Cryptocurrency regulation is imminent, but will regulators catch up?

Regulatory change in the cryptocurrency realm has been the subject of heated debate for many years. The general ethos of cryptocurrency is that of anarchism or anarcho-capitalism. Technology advocates tend to be adamantly against any kind of government intervention in markets or technology.

However, as digital assets and blockchain technology find themselves increasingly widespread, governments must respond. They need to incorporate these resources into existing regulations or create a new regulatory framework altogether.

Let’s take a look at how crypto regulations have evolved over the years, with a focus on US regulation.

Context: Cryptocurrency regulation in the United States

Much of the conversation around cryptocurrency regulation in the United States has focused on something called Try Howey. Having its roots in a landmark 1946 Supreme Court case, The Howey Test provides the criteria used to determine whether or not something qualifies as a security, i.e., an investment contract.

The test has four parts and states that a title is:

1. An investment of money;

2. In a joint venture;

3. With the expectation of profit; AND

4. Those profits come from the efforts of others.

If an investment is in line with all four of these precepts, then it can be considered a security, meaning it falls within the regulatory jurisdiction of the Securities and Exchange Commission (SEC ).

The Howey Test is almost 80 years old. Applying it to new technologies such as cryptocurrencies it can be difficult. However, many argue that most cryptocurrencies constitute investment contracts that meet the criteria of the Howey test.

Bitcoin may be an exception, as the SEC has hinted BTC is more like a commodity. This reasoning was part of what led to the approval of the Spot Bitcoin ETF in the United States in January 2024.

A timeline of cryptocurrency regulation

Between 2009, when Bitcoin was invented, and 2013, there were only a few significant developments regulation of cryptocurrencies. These included:

• The closing of The Silk Road market and seizure of his Bitcoins by the Federal Bureau of Investigation (FBI), e
• A seizure order is issued against Dwolla, a branch of Mt. Gox Cryptocurrency Exchangeby the Department of Homeland Security (DHS).

Silk Road was a Bitcoin marketplace used in part for the sale of illicit substances. Its founder, Ross Ulbricht, was sentenced to two life sentences without the possibility of parole. On the other hand, at the time Mt. Gox was an exchange responsible for 70% of Bitcoin trading.

These two enforcement actions were the first known measures taken by authorities against cryptocurrency.

In 2014, the Internal Revenue Service (IRS) released guidelines classify cryptocurrency as a form of property, making it subject to capital gains taxes. Up until that point, there were no tax implications for any type of cryptocurrency gains or losses.

Interestingly, while the IRS claims that cryptocurrencies are property, other agencies like the FBI view them as a form of currency. This illustrates the lack of clear existing regulatory guidance and the resulting compliance challenges facing consumers, businesses and institutions.

Later in 2020, the IRS will add a question to U.S. tax returns asking taxpayers if they had sold cryptocurrencies in the past year.

In 2016, the first summons was issued for John Doe CoinBase, the largest cryptocurrency trading platform based in the United States. A John Doe summons is a request from the IRS to obtain information about a group of unnamed taxpayers. Coinbase ultimately provided information on approximately 14,000 U.S. taxpayers who made transactions totaling $20,000 or more. The IRS then notified these individuals that they needed to amend their prior tax returns to avoid penalties and fines.

In March 2022, US President Joe Biden signed an Executive Order (EO) on “Ensuring the Responsible Development of Digital Assets.” While not a direct regulatory bill, the order served as recognition of digital assets by the government of the world’s largest economy. Additionally, this EO asked the US government to take some specific measures regarding cryptocurrency, including:

• Create new protections for consumers
• Introduce measures to prevent risk in cryptocurrency markets from leading to broader systemic risks in the US and global economies
• Mitigate the use of cryptocurrency in illicit activities
• Promote US leadership and dominance in the technological and economic spheres
• Support technological advances
• Explore the development of a US Central Bank digital currency (CBDC)

While the above is not an exhaustive list of regulatory activity in the United States, it covers many of the most important milestones.

Where is cryptocurrency regulation going?

Cryptocurrency regulations in 2024 have come a long way since the birth of Bitcoin. Much remains to be done and regulations differ from country to country. The United States and the European Union (EU) have so far led the way when it comes to regulating cryptocurrencies. Time will tell whether these rules will become too restrictive, as some fear, or whether they will take a more productive form.

Regulatory change in the cryptocurrency realm has been the subject of heated debate for many years. The general ethos of cryptocurrency is that of anarchism or anarcho-capitalism. Technology advocates tend to be adamantly against any kind of government intervention in markets or technology.

However, as digital assets and blockchain technology find themselves increasingly widespread, governments must respond. They must incorporate these resources into existing regulations or create a new regulatory framework altogether.

Let’s take a look at how crypto regulations have evolved over the years, with a focus on US regulation.

Context: Cryptocurrency regulation in the United States

Much of the conversation around cryptocurrency regulation in the United States has focused on something called Try Howey. Having its roots in a landmark 1946 Supreme Court case, The Howey Test provides the criteria used to determine whether or not something qualifies as a security, i.e., an investment contract.

The test has four parts and states that a title is:

1. An investment of money;

2. In a joint venture;

3. With the expectation of profit; AND

4. Those profits come from the efforts of others.

If an investment is in line with all four of these precepts, then it can be considered a security, meaning it falls within the regulatory jurisdiction of the Securities and Exchange Commission (SEC ).

The Howey Test is almost 80 years old. Applying it to new technologies such as cryptocurrencies it can be difficult. However, many argue that most cryptocurrencies constitute investment contracts that meet the criteria of the Howey test.

Bitcoin may be an exception, as the SEC has hinted BTC is more like a commodity. This reasoning was part of what led to the approval of the Spot Bitcoin ETF in the United States in January 2024.

A timeline of cryptocurrency regulation

Between 2009, when Bitcoin was invented, and 2013, there were only a few significant developments regulation of cryptocurrencies. These included:

• The closing of The Silk Road market and seizure of his Bitcoins by the Federal Bureau of Investigation (FBI), e
• A seizure order is issued against Dwolla, a branch of Mt. Gox Cryptocurrency Exchangeby the Department of Homeland Security (DHS).

Silk Road was a Bitcoin marketplace used in part for the sale of illicit substances. Its founder, Ross Ulbricht, was sentenced to two life sentences without the possibility of parole. On the other hand, at the time Mt. Gox was an exchange responsible for 70% of Bitcoin trading.

These two enforcement actions were the first known measures taken by authorities against cryptocurrency.

In 2014, the Internal Revenue Service (IRS) released guidelines classify cryptocurrency as a form of property, making it subject to capital gains taxes. Up until that point, there were no tax implications for any type of cryptocurrency gains or losses.

Interestingly, while the IRS claims that cryptocurrencies are property, other agencies like the FBI view them as a form of currency. This illustrates the lack of clear existing regulatory guidance and the resulting compliance challenges facing consumers, businesses and institutions.

Later in 2020, the IRS will add a question to U.S. tax returns asking taxpayers if they had sold cryptocurrencies in the past year.

In 2016, the first summons was issued for John Doe CoinBase, the largest cryptocurrency trading platform based in the United States. A John Doe summons is a request from the IRS to obtain information about a group of unnamed taxpayers. Coinbase ultimately provided information on approximately 14,000 U.S. taxpayers who made transactions totaling $20,000 or more. The IRS then notified these individuals that they needed to amend their prior tax returns to avoid penalties and fines.

In March 2022, US President Joe Biden signed an Executive Order (EO) on “Ensuring the Responsible Development of Digital Assets.” While not a direct regulatory bill, the order served as recognition of digital assets by the government of the world’s largest economy. Additionally, this EO asked the US government to take some specific measures regarding cryptocurrency, including:

• Create new protections for consumers
• Introduce measures to prevent risk in cryptocurrency markets from leading to broader systemic risks in the US and global economies
• Mitigate the use of cryptocurrency in illicit activities
• Promote US leadership and dominance in the technological and economic spheres
• Support technological advances
• Explore the development of a US Central Bank digital currency (CBDC)

While the above is not an exhaustive list of regulatory activity in the United States, it covers many of the most important milestones.

Where is cryptocurrency regulation going?

Cryptocurrency regulations in 2024 have come a long way since the birth of Bitcoin. Much remains to be done and regulations differ from country to country. The United States and the European Union (EU) have so far led the way when it comes to regulating cryptocurrencies. Time will tell whether these rules will become too restrictive, as some fear, or whether they will take a more productive form.

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