Crypto regulation in the USA: A short overview

 In the coming weeks, I would like to report what is new in cryptocurrency regulation worldwide regularly. Today we will focus on the USA. The article primarily aims at Europeans who want a quick overview and does not claim to be exhaustive. To keep on track with blockchain regulation worldwide, feel free to join the network www.blockchainlawyersnetwork.com. for free.

 In the United States, cryptocurrencies are the focus of both the federal and state governments, and although these agencies were active in work, there was little formal regulation.

 Several state governments have proposed and passed laws concerning cryptocurrency and blockchain technology, with most of the business being carried out in the legislative branch. However, despite the interests of these agencies, the federal government has not exercised its constitutional preemption right to regulate blockchain outside the states (as is usually the case with financial regulation), thereby leaving individual states free to impose their rules.

 With the development of financial crimes and the cryptocurrency itself, regulators seek to track, take action, and impose restrictions. In recent months, increasing attention to the regulation and enforcement of cryptocurrency at the federal and state levels has shown that digital currency is an established part of the financial landscape. The cryptocurrency industry and the government have become more consistent and interoperable.   

 General approach

While the government is considering making it harder to use cryptocurrency for illegal activities and tax evasion, Americans cannot still buy cryptocurrency using more traditional investment accounts such as Fidelity or Vanguard. The number one way that the government can regulate cryptocurrencies is to tax any fiat currency used to cash out the virtual token, and the main caveat is that the owner of the cryptocurrency can turn to another coin to cash out.   

 In addition, compared with traditional fiat currencies, many early adopters and hardliners prefer to use cryptocurrency as a medium of exchange for essential goods and services. As a result, cryptocurrencies are increasingly changing the banking and financial sectors and have sparked debate about whether the government should issue its digital currency to increase or eventually replace its traditional money. The U.S. Securities and Exchange Commission (SEC) generally treats cryptocurrencies as securities, while the CFTC refers to Bitcoin (BTCUSD) as a commodity and the Treasury Department as a currency. 

 On Tuesday, August 3, Senate Majority Leader Chuck Schumer (New York State) spoke at the Aspen Security Forum as the Senate seeks to pass a $ 1 trillion infrastructure bill that includes provisions to regulate cryptocurrency. In addition, SEC President Gary Gensler presented his views on the SEC's role in cryptocurrency regulation. The recent regulation of cryptocurrency has attracted the attention of U.S. lawmakers and government agencies.

 U.S. Department of Justice announced plans to crack down on the growing cryptocurrency market. Cybercrimes involving cryptocurrencies totaled about $1.9 billion across the world in 2020. Criminals will find it extremely difficult to get stolen money off crypto networks without getting arrested and thrown in jail. Transparent and immutable blockchain payments and fund transfers are more accessible to trace than those on opaque legacy payment networks. Investigators use advanced blockchain forensics to track stolen funds and identify blockchain addresses where funds are parked.

 In the United States, 49 out of 50 states and the District of Columbia regulate and require the licensing of money transfer services, unless they are tax-exempt entities such as banks, and many of the 53 states and territories have their own rules requirements and exceptions for licensing transfers. 

Cryptocurrency exchanges

The sale of cryptocurrencies is generally only regulated if the sale (i) constitutes a sale of a security under federal or state law or (ii) is an investment under state law or otherwise performed if the person is a financial service enterprise ("SME") under federal law.  

Cryptocurrency exchanges in the United States are subject to the Bank Secrecy Act (BSA) and are registered with the Financial Crimes Enforcement Network (FinCEN) and are also required to comply with their anti-money laundering (AML) and terrorist financing (CFT) obligations while the Internal Revenue Service (IRS). Cryptocurrencies are classified for federal income tax purposes as property. 

Stablecoins

The U.S. President's Working Group on Financial Markets (PWG) released its long-anticipated report and policy recommendations on stablecoins. The report's primary focus is on prudential risks that "payment stablecoins" — or those meant to maintain a stable value against a reference currency — could pose to users and financial stability. The prospect of the SEC taking the lead in stablecoin regulation left some actors in the crypto space unsettled. The authors concluded that 'Stablecoins, or certain parts of stablecoin arrangements, maybe securities, commodities, and derivatives.

SEC vs. Coinbase

On September 1, 2021, the SEC sent a notice of Wells to the public cryptocurrency exchange Coinbase, stating that it would sue if the company continued to launch its Lend product, allowing consumers to earn interest on cryptocurrency holdings. Coinbases' general counsel responded on his blog, stating that the company had been interacting with the SEC about the loan for about six months and argued that the loan was not a security.  

Also, Ripple is facing a lawsuit from the SEC. The controversy between Ripple and the SEC began in December 2020 when the SEC filed a suit alleging that Ripple Labs, a global payment platform, violated securities laws by not registering its XRP cryptocurrency as collateral, which was one of the last taken by then-SEC President Jay Clayton before Joe Biden left office following Trump's victory over Donald Trump in the 2020 Presidential Election. Ripple believes that XRP is not a security, so it does not need SEC approval. Brad Garlinghouse, CEO of Ripple, tweeted that SEC continues to struggle with cryptocurrencies.

The Securities Regulation Board (SRO)

The Securities Regulatory Board ( SRO ) has filed lawsuits in five states - Alabama, Kentucky, New Jersey, Texas, and Vermont - since July 2021 about Interest Income accounts that require unregistered securities in accounts that violate government bonds laws. Now that they meet the exact regulatory requirements of banks and other financial institutions, all cryptocurrency service providers tasked with storing, storing, and transferring virtual currencies must register with monetary authorities, including identifying their customers and reporting any suspicious activity in financial intelligence units.

 Regulation on State level

According to Coin.dance statistics, the United States controls nearly a quarter of all bitcoin volumes (22.6%), but regulators in the country's 50 states have different rules relating to the legality and use of virtual currencies.

In the absence of new federal legislation governing blockchain technology and cryptocurrencies, states are taking a range of actions that affect how blockchain and cryptocurrency businesses operate - from legislation, administrative measures, and government-funded research -, but the resulting patchwork of often conflicting definitions, laws, and regulations creates a minefield for industry players to maneuver, significantly increasing compliance costs. As a result, state actions took various forms, some of which were preventive, others defensive.

New York

Some states, such as New York, have clearly stated that activities that advertise, offer, or provide money transfer services or virtual currency businesses to New York City businesses or individuals are subject to New York City law and licensing requirements. 

Texas

However, this is certainly not the most crypto-friendly place on the list - after all, Texas was on the verge of passing a bill earlier this year that would ban the use of cryptocurrencies between unidentified parties. Blockchain lobbyist Long and House of Wyoming spokesman Tyler Lindholm even traveled to the Texas capital to meet with the legislators behind the document and persuade them to abandon it but was unable to meet with the legislators.

 New Mexico

New Mexico rolled out the HB250 in January 2017, requiring money transfer operators to be licensed (but did not specifically list cryptocurrency - transmitters as money transfer operators), which requires those who engage in any "virtual currency business" to obtain a license (the so-called Bitcoinlicence), to hire someone responsible for compliance with regulatory requirements and compliance.

Florida

In August, the Florida Financial Regulatory Authority issued a notice citing the court's interpretation that an MSB government license is required to sell virtual currencies in Florida. Therefore, effective January 1, 2022, all virtual currency merchants must apply for an MSB license with the state.  

Kansas

The State Banking Office has issued guidance clarifying the applicability of the Kansas Remittance Act to individuals or entities who use or transfer virtual currency. See Kansas State Bank Commissioner's Office, Guidance Document MT 2014-01, Regulatory Regime for Virtual Currencies under the Kansas Money Transfer Operators Act (June 6, 2014).

Illinois

On 06/13/2017, the Illinois Department of Financial and Professional Regulation (IDFPR) issued final regulatory guidance stating that a money transfer license is required for transactions involving both digital and sovereign currencies but not money for digital transactions. The guide also defines digital currency concerning the Commission's draft Virtual Currency Business Regulation (April 14, 2017).

Hawaii

In 2016 the Hawaii Financial Institutions Authority ruled that Bitcoin companies would be required to build and maintain reserves, which would have a significant and negative impact on the industry.

Idaho

Although Idaho currently does not have virtual currency laws, the State Treasury Department has issued 20 "letters of inaction and opinion" on issues related to the state's cryptocurrency and money transfer laws. AB1906 (Digital Currency Job Creation Act) will establish a regulatory framework for the use of digital currency in New Jersey. Nevada SB 71 refers to unclaimed property; amends the provisions of the Uniform Unclaimed Property Law New Jersey AB 1392 regulates and establishes consumer protection measures regarding digital currencies.

 While this can only outline a complex legal situation that is constantly changing at the state level, it is clear that regulation at the federal level is needed to create legal certainty. A similar problem currently exists in the European Union, where some member states are very generous in allowing commercial trading in cryptocurrencies, while others are much more restrictive. Here, too, only regulation at the level of the European Union itself will ultimately create legal certainty.