In the United States of America, the policymakers and the Regulating agencies have praised the Blockchain Technology and Cryptocurrency to play an imperative role in the future and emphasized the need to maintain a leading role in its development. The cryptocurrency has been regulated both by the Federal and the State governments. Even though there is significant monitoring by the regulatory agencies, there has been very little formal rulemaking due to the risk of over-regulating and passing legislation that would drive the investment overseas. The important regulatory agencies at the Federal level are:
- Securities and Exchange Commission (SEC)
- Commodities and Futures Trading Commission (CFTC)
- Department of Treasury through the Internal Revenue Service(IRS) and Financial Crimes Enforcement Network (FinCEN)
The cryptocurrency is generally regulated only:
- If its sale constitutes the sale of a Security under State or Federal Law
- If its sale is considered money transmissions under state law or making the person a Money Services Business (MSB) under Federal Law.
- If it Constitutes a commodity when any futures, options, swaps and other derivative contracts make reference to the price of Bitcoin or other Virtual Currencies.
SEC has the regulatory authority when the issuance or resale of any token or other digital asset constitutes security. To constitute security, it must have an ‘investment contract’ which as interpreted by the US Supreme Court is an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.
The SEC has reiterated its position that if a token issued in an initial coin offering (ICO) has ‘utility’, it would deem to be a security. If a digital asset is determined to be a security, then the issuer must register the security with the SEC or must fall within the exemptions from securities registration. Generally, the SEC places fewer restrictions on the sale of securities to ‘accredited investors’.
There are two other requirements for a token constituting security :
- A person be a broker-dealer licensed with the SEC and a member of FINRA
- The asset can only trade on a licensed securities exchange or alternate trading system (ATS)
Anti-Money Laundering (AML):
FinCEN regulates Money Service Business (MSB). The regulations of FinCen would be applicable if an administrator or an exchange: (i) accepts and transmits virtual currency or (ii) buys or sells virtual currency unless there is an express limitation or exemption specified.
The FinCen requires MSB to conduct a risk assessment and to develop, implement, and maintain a written program that is reasonably designed to prevent the MSB from being used to facilitate money laundering and the financing of terrorist activities.
IRS has explicitly declared all ‘virtual currencies’ such as Bitcoin or other cryptocurrencies will be taxed as a “property” and not currency. Any Individuals filing income tax return, the gains or losses from the sale of virtual currency will be held as “capital asset” for the purpose of investment.
Any gains realized on virtual currency held for more than a year are subject to capital gains tax rates whereas any gains held for one year or less will be subjected to ordinary tax rates.