The Cryptocurrency Market in the United States
The United States is a fairly friendly jurisdiction for the cryptocurrency market. According to an annual report by Chainalysis, the U.S. was ranked among the top five countries in crypto adoption in 2022. CoinsPaid Media reviewed the U.S. cryptocurrency market at the federal level.
How the U.S Government Regulates the Crypto Industry
Since 2013, there have been a number of laws and guidelines in effect at the U.S. federal level outlining the basic rules for regulating digital asset transactions. Let’s take a closer look at some of them.
- Under the Bank Secrecy Act (BSA), the Financial Crimes Enforcement Network (FinCEN) issued guidance in March 2013 setting out its authority regarding crypto regulation. The FinCEN explained that blockchain companies that engage in issuance, exchange, and other digital asset transactions would be considered cryptocurrency exchanges by the FinCEN. Consequently, these companies must be registered, comply with tax reporting, and follow AML policies.
- In September 2015, the Commodity Futures Trading Commission (CFTC) published rules related to the regulation of crypto exchanges. The CFTC made it clear that BTC and other cryptocurrencies would be treated as commodities under the Commodity Exchange Act (CEA).
- In April 2019, the Securities and Exchange Commission (SEC) published updated guidance clarifying which issued digital assets would fall under the category of securities. Accordingly, these digital assets are subject to all laws and regulations regarding offers and exchanges of securities. The SEC has been considering certain types of tokens as securities since 2015.
- In September 2022, the White House unveiled a concept to improve current regulations and rules governing cryptocurrencies. Under this concept, the CFTC and the SEC would investigate cases involving cryptocurrency fraud. The Consumer Financial Protection Bureau (CFPB), in cooperation with the Federal Trade Commission (FTC), will handle complaints from crypto investors. The Financial Literacy and Education Commission (FLEC) will communicate possible risks associated with cryptocurrency transactions to the public. The National Science Foundation (NSF) will oversee developments in blockchain and the financial sector.
The FinCEN guidance mentioned above permits digital asset transactions in the United States to be conducted by private users, cryptocurrency exchanges, and blockchain management companies that exclusively issue cryptocurrency and have the right to repurchase digital assets. Moreover, the U.S. Internal Revenue Service (IRS) ruled that digital assets, under the Internal Revenue Code, will be treated as property, which implies a tax on crypto transactions.
Specifics of Crypto Regulation in Certain American States
Despite the current laws and regulations governing digital assets at the federal level, some states have their own specifics regarding non-fungible tokens, mining, decentralized autonomous organizations, and other areas of the blockchain industry.
The state of New York has had a special regulatory regime for the cryptocurrency sector, BitLicense, since 2015. Its rules require operating cryptocurrency companies to obtain a license from the New York State Department of Financial Services (NYDFS) ad undergo regular inspections, also carried out by this body. BitLicense treats digital assets as a medium of exchange or expression of value.
However, the BitLicense regime doesn’t require a license for mining-related transactions. It also doesn’t license companies that develop software for blockchain projects and then distribute it.
The state of California has long lacked specific laws to regulate the cryptocurrency market. In September 2022, local officials drafted a bill enabling the licensing of companies wishing to provide crypto and financial services.
The draft bill was sent to Governor Gavin Newsom for consideration but was vetoed by him due to several flaws. According to the governor, adopting an appropriate regulatory framework for California is important, but with more flexibility on the part of regulators and proper tools for crypto transactions.
California has the largest number of crypto ATMs — more than 2,400 devices.
The state of Texas has several bills aimed at regulating the cryptocurrency market.
- The Texas Department of Banking (TDB) reported on June 10, 2021, that it permits banks to save digital assets. Customers can keep copies of private keys, turn over control of digital assets to the TDB, etc.
- Greg Abbott, Governor of Texas, signed legislation in June 2021 to include digital assets in the state’s Uniform Commercial Code.
- Commercial law was adapted to the blockchain industry in early September 2021, when legislation was passed spelling out the rights of cryptocurrency holders and how to identify them.
Digital currencies in the state of Texas are being considered as a means of savings, exchange, and unit of account based on blockchain technology.
In April 2023, House of Representatives Member Mark Dorazio and Senator Bryan Hughes introduced several bills proposing to issue a Texas digital currency backed by gold.
In late April 2021, Wyoming Governor Mark Gordon signed a bill allowing DAOs to be registered as legal entities. On July 1, 2021, the state of Wyoming created the first official DAO in the United States — American CryptoFed. This company issued two tokens, Ducat and Locke, the main objective of which was the development of the state’s economy without the accompanying inflation.
Wyoming is quite a crypto-friendly state. In August 2021, several pieces of legislation came into effect to attract blockchain companies and miners to its jurisdiction. For instance, the state has tax incentives, relatively cheap energy resources, and high-speed Internet connections.
Wyoming offers special statutes for banks that register as special purpose depository institutions (SPDI), which allow them to handle cash and crypto. In this state, companies such as Kraken, Avanti, Commercium Financial, and Wyoming Deposit and Transfer have already obtained SPDI licenses.
In September 2021, the Boston Blockchain Association (BBA) and media company Media Shower presented local lawmakers with recommendations for regulating cryptocurrencies, largely copying several similar laws from Texas.
As of May 2023, Massachusetts is still in the process of passing legislation to create a special commission to work with the General Court to address the blockchain sector and regulate cryptocurrency transactions.
Crypto-Based Investment Products
Investors in the U.S. can invest not directly in cryptocurrencies but in derivative financial instruments based on them.
Exchange-Traded Funds (ETF)
ETFs are investment funds that form portfolios of assets. They issue their own shares, where each particular security is tied to a certain part of the fund’s assets. Thus, ETFs offer the opportunity to buy a particular asset without owning it directly.
Since 2017, companies that own assets in the United States have begun applying to create Bitcoin ETFs. However, the SEC rejected such applications. Since Gary Gensler took over as the SEC Chair in 2021, the number of applications for ETFs has grown noticeably. Gensler said that the SEC could protect the rights of cryptocurrency investors based on excerpts from the Investment Company Act of 1940. On top of that, the SEC Chair added that crypto ETFs are still a fairly volatile and speculative asset.
In October 2021, ProShares was the first company in the U.S. to launch an ETF that allows investors to open short positions in cryptocurrencies. ProShares said that this ETF offered investors the opportunity to hedge risks and also receive dividends by reducing or increasing the price of the main cryptocurrency.
According to CNBC, shares of the ProShares ETF under the ticker BITO on the NYSE showed a volume of $984 million in the first trading session. The price per share was $41.94 at the peak of trading. Following ProShares, several companies applied to the SEC to launch ETFs, including:
- VanEck (trading began on the CBOE on November 16, 2021);
- Volt Equity (trading began on the NYSE in October 2021);
- ARK Investment Management (application for the launch of an ETF is under consideration by the SEC), etc.
Anthony Bertolino, VP of iTrustCapital, said the launch of crypto ETFs in the U.S. would only strengthen the market for digital assets and create a new class of investors who will be able to experience all the benefits of Bitcoin.
Investing in crypto through a pension fund is quite common in the U.S. For example, in October 2021, the Houston Firefighters’ Relief and Retirement Fund in Texas (HFRRF) set up a special payout portfolio with Bitcoin or Ethereum as assets. According to HFRRF Director Ajit Singh, investments in blockchain reflect the company’s belief in the potential of blockchain and the complete democratization of the savings system without any intermediaries.
Remarkably, the HFRRF has over 6,600 firefighters as members, including active employees, retirees, and injured firefighters. Members have been contributing 9% of their salaries to this pension fund since July 1, 2004.
In November 2022, a number of U.S. Senators sent a collective letter to Fidelity Investments’ CEO concerning the company’s actions regarding the retirement accounts. Fidelity Investments is a U.S.-based financial services company serving more than 40 million investors around the world. The company is a global leader in the retirement industry and provides the most popular 401(k) savings plan for retirees in the United States.
In their letter, the senators expressed concern about the recent bankruptcy of blockchain company FTX Group. According to them, the digital asset industry is facing severe problems, namely a lack of transparency in crypto transactions and, as a result, a high incidence of fraud. The senators warned Fidelity Investments not to use Bitcoin in retirement savings accounts, as the company had intended to launch the option for 401(k) accounts in the summer of 2022. However, Fidelity Investments opened the option to use BTC and other cryptocurrencies for 401(k) accounts in the fall of 2022, after which the senators sent a follow-up letter to the company in November 2022 asking it to remove the option for clients.
Public pension funds in the United States first started investing in cryptocurrency back in February 2019. At that time, the investment company Morgan Creek Digital announced the creation of a cryptocurrency venture fund, whose main investors were two public pension funds. Back then, Morgan Creek Digital CEO Anthony Pompliano didn’t disclose the names of the pension funds, citing anonymity.
Cryptocurrency and Taxes
In 2014, the Internal Revenue Service (IRS), the U.S. government agency responsible for taxation, published guidance regarding cryptocurrency and taxes. This document defines digital assets as property. Consequently, all crypto transactions, including mining, must be taxed.
The main points from the guidance provided by the IRS are as follows:
- if an employee receives a paycheck in digital assets, such payments are subject to Federal Income Tax Withholding and Payroll Taxes;
- income in crypto received by individuals must be declared in dollars;
- a user must report all cryptocurrency transactions to the IRS.
In December 2017, then-U.S. President Donald Trump signed amendments to the U.S. tax code that required holders of digital assets to pay income tax on all cryptocurrency transactions. Notably, before Trump’s law came into effect, private investors and traders used a legislative loophole, U.S. IRS Section 1031, which allowed them not to pay taxes after making cryptocurrency exchange transactions.
As of January 1, 2018, updated regulations in the U.S. Internal Revenue Code took effect. Thus, only information about real estate transactions was left in Section 1031.
Speaking of the types of taxation on crypto in the U.S., there are two main taxes: an income tax and a sales tax. The income tax rate depends on a company’s or individual’s net annual income and varies from 15% to 35%. Income tax also includes a specific state’s tax rate, ranging from 0% to 15%, depending on the state where the cryptocurrency transactions take place. Therefore, the total income tax rate for crypto transactions in the U.S. may be 40-50%.
The sales tax applicable to crypto transactions ranges from 0% to 8%. Since this tax is considered a regional one in the U.S., it’s up to each state to determine the tax rate. When forming the rate, the state’s economic situation, demand for a particular product, the product’s origin, and so on are considered.
For example, some counties in the state of Alaska set their own sales tax rate of up to 7%. And this is despite the fact that there’s no sales tax at the state level. Before conducting cryptocurrency transactions in any U.S. state, users should familiarize themselves in advance with the peculiarities of local taxation laws.
CP Media wrote a separate article on cryptocurrency taxation issues: https://CoinsPaidmedia.com/business/cryptocurrency-taxation-2023/
All in all, the United States has a rather flexible legislative system responsible for regulating the cryptocurrency market, and each state can develop and implement its own regulatory framework. The White House’s concept of improving existing legislation regulating the cryptocurrency sector could open up new prospects for private investors and companies in the next few years.