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    Landscape of Crypto Regulations in the US

    Pathik Bhattacharya
    Pathik Bhattacharya
    Published on December 9, 2022 6:29 PM

    Updated on January 10, 2023 1:03 PM

    A global crypto regulatory framework is something which still needs to be drafted. A new crypto regulation bill is in development while US SEC is still trying to find a way to regulate the digital asset market.
    Landscape of Crypto Regulations in the US
    Source: Unsplash

    You've probably heard that the United States has enacted new crypto regulations. And you may be asking how this legislation will affect investors or how cryptocurrency prices will be affected. You may even be wondering if cryptocurrency is legal in your state.

    After the FTX collapse, a wave of crypto regulations has been flowing through the market. The need for regulation became so much important that even big names like Cz Binance and many more are asking centres to draft a global crypto regulatory framework.

    While finding a uniform legal approach at the state level is challenging, the United States is making headway in drafting federal cryptocurrency legislation. The Financial Crimes Enforcement Network (FinCEN) does not consider cryptocurrencies to be legal tender, but it does consider cryptocurrency exchanges to be money transmitters because cryptocurrency tokens are "other value that substitutes for currency." 

    The Internal Revenue Service (IRS) does not consider cryptocurrency to be legal tender, but it defines it as "a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value."

    The Securities and Exchange Commission (SEC) of the United States is spearheading the charge to subject cryptocurrency marketplaces to the entire range of financial rules that the SEC controls. SEC Chair Gary Gensler stated in April 2022 that the top five exchanges representing for 99% of bitcoin trading "certainly are trading securities" and should register with the SEC and comply with applicable laws. Gensler has advocated for enhanced financial regulation enforcement for stablecoins and other cryptocurrencies.

    Crypto Exchanges Will be Registered as Brokers

    Gensler stated in a hearing before the Senate Banking Committee in September 2021 that crypto exchanges should be required to register like securities exchanges.

    He made the same request in April 2022."These crypto platforms play roles similar to those of traditional regulated exchanges. Thus, investors should be protected in the same way," Gensler added.

    Historically, cryptocurrency exchanges have been opaque, allowing their operators to earn profits without governmental supervision or responsibility. Many exchanges have been accused of engaging in wash trading, front running, or freezing customer accounts.

    Crypto exchanges that register with the SEC must have technological solutions that make their order books audit-compliant. They would also be subject to tight order execution procedures to avoid market manipulation.

    Many exchanges have already opted to escape US regulation by operating abroad and denying US users. Many exchanges, however, accept compliance as a cost of entering the lucrative US market. Some cryptocurrency exchanges, such as Coinbase, have attempted to comply with SEC laws by purchasing broker-dealers licensed in the United States.

    Could US Regulations Affect Crypto Prices?

    Overly restrictive US regulations may have a serious effect on cryptocurrency pricing. For example, if the United States imposed legislation that prohibited crypto exchanges, it would be extremely difficult for US individuals to obtain cryptocurrency. And the loss of cash may create a sharp drop in the whole crypto market.

    A rule that forces exchanges to preserve accurate records of deals and prevent market manipulation, on the other hand, may open this market up to more cautious investors, perhaps leading to higher pricing. As a result, regulation can have an impact on cryptocurrency pricing, for better or worse.

    Fortunately, the United States is not currently attempting to prohibit cryptocurrency exchanges. In truth, it is most likely attempting to allow banks to sell digital currency.

    New Crypto Projects and NFTs May Face US Regulations

    During the initial coin offering (ICO) boom in 2017, the SEC said unequivocally that DAO tokens constituted investment instruments.

    The SEC sued Ripple Labs Inc. and two of its executives in 2020, saying that Ripple violated securities laws by selling the XRP cryptocurrency without complying with securities registration and disclosure requirements.

    Many ICO issuers have been fined or reached out-of-court settlements.

    Although the SEC has focused much of its enforcement actions on ICOs, new forms of blockchain tokens have emerged in recent years, ranging from decentralized finance (Defi) to non fungible tokens (NFTs).

    Many of the new projects, like the ICOs, appear to evade securities rules, either because there is no central administrator or because the tokens represent collectables such as in-game assets or digital artworks. However, if these tokens are marketed as an investment, they are still subject to securities rules.

    In August 2021, the SEC announced its first enforcement action in the decentralized finance area, settling with the platform DeFi Money Market on charges that it handled sales of digital tokens worth more than $30 million that should have been registered as securities. The project's two founders agreed to pay $12.8 million in restitution and $125,000 in penalties.

    Regulators may soon apply securities regulations to non-traditional financial instruments. Hester Peirce, one of the SEC's more crypto-friendly commissioners, has cautioned that some NFTs may land investors in legal jeopardy.

    While the SEC has yet to announce any enforcement proceedings explicitly against NFTs, it has allegedly subpoenaed NFT developers as part of its investigation. These restrictions will not be enacted until the 2024 tax filing season. As a result, traders will not get a 1099-B for any deals made in 2022.

    However, trades made in 2023 will be reported to the IRS the following year. So, when 2023 arrives, bear this in mind.

    Frequently Asked Questions

    Q1) Is cryptocurrency legal in the United States?

    Ans: Cryptocurrency exchanges are lawful in the United States and are governed by the Bank Secrecy Act (BSA). In effect, this means that bitcoin exchange service providers must register with FinCEN, create an AML/CFT program, keep proper records, and report to the authorities.

    Q2) Are there any cryptocurrency regulations?

    Ans: Cryptocurrencies are not regulated, however, crypto firms that provide services using digital tokens must be licensed and registered with the FCA for anti-money laundering legislation.

    Q3) How does the IRS know you have crypto?

    Ans: The IRS can track cryptocurrencies through cryptocurrency exchanges or trading platforms. Transactions made on the exchanges/platforms are reported to the IRS immediately. If your trading platform supplies you with a Form 1099-B or 1099-K, the IRS knows about your crypto transactions.

    Q4) Which US state is crypto-friendly?

    Ans: According to a 2022 SmartAsset survey, cryptocurrency enthusiasts might consider relocating to Nevada, which rates as the No. 1 most crypto-friendly state in the United States. This is due to a variety of factors, including the increased availability of crypto-related professions and crypto-friendly laws.

    Q5) Which crypto exchanges are regulated in the USA?

    Ans: Coinbase, Kraken, Robinhood, Binance, Gemini, FTX, Crypto.com, and eToro are some examples of regulated and permissioned crypto exchanges in the US.