICOs,” he said.

Action Against DJ Khaled and Floyd Mayweather is Evidence that the SEC is Taking Its Job Seriously

Minihan went onto say that “notable public enforcement actions against AirFox, Paragon, Floyd Mayweather and DJ Khaled provided concrete proof that the SEC is indeed serious that token issuers and promoters follow long-established guidelines around the issuance of securities.”

Both DJ Khaled and Floyd Mayweather were recently fined hundreds of thousands of dollars for securities violations. Both celebrities were paid to use their social media channels to promote ICOs; neither of them disclosed that their promotion was paid.

“None of [the SEC’s actions] should be surprising, as the SEC has been nothing, if not consistent in its directive that those who wish to utilize the US capital market must abide by existing regulatory frameworks,” Minihan said.

The U.S. Justice Department has opened a criminal probe into price manipulation of Bitcoin. Here's what we know so far https://t.co/DAhn4vWrRU ▶️ pic.twitter.com/bSZgwWNBBO

— Bloomberg Crypto (@crypto) May 24, 2018

While the ICOs that Mayweather and Khaled were involved with may be the SEC’s most famous targets of the year, they certainly weren’t the only ones--a growing list of ICOs and ICO-backed companies have been targeted by the commission.

Most recently, Paragon and AirFox have been accused of violating securities laws by the SEC. Cease-and-desist orders were made on the two companies, both of which raised money in token sales in late 2017. The Commission alleges that each company’s token was a security and that both companies broke the law by failing to register their tokens as securities with the SEC.

The SEC’s Inaction on a Bitcoin ETF Sends a Strong Message--But It Could Change in the Future

The SEC has also sent a strong message about its attitude toward cryptocurrency by continually rejecting and delaying decisions on Bitcoin ETFs (exchange-traded funds). The world watched as the price of Bitcoin rose and fell with anticipation and disappointment over the continued series of rejections. The most notable rise and fall happened around the application submitted by Tyler and Cameron Winklevoss, billionaire twins and creators of the Gemini exchange. The price of Bitcoin briefly ascended to nearly $10,000, a price that it hadn’t reached in months.

Most recently, representatives from three firms (VanEck, SolidX, and the CBOE BZX Exchange) met with the Commission on Monday to try and convince them that the Bitcoin market is now mature enough to handle an ETF, as it resembles the markets of other assets that support ETF, including crude oil and silver.

Previously, the SEC delayed its decision on an application for a Bitcoin ETF by VanEck and SolidX until the first quarter of next year, but there’s no telling whether or not another delay will take place, or whether the application has any chance of being approved. However, the SEC has made it known that public opinion is being taken into account over the decision-making process--in early October, comments for against the ETF were invited until the end of the month.

If the SEC were to approve a Bitcoin ETF, a number of analysts predict much positive price movement.

The Government Slowly Extends a Hand Toward Crypto

However, not everything the government has taken action on with regards to cryptocurrency has been negative. “On the state side, there have been lots of positive, crypto-friendly advances, including Ohio’s recent decision to take tax Payments in crypto, and especially Wyoming’s myriad regulatory recognitions for businesses active with crypto,” Minihan said.

Beth Logan, Enrolled Agent and Tax AdvisersAuthor, also mentioned Ohio’s decision to accept Bitcoin for tax payments. “Ohio accepting BitCoin for taxes is huge,” she said to Finance Magnates.

Additionally, “the IRS is taking cryptocurrency very seriously. Over $2M has been spent on Blockchain analysis to find coin holders. Both the IRS Commissioner Charles Rettig and US Treasury Secretary Steve Mnuchin have both discussed ongoing efforts to find criminal activity and tax avoidance via cryptocurrency.”

1/ Long Reads Sunday #12. Now this, THIS was a week in crypto. We’ve got data, debates, emergent privacy technology, regulation, enforcement, mining 2.0, stablecoins (so, so many stablecoins), and, for good measure, the emergent global competition for citizenship. pic.twitter.com/jRFBPwHITJ

— Nathaniel Whittemore (@nlw) September 16, 2018

Logan said that over time, this should “increase BitCoin use.”

“The others may reduce the use as unscrupulous users go in search of more secretive methods of exchanging assets. The market is so large that many of the changes will not be obvious until some time has passed,” she explained.

How Have Regulatory Changes in the US Affected Crypto Markets Globally?

“While it would be convenient to pin the decline on regulatory failures, which scared off the US capital market, I think that is only a small part of the story,” Minihan said. “The regulatory issues certainly led to a decline in token offerings, and a consequent decline in key parts of the market, including Ethereum. In a falling market, many projects needed to sell crypto holdings to continue operations, and that has likely hurt prices too.”

Further, the government’s inaction has likely stifled the adoption of cryptocurrency use. “The enforcement actions of the SEC, together with the general decline in the cryptocurrency market capitalization, has likely slowed the path towards widespread adoption. In addition, the US failure to move forward with things like a Bitcoin ETF, or adequate tax regulation, have likely dampened activity in the cryptocurrency markets, and thus, widespread adoption,” Minihan said.

What kind of regulatory changes would the crypto market need in order to truly flourish? Braden Perry told Finance Magnates that the government needs to “make sure the regulators are on the same page.”

“That’s obviously not occurred,” he added. “The CFTC, SEC, and FinCEN all this past week as attempted to snarl headlines from one another and only cooperative and cohesive federal regulations will allow a broader framework to occur.”

“You [also] need input from the stakeholders, meaning those in the industry and those with interest in investing in the industry,” Perry said.

Indeed, there are some regulators who have attempted to reach out to figures in the cryptocurrency industry. “In September, numerous leaders in the cryptocurrency industry met with Congress with a common message that regulation was welcome, and would actually create more certainty for the marketplace, thus reducing volatility, and increasing acceptance,” Minihan said.

On the industry side, at least one PAC (political action campaign) has been formed, and Gemini founded a self-regulatory organization earlier this year.

“Finally, the regulations need to be pliable enough to survive the everchanging technology, something which the government does not do well,” Perry said. What’s most likely is that “the federal government will likely attempt to treat cryptocurrency regulation like many investment products currently, with an overarching regulatory system and room for states to add specific provisions.”

The future is unclear, but indeed, the government is slowly gaining its footing in crypto regulations.