From Bitcoin to Ethereum, we’ve all heard of Cryptocurrency. However, the legality around the asset is sometimes confusing. Is the trading of cryptocurrency legal in the US? We’re breaking it down with a complete guide on regulations and who it is that regulates the currency.
Cryptocurrency is a type of digital asset which allows users to securely send or receive payment electronically. It eliminates the role of a third party to process payments as all transactions are permanently recorded on a digital ledger using blockchain. In the US, there are a large number of cryptocurrency investors and blockchain firms. However, the country hasn’t yet developed a clear regulatory framework for crypto assets.
Learn More: Understanding Money Laundering
Is Cryptocurrency Legal In The US?
The answer is a mixed bag of yes and no. While finding a consistent legal approach at the state level is difficult, the United States continues to make progress in drafting federal cryptocurrency legislation. Cryptocurrencies are not considered legal tender by the Financial Crimes Enforcement Network (FinCEN), but cryptocurrency exchanges are considered money transmitters since cryptocurrency tokens are "other value that substitutes for cash." The Internal Revenue Service (IRS) does not consider cryptocurrencies to be legal cash, but it has released tax guidance that defines it as "a digital representation of value that operates as a medium of exchange, a unit of account, and/or a store of value."
Who Regulates Cryptocurrency In The US?
The main federal agencies that came up with regulations, guidelines and enforcement with regard to cryptocurrencies are the Securities and Exchange Commission (SEC), the Commodities and Futures Trading Commission (CFTC), the Department of the Treasury, the Internal Revenue Service (IRS) and Financial Crimes Enforcement Network (FinCEN).
- SEC: The SEC considers crypto as a security, and has been monitoring Initial Coin Offerings (ICOs) – the cryptocurrency industry’s equivalent to an initial public offering (IPO) -for fraud and other misconduct.
- CFTC: The CFTC has exercised its authority over derivatives linked to cryptocurrencies. The CFTC calls Bitcoin, the most popular and widely used crypto, a commodity.
- FinCEN: FinCEN has been classifying crypto exchanges as “money transmitters” subject to anti-money laundering (AML) requirements. Crypto exchanges in the US fall under the regulatory scope of the Bank Secrecy Act (BSA) and are required to register with FinCEN. They are also required to comply with anti-money laundering (AML) and combating the financing of terrorism (CFT) obligations.
- Treasury: Regulators of the state bank have been observing cryptocurrency trading platforms for consumer protection.
- IRS: The IRS classifies cryptocurrencies as property for federal income tax purposes.
What Are The Sales Regulations on Cryptocurrency?
Cryptocurrency regulation in the US includes sales regulations. The sale of cryptocurrency is only regulated if the sale constitutes under State or Federal law. Or on the other hand, if money transmission is conducted under State law or otherwise, it makes the person a Money Services Business (MSB) under Federal law. The price of Bitcoin or another cryptocurrency is considered a commodity. Future derivative contracts are subject to regulation by the CFTC under the Commodity Exchange Act. The possibility of CFTC asserting its authority is much higher in today’s time.
What Are The Security Regulations on Cryptocurrency?
The SEC, under cryptocurrency laws in the US, regulates the issue and resale of any digital asset that constitutes a security. To determine whether a token or digital asset is an “investment contract”, the SEC looks at facts and circumstances to determine the substance of the transaction.
The person who issues cryptocurrency must register the security with the SEC or offer it pursuant to an exemption from the registration requirements. SEC places fewer restrictions on the sale of securities to “accredited investors”. An “accredited investor” means that the investor is the director or executive officer of the company issuing the securities. That their net worth exceeds $1 million, excluding the value of their residence. Their income should exceed $200,000 in the two most recent years or a joint income that exceeds $300,000 in the two most recent years.
Two other implications under United States cryptocurrency regulations are:
- A person is required to be a broker-dealer licensed with the SEC and a member of the Financial Industry Regulatory Authority (FINRA) for the sale of securities or to act as a market maker.
- A licensed securities exchange is required to be traded by the asset or an alternative trading system (ATS) approved by the SEC.
What are the Taxation Rules on Cryptocurrency?
In 2014, the IRS declared that cryptocurrency is to be taxed as property and not currency. Every person that owns cryptocurrency will be required to:
- keep a detailed record of cryptocurrency purchases and sales
- pay tax on profits made from the sale or purchase of any goods or services with cryptocurrency for cash
- pay taxes on the market value of collected cryptocurrency, on the date of the receipt
What Are The AML Regulations on Cryptocurrencies?
FinCEN regulates Money Services Businesses (MSBs) under the Bank Secrecy Act. FinCEN designated a virtual currency exchange and an administrator of a centralised virtual currency repository with the authority to issue and redeem the currency as MSBs in 2013.
MSBs must do a thorough risk assessment of their vulnerability to money laundering. They must also adopt anti-money laundering (AML) programmes based on their risk assessments. MSBs are required by FinCEN to establish, execute, and maintain a compliance programme to prevent money laundering and terrorism financing.
A typical AML programme for a US cryptocurrency exchange must include:
- Written policies, procedures, and internal controls such as an anti-money laundering suite must be incorporated to ensure ongoing compliance
- An individual compliance officer must be designated for assuring compliance with the programme
- Training should be provided for the appropriate personnel and for the detection of suspicious transactions
- An independent review to monitor and maintain the programme
It’s important to have a compliance programme in place to avoid receiving civil and criminal penalties from the Office of Foreign Assets Control (OFAC). State laws for money transmissions under cryptocurrency laws in the US vary from each other but can be put into a few categories. They may include the following types of activities:
- money transmission
- issuing or selling payment instruments
- Issuing or selling stored value
- Some states regulate substitutes for money and consider virtual currency within the scope of their money transmission statutes.
Federal and state policymakers in the US are still on the lookout and continue to consider if and how to regulate cryptocurrency transactions.
While there may not be a competitor to the currency in terms of laundering volume at present, the ever-increasing use of cryptocurrency and their unregulated or less-regulated nature in many jurisdictions mean that the financial world has a lot to worry about. Many large companies now accept the digital currency for payments of products and services. Cryptocurrency really has the potential to replace its paper and plastic variants. Therefore, it is important to analyze the loopholes enabling these currencies to be used for money laundering and to develop adequate counter technologies to combat crime.
MSBs need to have a well-designed AML compliance programme. This should be a well-balanced combination of compliance personnel and technology. Having an in-house compliance team may be feasible only for large MSBs. However, the same is usually very expensive and impractical for smaller firms. They would have to rely more on highly intelligent process automation tools and platforms to sift out illegitimate transactions from large data sets.
We have developed a first-of-its-kind Typology Repository Management (TRM) framework to effectively solve the shortcomings of the static rules-based AML transaction monitoring environment that traditionally exists. It’s also software that uses collective intelligence instead of data that works in silos. Through continual learning, TRM is an intelligent and efficient means of identifying money laundering. Financial institutions will be able to capture shifting customer behaviour and stop bad actors with high accuracy and speed using this advanced machine learning approach.
To learn more about our AML solutions, speak to one of our experts.
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