Cryptocurrency Regulation in the US

The US Securities and Exchange Commission (SEC) has issued several warnings about the risks of cryptocurrencies but there is a tacit acceptance that the crypto asset sector is here to stay.

The crypto market does provide some positives, such as the underlying blockchain technology that supports faster payment services and transactions.

The SEC is concerned about an increase in investors putting money into cryptocurrencies – especially in a time of stock market volatility and poor savings rates – and has warned there is a risk of losing all your money.

It is with these factors in mind that the federal watchdog is looking at cryptocurrency regulation where it can.

Here is what regulation could mean for cryptocurrency investors and crypto-asset businesses.

Also See: Best Crypto Exchanges

Are cryptocurrencies regulated?

Unlike financial products such as savings, pensions, and mortgages, cryptocurrencies are not regulated.

Customers of regulated firms benefit from the protection of the Federal Deposit Insurance Corporation (FDIC) for their real or fiat currency.

That means if a company you have savings or investments with collapses, up to $250,000 of your money will be protected, and in some exceptional circumstances, even sums over this limit cap can be protected.

You can also complain to the Consumer Financial Protection Bureau if you are unhappy about a regulated service or product or if you think you have been mis-sold.

At present, there are no such measures to protect customers when it comes to cryptocurrencies.

That means that should you decide to invest in a cryptocurrency or token and should it suddenly close and disappear, your options are very limited and it is likely that you may never see your money again.

This lack of consumer protection means it is possible for you to be scammed by a fake cryptocurrency or targeted by investment fraud using unregulated crypto tokens. And the relative lack of consequences for would-be scammers means the dangers are real.

Additionally, the founders of digital currencies don’t have any of the responsibilities that executives at regulated firms have, such as treating customers fairly and making terms and prices clear.

The founders of cryptocurrencies are based all around the world, with a good portion of these outside of the US. This makes it even harder to regulate cryptocurrencies and also means US authorities are very limited in what they can do in cases involving an overseas-based crypto.

As with all financial products, there is plenty of jargon associated with cryptocurrencies.

You may see terms such as crypto assets or tokens.

Essentially, a crypto asset is a catch-all term for all types of digital blockchain-based tools.

A cryptocurrency such as Bitcoin or Ethereum is a type of crypto asset.

Cryptocurrencies may also be referred to as tokens.

It then gets a bit more complicated as there are tokens that can be used as a means of exchange, payment, or investment, such as Bitcoin or Ethereum, plus there are also utility tokens.

A utility token isn’t seen as a form of investment but is used to access a specific product or service.

An example of this is fan tokens that have become popular in sports as a way of engaging with fans.

Teams will sell their own fan token that then gives supporters a say in aspects of how the club is run.

Fan tokens do not neatly fit into a category of assets under the scope of the SEC, and as such inhabit a legal limbo when it comes to oversight.

However, there is another type of token called a security token that can provide rights to the payment or value of an asset.

In order for a security token to be traded within the US it must first be approved by the SEC.

Other types of crypto assets include decentralized finance platforms that use blockchain technology to provide services such as crypto-backed loans.

Are cryptocurrency investments taxed?

While cryptocurrencies aren’t regulated, the IRS (Internal Revenue Service) has already taken an interest in the sector and is hard at work at implementing tax compliance for crypto.

You will need to pay tax on your returns from investing in cryptocurrencies.

Investors in cryptocurrencies or exchange tokens may need to pay capital gains tax when they sell, trade, or dispose of cryptocurrency in any way and recognize a profit.

This may be when you sell a token, exchange it for a different one or use it to pay for goods or services.

For 2022 the tax rate is as follows:

Data source: IRS.

The IRS taxes short-term crypto gains as ordinary income. For 2022 the rates for gains on crypto you have held for 365 days or less are as follows:

You can check the IRS crypto tax guidance on the irs.gov website.

Are cryptocurrency exchanges regulated in the US?

One area where you will find some regulation creeping in is when purchasing or trading cryptocurrencies through an exchange.

In a hearing of the Senate Banking Committee in September of 2021, the SEC Chair said crypto exchanges should have to register as securities exchanges.

In the past, many exchanges simply chose to register outside of US jurisdiction and, as such, not subject themselves to federal scrutiny, however, the US market is simply too large and tempting to completely ignore so many exchanges are looking to operate in the US.

You can see if an exchange is registered with the SEC for anti-money laundering through its crypto asset register.

What is the SEC’s role regarding cryptocurrencies?

The FCA doesn’t regulate or approve cryptocurrencies.

The only oversight it currently has is to check that crypto asset firms have effective anti-money laundering procedures.

It isn’t the only regulator interested in cryptocurrencies though.

The Commodity Futures Trading Commission (CFTC) has jurisdiction over crypto assets on a federal level that are constituted as being a commodity. It is more than entitled and increasingly likely, to exercise its power if concerns arise over market manipulation of the prices of a crypto asset.

How will cryptocurrencies be regulated in the future?

A regulatory regime is gradually developing for the crypto sector.

It may not hit virtual currencies directly, but crypto asset exchange providers could be affected.

The Biden administration has been busy consulting on new rules on how cryptocurrencies are promoted and attempting to reach a workable solution.

The reality is that the attempts to regulate this digital landscape will be extremely difficult and will be a delicate balancing act. On the one hand, legislation must not stifle the innate entrepreneurial spirit of crypto and on the other, it must protect customers from exploitation and ensure platforms are not open to abuse by criminals.

But until such time, it is important that trading platforms and crypto asset providers communicate clearly with their customers to ensure that individuals are aware of the significant risks of what they are buying.

They have to ensure their advertising and platforms comply with rules on financial promotions that say the risks of a product must be made clear.

Retail customers may have to complete appropriateness tests and declare how much investing experience they have.

Increased scrutiny from the Federal Trade Commission could also protect consumers, while financial promotions rules could help combat crypto scams and reduce consumer harm.

A lot of investors and some very vulnerable people may be tempted into the market by social media influencers promoting cryptocurrencies. They may promise future profits but often are being paid to promote a particular token or to share in any of the value growth. Some influencers have also gotten caught up in crypto scams in the past.

For example, crypto influencer Matt Lorion had to apologize to his TikTok followers in April 2021 after he promoted the Mando cryptocurrency to his millions of followers, which turned out to be a scam. He invested $10,000 himself in the Star Wars-inspired coin so also lost money and has promised to conduct more checks in the future.

If there were rules on promoting cryptocurrencies, then influencers may be more reluctant to promote coins.

How will regulation affect cryptocurrency?

The effect of regulation on cryptocurrencies will depend on how far it goes.

Some countries such as Russia and China are looking to ban crypto assets. This would typically push prices down as it essentially closes the crypto market for that country. However, a regulated market could be a positive for crypto assets. Confidence in the sector may be boosted if all exchanges have to follow set standards and conduct checks on the cryptocurrencies they sell on their platforms and ensure consumers understand the risks.

Sentiment is a key factor in the pricing of cryptocurrencies, so if confidence in the viability of the sector increases, so could values. On the other hand, if regulation is shown to be too prohibitive, expensive, or deters users, that may push prices down as demand drops.