On May 22, 2018 the US Commodity Futures Trading Commission (CFTC) issued an advisory statement for listing virtual currency derivative products. The statement is aimed at providing clarity for exchanges and clearing houses. Previously this week, major US cryptocurrency exchange and wallet Coinbase spoke to regulators about obtaining a federal banking charter.

Those events came in the midst of uncertainty regarding the status of crypto in the US, as federal regulatory bodies still haven’t come up with one definitive scheme to regulate Bitcoin, altcoins and initial coin offerings (ICOs). There are currently a number of federal regulators involved in crypto, and all of those bodies view cryptocurrencies like Bitcoin differently - defining it as a security, money, property or a commodity. Furthermore, on a state to state level, some additional regulations may apply.

With the absence of one definitive regulatory framework at the federal level, cryptocurrencies in the country fall into various categories, all of which must be considered.

In the US, Congress holds supreme power over federal regulatory agencies such as the CFTC and the Securities and Exchange Commission (SEC), enforcing them to comply with the laws it issues. Now that Congress is silent on the matter, each regulatory agency views cryptocurrency from its perspective, which is why it’s possible for different agencies to claim concurrent authority over the same actions… This means that US citizens must abide by the existing regulatory schemes of all the various agencies, even if they conflict.

The SEC: fights against ICOs and leans towards a “balanced approach”

The SEC, which regulates securities transactions, mostly considers crypto as securities. According to the 70 year old Howey Test, which the SEC applies to determine the purview of its jurisdiction, a security involves the investment of money in a common enterprise, in which the investor expects profits primarily from others' efforts.

Last year, the agency issued a marker opinion on digital assets, claiming that ICOs can sometimes be considered securities and therefore are subject to strict laws and regulations. Recently, the SEC elaborated on its views regarding crypto and said that it is looking to apply securities laws to everything from cryptocurrency exchanges to wallets.

ICOs appear to be the agency’s primary focus, as in February 2018 the SEC came through with a sweeping probe, issuing subpoenas to shut down a number of “unregistered securities” among ICOs. Prior to that, SEC chairman Jay Clayton accused “many promoters of ICOs and cryptocurrencies” of not complying with securities laws. Whilst he previously recognized ICOs as “potentially efficient fundraising tools”, in a op-ed published by the Wall Street Journal, Clayton also warned that “The SEC will vigorously pursue those who seek to evade the registration, disclosure and anti-fraud requirements of our securities laws.”

In a hearing at the US House of Representatives in April, William Hinman, the director of the SEC’s Division of Corporation Finance, explained why his agency had not completely banned ICOs, hinting that the SEC leans towards “a balanced approach” regarding digital assets and coin offerings, and that the area that “continues to evolve”.

Hinman also followed previous comments from Clayton that most ICOs should be considered securities. According to Hinman, the SEC would be consulting with entities releasing tokens to verify that the offerings were either regulated or not qualified as securities. When asked if he could think of an instance in which an ICO would not be seen as the offering of a security, Hinman replied:

“In theory, there is a time when a coin may achieve a sort of decentralized utility in the marketplace. There are some coins where you wouldn’t have an issuer to regulate…. In theory, there may be coins where that lack of a central actor would make it difficult to regulate… as a securities offering.”

Recently, SEC Commissioner Robert Jackson called the ICO market a prime example of an unregulated securities market in an interview with CNBC:

"If you want to know what our markets would look like with no securities regulation, what it would look like if the SEC didn't do its job? The answer is the ICO market”

Jackson also said that he hasn’t yet seen an ICO that wasn’t a security and currently, there are no ICOs that registered with the SEC. However, in early March, The Praetorian Group filed with the agency to register their ICO as a security offering; if their application is accepted, they will become the first company to hold an SEC-regulated ICO.

The Securities and Exchange Commission (SEC)

What’s that? An independent federal agency responsible for protecting investors from fraud schemes. Primary overseer of the US securities markets

How does it view crypto? Securities

The Commodity Futures Trading Commission (CFTC)

What’s that? An independent federal agency that protects market participants from frauds. Regulator of futures and option markets in the US

How does it view crypto? Commodities

The Financial Crimes Enforcement Network (FinCen)

What’s that? A bureau of the US Department of the Treasury. Analyzes financial transactions in order to fight money laundering, terrorist financing, and other financial crimes.

How does it view crypto? Money

The Internal Revenue Service (IRS)

What’s that? A government agency that collects taxes and enforces tax laws.

How does it view crypto? Properties

The US Office of Foreign Assets Control (OFAC)

What’s that? An agency of the U.S. Treasury Department. Enforces economic sanctions in support of U.S. national security and foreign policy

How does it view crypto? Money, or fiat currencies

The CFTC: Overall cryptofriendly approach

The CFTC, a body that fully controls commodity derivatives transactions, claims that tokens are commodities. That means that in their view, Bitcoin (BTC) is closer to gold than to conventional currencies or securities, as it is not backed by the government and doesn’t have a liability attached to it. The CFTC’s approach to regulating cryptocurrencies as commodities has been recently backed up by a New York federal judge.

As CFTC Commissioner Brian Quintenz explained, “crypto-tokens offered in a pre-sale can transform. They may start their life as a security regulated under the SEC from a capital-raising perspective but then at some point – maybe possibly quickly or even immediately – turn into a commodity."

The CFTC has shown some pro-Bitcoin leanings, granting LedgerX the right to create a regulated Bitcoin futures market. Moreover, J. Christopher Giancarlo, chairman of the US Commodities and Futures Trading Commission and self-proclaimed “cryptodad” - that hashtag was briefly featured in his Twitter bio - has gained the reputation of a rather cryptofriendly regulator, although he will leave office in 2019 as his term expires. In February, he said:

“We owe it this new generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one.”

Despite having dissimilar definitions of cryptocurrencies, the CFTC has been collaborating with the SEC. In February, the agencies held a highly anticipated hearing, where they gave credit to the cryptocurrency industry for adding a new paradigm to the financial system, stressed the importance of fair regulatory frameworks and famously said that “if there was no Bitcoin, there would be no blockchain”.

The CTFC also made its priorities clear. The agency stressed its interest in allowing growth for blockchain and cryptocurrencies, while focusing on fraudsters in ICOs. That seems to be the main direction for federal regulators at the moment. After dealing with unlawful ICOs, the various regulatory agencies might proceed to tackle more difficult issues, like what makes a token a security, a commodity, money or a utility.

The FinCen: ICO arrangements vary, but tokens are basically money

The Financial Crimes Enforcement Network (FinCen), a bureau of the Treasury Department that has full authority for Know Your Customer (KYC) and Anti-Money Laundering (AML) matters, considers tokens to be money. In other words, under the FinCen’s jurisdiction, ICO sales are subject to the money transmitter rules under the Bank Secrecy Act, and therefore are required to register with the government, collect information about their customers, and report any suspicious financial activities.

In March, FinCen disclosed in a letter written by its Assistant Secretary for Legislative Affairs Drew Maloney to senator Ron Wyden, that the agency will apply its regulations to ICOs, stating that “an exchange that sells ICO coins or tokens, or exchanges them for other virtual currency, fiat currency, or other value that substitutes for currency, would typically… be a money transmitter". The regulatory body mentioned that “approximately 100 virtual currency exchanges” are registered with the FinCen, and reminded about their policing action against Ripple Labs in 2015 and BTC-e in 2017.

However, in that letter, FinCen also recognized that “ICO arrangements vary”, and that “certain participants could fall under authority of the SEC, which regulates brokers and dealers in securities, or under the authority of CFTC, which regulates brokers and dealers in security”.

The IRS: make sure to pay taxes, although we know it’s not easy

The Internal Revenue Service (IRS) thinks that cryptocurrencies are not currencies, but properties, meaning that if you sell your cryptocurrencies for a profit you will be subject to a capital gains tax. In 2014, the agency issued guidance on how cryptos should be taxed. According to Notice 2014-21, received or mined cryptocurrencies must be included in computing gross income with fair market value of the virtual currency as of the date it was received.

In an Expert Take for Cointelegraph, Robert W. Wood, a San Francisco-based tax lawyer of Wood LLP, explained the nuances of paying taxes for crypto, reminding that with the agency using software for tracking purposes and the summons of Coinbase, the IRS hunt for cryptocurrency isn’t going away.

On March 23, the IRS released a memo reminding US citizens of the need to report their digital currency earnings on their income tax returns. The agency also highlighted the “inherently pseudo-anonymous aspect” of cryptocurrency transactions.

But, as the stats show, people are hardly paying their taxes on crypto. A couple of days before the taxes deadline in the US, the Credit Karma Tax platform told CNBC that less than 100 people have reported capital gains from crypto investments out of the 250,000 most recent tax filers. In February, at the beginning of tax season, Credit Karma reported the very same numbers, 100 out of 250,000, or 0.04 percent of tax filers reported gains on crypto in 2017. In 2015, the IRS reported that only 802 people in total had crypto gains and losses in their tax filings.

OFAC: blacklisting crypto wallets of sanctioned persons

The US Office of Foreign Assets Control (OFAC), an agency of the US Treasury Department that enforces economic sanctions in support of US national security and foreign policy, seems to treat cryptocurrencies as money, or fiat currencies. In March, the agency updated its FAQ with a section on virtual currency.

Essentially, as an international tax attorney Selva Ozelli explains in an Expert Take for Cointelegraph, under OFAC’s new guidance, US citizens will have the same sanctions compliance obligations regardless of whether transactions involve fiat currencies or cryptocurrencies. In other words, sanctions violations involving crypto are going to be treated similarly to those involving fiat currencies.

Moreover, the Specially Designated Nationals and Blocked Persons List (SDNL) curated by the OFAC is going to be updated with digital currency addresses or wallets of people featured in it. As Ozelli points out, “this would put US persons on notice that doing business with those digital addresses may be prohibited, increasing compliance considerations for businesses delving into the world of virtual currency.”

Thus, the program mechanism looks similar to KYC procedure, which includes sanctions list screening and other relevant measures. Those who fail to comply with OFAC’s regulations may face significant civil and criminal penalties.

Although it’s not completely clear how OFCA will obtain crypto wallets of those on the SDNL, in March, classified documents obtained by Edward Snowden revealed that The US National Security Agency (NSA) managed to create a system to track down and deanonymize cryptocurrency users.

“Chilled market”: rising need for responsible and definitive regulation

In a recent hearing entitled “Examining Cryptocurrencies and ICO Markets” that took place in Washington, Coinbase, one of the largest mainstream wallets and cryptocurrency exchanges, voiced their concerns regarding the patchy state of regulation in the US and how it is “chilling” the market.

Mike Lempres, Chief Legal and Risk Officer at Coinbase, stressed that the “tremendous potential” of the digital currency’s technology can be only achieved through “responsible regulation.”, while at the current stage, the US regulatory system “is harming healthy innovation” due to a lack of understanding of what should be allowed and what should be not, and how digital assets should be considered; either as securities, commodities, property, or money.

“There is so much uncertainty about the definition of a security and the scope of regulatory control that the market is being chilled. This is bad for everyone because the technology won’t stop — it will simply move overseas and we will miss out on the opportunity to cultivate the benefits in the U.S.”

Lempres pinpointed “a lack of coordination” between federal regulators and stated that Coinbase cannot start supporting ICOs until the necessary regulations are adopted.

Defining cryptocurrencies as an asset is indeed tricky: some cryptocurrencies might look like securities, while others act like commodities. It is also fair to suggest that most cryptocurrencies have some qualities of each. The CFTC chairman’s statement echoes that sentiment, as he suggests that despite all complexities, a regulatory framework isn’t coming any time soon.

Nevertheless, the future for crypto in the US might be bright after all. Most US regulators seem to be quite "cryptofriendly" because they don't want to stifle innovation and would like to keep blockchain businesses in the country, but at the same time they want to protect individuals from bad actors. It's a difficult balancing act, one that requires pragmatism and time.