Over the past several years regulation of crypto currency has been a point of discussion for the US Government.  The rationale for regulations ranges from acquiring intelligence to combat the funding of terrorism, prosecuting participants in the black-market economy, and investigating drugs, child pornography, and human trafficking.  But despite the debates and handwringing, Congress and the Executive Branch have done little to regulate the crypto currencies.  That has begun to change, however, with a new set of proposed laws and regulations.

Congress

The new Infrastructure Bill proposed in Congress, includes provisions for the US Treasury to monitor, regulate, and tax crypto currency.  It is estimated that the IRS could raise $28 billion dollars of tax revenue to offset a portion of the proposed spending by taxing transactions on crypto currency exchanges.  The language, however, is very broad and could be interpreted to require reporting from miners, network validators, and others while the intention is simply to force crypto currency exchanges to report transactions to the IRS for tax purposes.  The US Treasury has responded to the criticism of the proposed language and clarified that it does not intend to force a reporting requirement on individuals, just decentralized exchanges.[1]  The statement from the IRS has not assuaged the concerns of critics and further revisions to the proposed language remain under discussion.

The US Treasury has also asked Congress to expand the beneficial owners’ rules to crypto currency.  Under current law, banks are required to track beneficial owners of accounts to identify taxable individuals and report taxable income to IRS.  The US Treasury has proposed that Congress expand the beneficial owner requirement to foreign account holders who buy and sell cryptocurrencies.[2]

US Treasury

Aside from asking Congress to enact new laws, the US Treasury has proposed a new set of regulations that require the reporting of crypto currency transaction over $10,000.[3]  The new regulations would be imposed on crypto currency exchanges and businesses which facilitate such transactions.  The regulations would be very similar to the current Financial Crime Enforcement Network (“FinCEN”) rules that require the reporting of all cash transactions over $10,000 by banks, car dealerships, or any business that collects large cash payments or makes large cash deposits.  The new regulations would apply the same currency reporting requirements to crypto currency.  The new reporting requirements are estimated to collect $700 billion in tax revenue over the next 10 years.

SEC

The SEC Chairman Gary Gensler has stated that the SEC intends to regulate any crypto investment schemes which fall under its purview.[4]  Most recently the SEC has decided that Coinbase, a publicly traded cryptocurrency exchange, who is launching a program called “Lend” would be subject to SEC regulation.  Lend is program which allows people to borrow money in a sub-crypto currency referred to as a “stablecoin” which is pegged to the value of the USD.  While Coinbase is not registered as a stock exchange, the tokens trading on the platform may all be securities subject to SEC regulation according to Gensler.

Stablecoins have also caught the eye of many regulators and law makers precisely because they are pegged to the US Dollar.[5]  The pegging of an unregulated digital assets potentially could have the affect of causing an instability in the US Dollar.  The potential to affect the value of or cause instability in the dollar is drawing the attention of the federal government and government regulators.

Commodity Futures Trading Commission

Finally, the CFTC is proposing new rules based on what has been observed as scams targeting individual investors promising high profits while charging high “fees” and “taxes”.[6]  The CFTC is also warning of several old scams wrapped in a new crypto currency name; pump-and-dump schemes involving crypto currency; virtual currency IRAs; fake trading platforms; and fraudulent money mangers luring victims to invest in highly speculative crypto securities.  The CFTC has clarified that it does not regulate the digital assets themselves, but the CFTC does regulate derivatives of digital assets just like every other derivative.[7]  This includes futures contracts and swaps of digital assets.

Just this year the CFTC brought its first digital assets market manipulation case against John McAfee, the antivirus software founder.[8]  The allegations are that he and a former employee engaged in a series of transactions designed to accumulate assets, promote the assets, and then quickly dump and sell the digital currencies.

Conclusions

The rise of crypto currency has peaked the interests of investors, companies, and now the US Government.  The number of government agencies looking to increase their jurisdiction will also lead to an increase in government oversight and regulation.  The reach of government into the tracking and taxing of digital assets, derivatives, and securities will only lead to further government regulation and oversight.  And, finally, as the government continues to look for ways to capture and increase tax revenue there will be greater regulatory authority that allows the IRS to track and tax digital assets. 

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[1] https://news.bitcoin.com/us-treasury-crypto-requirements-in-infrastructure-bill-wont-target-non-brokers-even-without-amendment/

[2] https://www.rollcall.com/2021/08/30/treasury-pushes-global-crypto-data-sharing-rules-in-budget-bill/

[3] https://techcrunch.com/2021/05/20/new-cryptocurrency-irs-rules-2023-crypto/

[4] https://www.vox.com/recode/22663312/coinbase-sec-cryptocurrency-bitcoin; and see https://www.barrons.com/articles/cryptocurrencies-bitcoin-stablecoins-regulation-51631724992

[5] https://www.cnbc.com/2021/09/17/mark-cuban-stablecoins-will-be-one-of-the-first-to-get-regulated.html

[6] https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/CustomerAdvisory_CoronaFees.htm

[7] https://finance.yahoo.com/news/cftc-reminds-sec-regulate-derivatives-123215809.html

[8] https://www.ropesgray.com/en/newsroom/alerts/2021/March/The-CFTC-Signals-New-Era-in-Enforcement-of-Cryptocurrency-Trading-with-Action-Against-Antivirus