How Is Cryptocurrency Regulated?

Bitcoin and cryptocurrencies have benefited as well as suffered from very vague and inconsistent messaging from governments across the globe. Countries like El Salvador have taken advantage of the Bitcoin network by declaring the digital currency as legal tender for their entire country of nearly 6.5 million people. For countries who see little benefit for providing clear regulatory guidance or who view digital assets as a threat to the current establishment, developments for taxation may be hard to find or keep up with.

Recent developments

Gary Gensler, Chairman of the SEC, is one of the key players in future regulations for Bitcoin and cryptocurrencies. He has stated that he does not intend on banning cryptocurrencies and that it would be up to Congress to make that final decision. Although, he has stated in interviews that many cryptocurrencies would require clearer classification.

“I think that many of these tokens … do meet the test of being investment contracts, or a note, or some other form of security that we bring them within the investment protection remit of the SEC.”

“It’s unlikely that 5,000 or 6,000 private forms of currency are gonna persist. Economic history tells us that’s unlikely. A handful might be competing with gold or silver as a digital speculative store of value … but not many of them. Most of them are speculative asset vehicles.”

-Gensler speaking with the Washington Post

Implications on the market

For companies like Coinbase, this could mean more regulation for tokens like stablecoins and yield instruments within the crypto space. Coinbase was recently forced to scrap their lending feature in September due to SEC claims that their planned service is a “security”. Other exchanges that service US citizens are also feeling the heat from regulators. This past summer, BlockFi was ordered by the state of New Jersey to stop offering interest-bearing account services. 

The most positive comments from Gensler included ones addressing Bitcoin. “Bitcoin … is a highly speculative asset, but it is a store of value that people wish to invest in as some would invest in gold…”. For now, it seems that bitcoin holders have the least to worry about based on Gensler’s comments. The space will continue to develop as will the needs of the citizens once more users adopt cryptocurrencies.

Cryptocurrency regulations in the US

The US has a number of government financial arms that are required to protect and serve their citizens from speculative assets. Whether or not they comply with this approach, many may be more progressive than others to classify bitcoin and other cryptocurrencies appropriately for retail investors.

  • SEC

The main role of the Securities and Exchange Commision is to protect investors, maintain fair and orderly markets, as well as facilitate capital formation. The SEC does not currently view cryptocurrency or bitcoin as a security but are planning for future regulations. They may however view certain tokens with ICOs as securities.

  • CFTC

The Commodity Futures Trading Commission (CFTC) is an independent US government agency that regulates the US derivatives markets. The CFTC currently views bitcoin as a commodity.

  • Treasury

The Treasury department operates many of the important systems within the national financial infrastructure. They currently view bitcoin as a currency or more specifically as “virtual currencies”.

  • IRS

The Internal Revenue Service (IRS) currently views bitcoin and other cryptocurrencies as property for Federal income tax purposes.

  • US Cryptocurrency Exchanges

Cryptocurrency exchanges that operate in the US fall under regulations provided by the Bank Secrecy Act (BSA). Each exchange must register with the Financial Crimes Enforcement Network (FinCEN) in order to operate. Compliance with anti-money laundering (AML) and combating the financing of terrorism (CFT) are also strictley required from each exchange. 

One may conclude from the disparities between each financial regulatory arm that there is currently no consensus on how to classify Bitcoin and other cryptocurrencies. The US would have a lot to gain in the long term with clear and concise guidance but current and previous administrations feel (based on current and past actions) that it is necessary to slow the progress required for Bitcoin and cryptocurrencies.  

Cryptocurrency regulations in Canada

Regulators in Canada have been very progressive with their stance on cryptocurrencies. Canada was the first country to approve a Bitcoin exchange-traded fund (ETF) in February 2021. 

Canada classifies crypto investment firms as money service businesses (MSBs). These businesses are required to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) have clarified that crypto trading platforms and dealers in the country must register with provincial regulators. 

Regarding taxes, Canada treats cryptocurrency similar to other commodities.

US Hodlers

If you compare the classifications of Bitcoin between the US and Canada, it is much easier to navigate within Canada because they view Bitcoin and other cryptocurrencies strictly as commodities. Similarly, the CFTC also views Bitcoin and other cryptocurrencies as commodities but the other financial branches of government disagree. 

As a US hodler, the simplest approach would be to hold bitcoin and other favorable cryptocurrencies until there is definitive guidance on how to best treat and tax holdings. Another solution would be to start investigating more favorable regulatory environments in other countries. 

Everyone is in their own unique situation and will seek the best outcome for themselves when navigating cryptocurrency regulations. Given enough time, governments will view digital assets more positively once more representatives hold the assets themselves.

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