As Bitcoin Soars, Attention Turns to Regulation and Compliance
It has been an eventful year for Bitcoin and the cryptocurrency space in general. After being caught up in the March stock market sell-off, Bitcoin is again trading near its all-time high. Several factors have contributed to this impressive price rally.
Governments around the world responded to COVID-19 with significant monetary and fiscal stimulus measures. The Federal Reserve, for instance, printed 20 per cent of all the U.S. dollars currently in circulation during this year alone. This expansion of the monetary base has left many investors looking to hedge their portfolios from inflation and fiat currency debasement. Bitcoin, due to its inherent scarcity, presents such a hedge. Over the last several months, Wall Street heavyweights Paul Tudor Jones, Bill Miller and Stan Druckenmiller have all disclosed positions in Bitcoin. At the same time, corporate treasuries are moving a share of their assets into Bitcoin, with MicroStrategy and Square being two notable examples.
Surging prices are likely to attract regulatory scrutiny as authorities seek to ensure gains are appropriately taxed. The Internal Revenue Service (IRS), for example, asks if “at any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” on the first page of the income tax return. Last year, more than 10,000 taxpayers received letters from the IRS in relation with their virtual currency transactions.
The rising price and more widespread adoption of Bitcoin is also drawing the attention of the U.S. Financial Crimes Enforcement Network (FinCEN). Bitcoin ATMs (BTMs), peer-to-peer cryptocurrency exchanges and other money service businesses (MSBs) come under the purview of FinCEN and must comply with anti-money laundering (AML) and know-your-customer (KYC) regulations. At a recent conference, FinCEN Director Kenneth Blanco highlighted banks are also not immune from regulatory scrutiny and should consider how virtual currencies affect their institutions. Research by CipherTrace Labs, a crypto analytics firm, shows that eight out of ten major U.S. retail banks dealt with illicit crypto MSBs in 2019.
The STABLE Act, an 18-page bill announced recently by three U.S. congressional Democrats is another sign of unbalanced and, frankly, prohibitive regulation. The act will require stablecoin issuers to obtain FDIC insurance, acquire a banking charter and get approval from the Federal Reserve.
While many investors and payment gateways are largely following the prescribed rules, the complexity of the regulatory frameworks makes things increasingly difficult. For income tax purposes, a taxable event is triggered every time Bitcoin is bought, sold, swapped for another asset, or even used to purchase a cup of coffee. This means that investors need to keep track of the fair market value of Bitcoin at the time of the transaction, the amount they originally paid for it and the holding period.
For BTM operators, there is no federal regulatory framework as each state has their distinct requirements to obtain a money transmitter license. While some states consider cryptocurrency transactions exempt from money transmitter rules, others have restrictive requirements like large surety bonds and costly permits.
Lack of clear-cut federal regulation is hindering innovation in the space, putting the U.S. at risk of losing a large share of cryptocurrency talent and business. Companies like Ripple Inc, Circle Exchange and Coinbase have either moved overseas or are considering their options. According to the Executive Chairman of Ripple Inc, Chris Larsen, “blockchain, and digital currencies are not welcome in the U.S.“
To develop a clear and transparent regulatory framework, without excessive restrictions on innovation, the regulators should work closely with the industry. In fact, many cryptocurrency companies are taking a proactive approach on the matter. Ben Weiss, COO of Bitcoin ATM operator CoinFlip, has actively supported bills in California and New Jersey, advocating for better regulatory clarity. In California, Assembly Bill 2150 is, according to Weiss, “a step towards fostering an innovative business climate in California, without jeopardizing consumer protections.” While in New Jersey, the “Digital Asset and Blockchain Technology Act” is designed to provide digital currency businesses operating in the state with a clear licensing process through the Department of Banking and Insurance.
As more traditional companies enter the space, the call for clear and transparent regulations will only grow louder. After PayPal introduced its cryptocurrency features, its CEO Dan Schulman spoke about the importance of regulatory compliance. In a recent speech, he invited other industry players to cooperate with financial regulators to advance the common goals. Other companies, like Visa and Square, are also increasingly collaborating with regulators to appease their concerns and facilitate widespread crypto payments usage.
Bitcoin and cryptocurrencies have, arguably, reached the point of no return in terms of adoption. Institutions and professional investors are increasingly using Bitcoin as an inflation, and macroeconomic hedge. At the same time, blockchain offers many benefits for payments and financial inclusion. Against this backdrop, the industry needs a clear and comprehensive regulatory framework to promote innovation and protect consumers.