One of the founding principles of cryptocurrency is that it’s decentralized and unregulated. But the U.S. government isn’t too worried about crypto’s founding principles.
In fact, cryptocurrency regulation has been a frequent point of interest lately for U.S. lawmakers and government agencies. A recent report from the Biden administration outlines proposed legislation that would bring more regulation to the cryptocurrency market. And in recent months, U.S. Federal Reserve Chairman Jerome Powell, and Security and Exchange Commission (SEC) Chairman Gary Gensler have both expressed concern over lack of cryptocurrency regulation.
But in spite of all the back-and-forth, a few key themes have emerged on the subject of new U.S. cryptocurrency regulation: stopping cryptocurrency crime and tax evasion, stablecoin regulation, and the potential for investment vehicles like crypto ETFs and other funds.
For many crypto enthusiasts, the decentralized nature of digital currencies — which, unlike traditional currencies, aren’t backed by any institution or government authority — is a big draw. But regulatory guidance can help protect investors. “As much as I like the decentralization and the lack of government [involvement], I am glad that they are paying attention because unfortunately with cryptocurrency, there are a lot of scams,” says Kiana Danial, author of “Cryptocurrency Investing for Dummies.”
Here’s a rundown of the proposals we’ve seen so far, and how they may affect cryptocurrency investors in the future:
Cryptocurrency Crime and Tax Evasion
Cryptocurrency regulation has been included in bipartisan infrastructure bill talks by U.S. legislators in recent months.
One possible provision would expand the definition of a brokerage to include companies that facilitate digital asset trades — like cryptocurrency exchanges. This kind of change would mean increased tax reporting responsibility to help the IRS track crypto tax evasion.
Additionally, Gensler has spoken about a need to increase regulation and help prevent more ransomware attacks, like the one that shut down the Colonial Pipeline in May 2021. The pipeline attack was one of a number of high-profile instances of hackers seeking Bitcoin ransoms.
While Gensler hasn’t said exactly how the SEC planned to help stop these crimes, he did say that the agency would continue to exercise the full extent of its power.
“[The SEC] will continue to take our authorities as far as they go,” Gensler said during an appearance at the Aspen Security Forum in Colorado.
A recent U.S. Treasury report voiced the same concerns as Gensler, saying cryptocurrency “poses a significant detection problem by facilitating illegal activity broadly including tax evasion.”
What Investors Should Know
Under a potential new law that has been considered by lawmakers, companies that facilitate crypto trades would be required to report tax information about those trades to the IRS (just as brokers of traditional investments like stocks do) starting in the 2024 tax season.
“The bill is generally investor-friendly because it makes crypto tax compliance easier for investors,” says Shehan Chandrasekera, CPA, head of tax strategy at CoinTracker.io, a crypto tax software company. “This is because if the bill passes, exchanges will have to issue 1099-B tax forms with cost basis information to investors.”
That means the exchange would provide a record of taxable events on the platform, like how much your Bitcoin was worth when you bought it and when you sell it back into U.S. dollars. Today, only some exchanges report this info.
“This will significantly reduce the crypto tax filing burden,” Chandrasekera says.
It’s already important to keep your own records of any capital gains or losses on your crypto trades, which you should report on your federal tax returns. But this regulation would make it even more essential, since the IRS would more easily be able to find any cases of tax evasion related to crypto.
The Biden administration released a report on Nov. 1 that includes specific proposed legislation that would bring new regulation to stablecoins. The proposed legislation would effectively classify stablecoin issuers as banks, subjecting them to similar oversight aimed at protecting consumers.
Stablecoins are a type of cryptocurrency pegged to an existing currency, like USDT (Tether). USDT is tied to the price of the U.S. dollar, so its value is constantly $1. And the SEC isn’t the only agency that’s taken interest.
Gensler has hinted in the past that increased stablecoin regulation could help with the cryptocurrency crime problem, as “the majority of what happens [on cryptocurrency exchanges and platforms] is cryptocurrency to cryptocurrency.”
Gensler says that by bypassing the involvement of U.S. dollars in direct crypto-to-crypto trades, bad actors may be more able to evade public policy measures and other sanctions aimed at preventing money laundering or ensuring tax compliance.
While legislators would need to enact new legislation to put the Biden administration’s report into action, it does show U.S. officials are paying close attention to the cryptocurrency market. “The absence of appropriate oversight presents risks to users and the broader [cryptocurrency] system,” Treasury Secretary Janet Yellen said in the report.
What Investors Should Know
Stablecoins are most commonly used by more advanced traders to reduce fees on crypto-to-crypto trades, but the Biden administration report hints at stablecoins’ potential as a more mainstream digital payment system in the future. Crypto is still in its relative early days as an asset class, so any new regulation has potential to impact investors’ portfolio.
Investors probably don’t need to make any immediate changes to their portfolio based on the proposed new legislation, as stablecoins are not as great a store of value as more volatile cryptos like Bitcoin. If you’re investing in crypto looking for long-term growth, experts recommend sticking with more established coins like Bitcoin or Ethereum.
In anticipation of any coming guidance, you should also make sure to choose a cryptocurrency exchange that maintains compliance with evolving federal and state regulators in the United States. This includes many established, high-volume U.S.-based exchanges, like Coinbase and Gemini.
“I only purchase my cryptocurrency assets from regulated brokers at this point, because we have the luxury of doing so. Of course in other countries they don’t have it, but we do,” says Danial.
While the government considers how to make it harder to use cryptocurrency for illicit activities and tax evasion, there is still no way for Americans to buy into crypto using more traditional investment accounts like those at a Fidelity or a Vanguard.
While a Bitcoin-linked ETF did recently debut on the stock market, the SEC has yet to approve a cryptocurrency ETF (exchange-traded fund) — despite several proposed funds from different institutions and exchanges — but Gensler revealed on Tuesday that it may be coming.
“We do it in the equity market, we do it in the bond markets, people might want it here,” Gensler said. While acknowledging there have already been SEC filings for ETFs, “I anticipate we’ll have some new ones under what’s called the Investment Companies Act — and when combined with other federal laws, the law provides significant investor protections,” he says.
The Investing Companies Act requires companies, including mutual funds, to disclose information about their finances and investments on a “regular basis,” according to the SEC.
Until an ETF gets approved, “there’s not really a way to buy a security that closely tracks the price of a specific cryptocurrency,” says Jeremy Schneider, the personal finance expert behind Personal Finance Club. That means the only way for investors to really do that is to buy coins directly from an exchange.
While there has been some confusion about whether cryptocurrencies are securities (and under SEC regulation), Gensler made clear that every initial coin offering (ICO) he has seen is a security: “Generally, folks buying these tokens are anticipating profits, and there’s a small group of entrepreneurs and technologists standing up and nurturing the projects … I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight.”
But Gensler reiterated that the SEC has jurisdiction, and “our federal securities laws apply.”
What Investors Should Know
Cryptocurrency ETFs are not yet available in the U.S., but may offer a way for investors to get into cryptocurrency without having to buy directly from an exchange in the future.
If you’re interested in crypto, these funds could help you diversify your holdings across different coins, like a conventional ETF or index fund. But they’re still just as speculative as any crypto investment; if you’re waiting for a Bitcoin ETF because you’re unwilling to take on the risk, you may want to reconsider whether crypto belongs in your portfolio at all.
In the meantime, Gensler’s stance that every ICO is a security could mean investors should look to the SEC for protections as regulation becomes more concrete.