Although various authorities in the US have repeatedly claimed that they do not wish to over-regulate cryptoassets or to stifle innovation in the space, overlapping regulations produced by a multitude of distinct agencies with different missions and priorities have produced a confusing mix of classifications and requirements. At the federal level alone, the Internal Revenue Service (IRS), the Department of Treasury through its Financial Crimes Enforcement Network (FinCEN), the Commodity Futures Trading Commission (CFTC), and the Securities and Exchange Commission (SEC), all impose requirements on the issuance, sale, and/or exchange of cryptoassets (also referred to as ‘crypto’).
The IRS regulates crypto as property, imposing record-keeping and reporting requirements on purchasers and denying owners the benefits of treating cryptocurrencies as ‘currencies’, even though FinCEN regulates businesses involved in the exchange of crypto as ‘money’ exchangers. Although the CFTC treats all crypto as commodities, and vigorously pursues enforcement actions when it sees fraud in connection with transactions involving crypto, the SEC simultaneously regulates the issuance of new cryptoassets as securities. In this way, a single cryptoasset is often regarded simultaneously as money, property, a commodity, and a security.
The problems posed by this approach relate to the extensive regulations imposed by each agency. FinCEN, for example, requires businesses involved in the exchange of crypto to register with it, and to comply with rigorous anti-money laundering and know your customer requirements. The obligation to make suspicious activity reports can also be overwhelming, and as Ripple can attest, the penalties even for non-criminal violations of these requirements can be substantial. At the same time, when cryptoassets that are regulated by FinCEN are issued or sold, the SEC is likely to impose extensive disclosure obligations in connection either with registration as a security or complying with an exemption from registration under federal law. Many of the available exemptions limit the persons to whom crypto may be issued or resold, restrict the amounts that can be raised, and/or impose extensive disclosure and sometimes on-going reporting requirements. The expenses associated with complying with these obligations can be prohibitive. Similarly, it is likely to be both expensive and time consuming for crypto exchanges to respond to Department of Justice subpoenas seeking information at the request of the IRS, acting to enforce the federal tax laws. Add to that the risk that the CFTC may choose to investigate and enforce what it considers to be suspicious or fraudulent behaviours, and it is easy to see why the US is not regarded as being receptive to crypto.
To further complicate matters, this is only the federal layer of regulatory oversight. Every state also has its own set of laws, and many of those may apply to crypto. For example, each state has its own securities laws, and only a small minority of states have determined that crypto should generally not be regulated under state securities laws. Similarly, states also have their own tax regimes, and again, many of those jurisdictions impose tax burdens on users of crypto. States also regulate money transmitters, often choosing to classify businesses facilitating the exchange of crypto as being subject to registration and reporting as money transmitters or as virtual currency businesses. Some states have even adopted specific and unique regulatory approaches geared towards crypto.
The current reality is that regulatory agencies in the US started with the idea that all cryptoassets are alike, relying on a very broad definition of ‘virtual currency’ originally promulgated by FinCEN and quickly adopted by the IRS. Thus, once it appears that any aspect of crypto is within a particular agency’s mission, the agency generally attempts to assert jurisdiction over all crypto. My paper suggests that a more nuanced regulatory approach would be more in line with stated goals of avoiding overregulation, while still allowing each agency room to fulfil its mission.