Cryptocurrencies have gone from a hobby project to a multibillion dollar asset class over the past decade, but regulators have struggled to keep up with the growth.
The IRS and SEC have aggressively prosecuted taxpayers that fail to report their crypto trades and businesses that fail to register their tokens as securities. However, they have failed to offer robust guidance on how to determine the cost basis of certain crypto transactions or whether their initial coin offering qualifies as a securities offering.
The Cryptocurrency Act of 2020 seeks to answer some of these questions by categorizing cryptocurrencies and defining which agencies are responsible for regulation and enforcement.
Let's take a look at the Cryptocurrency Act of 2020 and how it would regulate the market.
What Are the Origins of the Bill?
U.S. Congressman Paul Gosar (R-AZ) introduced the Cryptocurrency Act of 2020 to the House of Representatives in December 2019. The move came shortly after the three most important regulatory bodies in the U.S. — the SEC, FinCEN and the CFTC — issued a joint statement saying that people who engage in digital asset activities must adhere to certain laws.
In particular, the statement said that crypto market participants must adhere to anti-money laundering and counter-terrorism financing (AML/CFT) obligations defined in the Bank Secrecy Act (BSA). Any institutions transacting in crypto assets must establish AML programs that include detailed record-keeping and reporting of suspicious activities.
The problem is that the definition of crypto assets is relatively uncertain and there's no clear definition of which government agency is responsible for regulating and enforcing each type of crypto asset. The Cryptocurrency Act of 2020 seeks to address these issues and clarify who makes the rules, as well as provide some basic requirements for the rules.
How Are Crypto Assets Categorized?
The Cryptocurrency Act of 2020 categorizes cryptocurrencies into three main groups. These groups determine what government agency is responsible for the creation and enforcement of regulations, including the development of licenses, certifications or registrations required to issue or trade the digital assets across markets.
The three categories include:
- Crypto Currencies - Any representation of currency or synthetic derivatives resting on a blockchain or decentralized cryptographic ledger (e.g. Bitcoin or Litecoin), including reserve-backed digital assets (e.g. stable coins).
- Crypto Commodities - Economic goods or services that markets treat without regard for who produced them that rest on a blockchain or decentralized cryptographic ledger (e.g. Bitcoin futures contracts).
- Crypto Securities - Debt, equity or derivative instruments that rest on a blockchain or cryptographic ledger (e.g. initial coin offerings).
The only exception to these classifications is a synthetic derivative that's operated and registered with the Department of the Treasury as a money services business and operates in compliance with the Bank Secrecy Act and other anti-money launder, anti-terrorism, and other screening requirements designed to prevent abuse by criminals.
Who’s Responsible for Regulation?
The Cryptocurrency Act of 2020 clarifies what government agencies are responsible for each crypto category. If the bill passes, these agencies will gain regulatory control over the assets in their jurisdiction. These agencies will have sole authoritative power over the crypto assets that they're assigned, eliminating many ambiguities in the market.
The three agencies include:
- The Financial Crimes Enforcement Network (FinCEN), which typically regulates banking and money service institutions, will be responsible for regulating cryptocurrencies.
- The Securities and Exchange Commission (SEC), which typically regulates the securities markets, will be responsible for regulating crypto securities.
- The Commodity Futures Trading Commission (CFTC), which typically regulates the commodities and futures markets, will be responsible for regulating crypto commodities.
The Federal Digital Asset Regulator will maintain a public record of all licenses, certifications and/or registrations required to create, issue or trade digital assets. In addition, FinCEN will be required to work with the Security of the Treasury to create similar rules enforced by traditional financial institutions to trace crypto transactions.
Paving a Way Forward
The Cryptocurrency Act of 2020 is designed to categorize crypto assets and assign regulatory responsibilities. That said, specific regulations won't appear until these agencies start to draft and publish their proposed regulations, which could take months or years from the time the bill is passed. The bill represents a step forward, but not a comprehensive solution.
Other bills under consideration could have an equal impact on the market. For example, the Token Taxonomy Act would exempt digital tokens from securities regulations entirely, which would essentially eliminate the crypto security categorization found in the Cryptocurrency Act of 2020. Traders and investors should take stock of all proposals for a complete picture.
Cryptocurrency traders looking for a way to cope with the complexities of IRS regulations may want to consider tools like ZenLedger, which automatically aggregates transactions, calculates capital gains or losses, and pre-fills popular IRS forms like Form 1040 Schedule D and Form 8949. You can even identify opportunities for tax loss harvesting. With the 2019 tax season starting today, investors may want to consider the solution to get everything in order to avoid any fines or penalties from underreporting.
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The Bottom Line
The Cryptocurrency Act of 2020 is just one of many crypto-related bills under consideration. Many of these bills came in response to Facebook's plans to launch its Libra cryptocurrency, which lawmakers fear will circumvent the traditional financial system and enable people to buy and sell goods and services without U.S. dollars.
Crypto traders and investors should keep an eye on these regulations as they could impact everything from their own reporting requirements to the viability of initial coin offerings (ICOs) and other cryptocurrency investments. The easiest way to track these bills is using online tools, like GovTrack, that enable you to see bill text and voting history.