Over the past decade, the cryptocurrency market has significantly grown in size and popularity around the world. As demand for Bitcoin and other cryptocurrencies increases, each country has been making legal decisions about how to regulate them. These regulations continue to evolve over time.
It is likely impossible to completely stop cryptocurrency use, since transactions can be done anonymously over the internet or even using paper wallets .
Countries can ban cryptocurrency exchanges and ICOs (initial coin offerings ), and they can make it illegal for businesses to accept cryptocurrencies. Even if it’s illegal for citizens to use cryptocurrencies, however, it can be extremely challenging to actually track users down.
While some regulations might slow down the purchase and usage of cryptocurrencies, others could actually aid in the growth of this new asset class. Even an announcement about a cryptocurrency regulation can cause prices to rise or fall.
If you are already invested in cryptocurrencies or are interested in investing, you may want to learn about regulations and how they might affect you.
Note: This article is only a high-level overview of crypto regulations. And, as crypto is not currently regulated (which is discussed below), it is highly volatile to invest in and comes with significant risk.
Background on U.S. Crypto Regulations
Anytime a new technology is developed, the U.S. government makes decisions about how to regulate it. This process can take years. Blockchain technology is complex and can be applied to pretty much any industry, including manufacturing, food, and governance. Cryptocurrencies are just one part of the broader usage possibilities of this technology.
Lack of regulation in the U.S. has largely prevented U.S. citizens from being able to participate in many ICOs, and has caused numerous blockchain and cryptocurrency companies to start up elsewhere and avoid working with the U.S.
Although the U.S. has been slow to release comprehensive laws and regulations about cryptocurrencies, the Securities and Exchange Commission (SEC) has increased its crackdown on certain activities in recent months, especially ICOs. In 2017 the SEC made five actions regarding digital tokens, which increased to 18 actions in 2018.
The case-by-case approach the U.S. has taken up until recently fits with the broader legal structure and philosophy of the U.S. government.
The U.S. legal system is set up to respond to issues through the lens of a specific event and legal case.
Rather than releasing broad laws and regulations about topics, a regulatory landscape is typically created over time as issues arise. This differs from many other nations that create rules first and then act to enforce them as cases arise.
Current U.S. Regulations
Cryptocurrencies are currently viewed by the IRS as assets or property, which means that capital gains taxes apply. They are not considered legal tender in any state, though the Missouri House of Representatives introduced a bill in March to change that within the state.
The SEC currently views some cryptocurrencies as securities . Its goal is to apply securities laws to the industry across the board. This would affect everything from exchanges to ICOs to wallet companies. In April, the SEC released new guidance on cryptocurrencies, though those guidelines are not yet law.
Unlike the SEC, the Commodity Futures Trading Commission (CFTC) considers Ether, the second-most traded cryptocurrency, as a commodity . This stance, and the resulting regulations which would come with it, would be more crypto-positive than the SEC’s position, because it would allow Ether to be traded on the U.S. markets.
Congress has introduced more than 20 bills this year related to cryptocurrency. And in 2018, two bills were introduced in an effort to make the U.S. a stronger player in the cryptocurrency industry. The Virtual Currency Consumer Protection Act of 2019 and the U.S. Virtual Currency Market and Regulatory Competitiveness Act of 2019 aim to move the regulation process forward so that the U.S. can benefit from the growing cryptocurrency industry.
The U.S. has been taking its time in solidifying cryptocurrency regulations, but that doesn’t mean there haven’t been discussions. There have been numerous meetings and reports written about the industry.
Although the ultimate decisions around how to regulate cryptocurrencies may not look positive for the industry, the fact that the government is gathering so much information is a good sign.
Cryptocurrency technology is complex, and there are many factors to take into consideration. Unfortunately, the technology is changing very quickly and the policies aren’t necessarily keeping up, which may result in regulations being passed that are already out of date with the current market.
Part of the delay is due to the fact that there isn’t a particular regulating body to pass and enforce cryptocurrency regulations. The SEC and the CFTC can step in if an exchange does something illegal, but state-level laws actually apply to most money-transmitting operations. Congress could potentially form a new regulatory body for cryptocurrencies.
More clarification is still needed in a number of areas. Regarding the question of whether cryptocurrencies are securities or commodities, some have felt that this is determined by the project’s level of decentralization.
If a project is decentralized and no central authority controls the project’s development, it would not be classified as a security. A new bill introduced last year would confirm this. The problem is that projects can ramp up their operations before hearing from the SEC about whether they are a security or not, and then end up getting shut down.
The way cryptocurrencies are currently taxed, an investor might see a huge tax bill. A token could go up significantly one year but lose all its value the next year. Avoiding large losses and taxes requires a more in-depth level of attention and knowledge than many investors have.
Global Cryptocurrency Regulations
There is currently no global regulation standard for Bitcoin and other cryptocurrencies. Regulations are handled individually by each nation.
In June 2019, the Financial Action Task Force (FATF) released regulations requiring virtual asset service providers, which includes cryptocurrency companies in more than 200 countries to verify the identities of anyone sending more than $1,000 in a transaction.
They also need to send customer information back and forth to one another in the same way that banks do. Countries have 12 months to implement these rules.
Exchanges and ICOs previously had to comply with certain “know your customer” (KYC) rules, but these new regulations are stricter. Smaller businesses may suffer since they do not have the team and resources to implement this rule.
Although there has been pushback against these regulations, the goal is to protect consumers and prevent money laundering and the funding of terrorism.
G-20 is a group of central bank governors and finance ministers from the European Union and 19 nations with the world’s largest economies. The group includes representatives from the U.S., Japan, France, Germany, the U.K, and other powerful nations. Formed in 1999, the G-20 is the main global council for economic issues.
The goal of the group is to regulate financial markets, and promote global trade and economic growth. The group has no legal power, but its agreements do have a powerful impact on the economy since they influence the economic decisions of the world’s largest economic powers.
The members of G-20 have been discussing cryptocurrencies in their recent meetings, and they agreed to comply with the regulations released by FATF. The Financial Stability Board, a global financial regulation board, gave the G-20 an assessment claiming that cryptocurrencies do not pose a financial threat, and recommended against attempts to ban them.
The International Monetary Fund, or IMF, is concerned about the use of cryptocurrencies for terrorism, fraud, and money laundering. They are considering the possible benefits for financial policies to protect consumers and nations against these uses.
Crypto Regulations in Other Countries
Each country has its own stance on cryptocurrencies. Little by little, each country is issuing regulations which are generally favorable to the growth of the industry. Some countries, such as Norway, Canada, and the Bahamas, are considering issuing their own cryptocurrencies.
In 2018, Malta became the first country to release a comprehensive framework for the use of cryptocurrencies. The nation now requires businesses to acquire certifications, go through specific processes to run ICOs, and more.
The framework makes it clear that Malta wants to support the industry and does not find cryptocurrencies to be illegal. Malta’s regulations may set a precedent for other countries to create similar frameworks. Switzerland is on track to release a full cryptocurrency framework.
Recently, Japan approved a new bill which tightens crypto regulations in an effort to protect consumers and prevent hacks. The bill also officially names cryptocurrencies as “crypto assets.”
Australia also released regulations stating that all companies involved with cryptocurrencies, including ICOs, exchanges, and mining operations, must comply with Australian laws and rules associated with financial institutions. In some cases this requires obtaining a license or authorization.
Hong Kong hopes to become a hub for cryptocurrency trading, so they recently unveiled new rules to position themselves as such.
Others, however, don’t have such a positive view of cryptocurrencies and don’t show signs of loosening their stance. China has attempted to crack down hard on cryptocurrencies by banning exchanges and ICOs .
When Ecuador attempted to launch their own cryptocurrency, they banned others to eliminate competition.
As of Oct. 2019 , there are 124 countries where using Bitcoin is unrestricted, and eight where it’s illegal. However, these rules are not always enforced and it is difficult to do so. Bangladesh is the only country which has been known to enforce its ban.
Is More Regulation Positive or Negative for Cryptocurrency Users?
Although an outright ban on cryptocurrencies would make it difficult to continue using them, other types of regulations can actually help grow the industry and protect consumers.
Many exchanges and ICOs have turned out to be scams and have been vulnerable to hackers. Regulations may not have prevented all of those financial losses, but they could have helped with some. Business requirements such as insurance, cybersecurity requirements, and audits can all be positive for the industry.
Some consumers have not invested in cryptocurrencies because of the fear of hackers and the stigma around them, so it’s possible that regulations will encourage them to get involved.
More regulations may also make it possible for larger funds and established financial players to get involved. However, more regulations may cause certain cryptocurrency users to move away from exchanges and toward peer-to-peer transactions in order to keep the privacy characteristics intact.
Everyone may agree that we don’t want cryptocurrencies to be used to fund terrorist attacks or underground criminal networks, however, the process to prevent that from happening is not simple. Privacy is one of the overarching principles of cryptocurrencies and is nearly impossible to regulate. Governments want to be able to track cryptocurrency transactions in order to prevent crime, but also so that they can collect taxes.
Policymakers can require that exchanges take users’ information, but you don’t have to go through an exchange to use cryptocurrencies.
Cryptocurrencies, such as Bitcoin, don’t have a central authority or founder, so there isn’t any business or team that can be regulated or shut down. Certain privacy coins may be at risk if regulators attempt to require identification for all transactions.
Unfortunately for U.S. investors, the lack of legal clarity has caused many of the most well-organized exchanges and businesses to base themselves in other nations and exclude U.S. participation. U.S. customers have not been able to invest in certain ICOs for this reason.
In certain circumstances, the U.S. only allows accredited investors to participate in investments. If they required this for all ICOs it would severely dampen the growth of the industry and would block many citizens from participating. With a well thought out balance of regulations, the industry can continue to grow and U.S. citizens can benefit.
How Do Regulations Affect You as an Investor?
Currently, as a U.S. investor you can buy, sell, and send cryptocurrencies on numerous exchanges and investment apps. Some exchanges have limits on the amount of money you can deposit or withdraw and some require more extensive identity verification than others.
Once you know how much money you are looking to invest into cryptocurrencies, which coins you are interested in buying, and how often you plan to buy, sell, or withdraw them, you can make a decision about the best platform to use for your portfolio. It’s important to pay attention to the tax regulations, which require you to keep track of your transactions in order to pay the appropriate capital gains tax.
If you are looking to invest in ICOs, each project will have different rules surrounding your participation. Some ICOs ban U.S. citizens altogether and some require you to be an accredited investor.
Begin Growing Your Cryptocurrency Portfolio Today
Whether you’re already invested in cryptocurrencies or looking to get started, it can be confusing trying to keep up with all of the regulations. One way to start building your portfolio and making sure you are fully compliant is to use an investing platform such as SoFi Invest®. And SoFi Invest now offers SoFi
Crypto as part of its platform.
With Crypto, you can learn more about cryptocurrency by tracking up to 40 different cryptocurrencies and their prices, and trade Bitcoin, Litecoin, and Ethereum—all on the SoFi app. And although crypto is volatile and comes with risk, SoFi can help you understand it better and take a well-informed approach toward investing in it.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.