Key Insights
- The crypto industry has been compared to the wild west, considering how few regulations it has in place compared to the traditional markets.
- Several agencies have been put in place to regulate the industry, including the SEC, CFTC, IRS, and FinCEN.
- The SEC determines whether cryptocurrencies qualify as securities or commodities, while the CFTC regulates the derivatives market.
- The IRS is focused on tax laws, while FinCEN ensures that crypto cannot be used for vices like money laundering or terrorist financing.
Crypto has been compared to the Wild West for a long time.
To many, the crypto industry is a whole new digital market filled with opportunity—as well as endless ways to lose everything.
The US in particular has trouble with regulating the industry.
Traditional financial markets, for one, have well-defined agencies that protect customers and make sure that financial services provided follow the law.
The crypto industry, on the other hand, has a mix of agencies with their own focus and jurisdictions.
Let’s break down the major players in control of crypto regulation within the US and what their roles mean for investors and traders alike.
The SEC—Are Cryptocurrencies Securities?
The SEC is arguably the most well-known regulatory agency in the US. This is because of some of its high-profile lawsuits against some of the biggest companies in the crypto space, including Ripple and Binance.
The agency’s major function is determining whether a digital asset qualifies as a security or a commodity.
If a cryptocurrency is deemed to be a security, it has to comply with strict requirements before it can be sold or bought.
These include registration with the SEC and investor protection measures.
The SEC, Securities and Commodities
Think of a security as an asset that “represents” ownership of another asset, like stocks, bonds, options, and derivatives.
Securities are typically intangible, and investors mostly buy them with the expectation of profit.
Commodities, on the other hand, are tangible assets that can be exchanged for a similar asset—like gold, silver, or oil.
To determine whether a cryptocurrency is a security, the SEC simply applies what is known as the Howey Test.
The Howey test simply asks: Is there an investment of money? Do investors expect profit? And do these profits come from the efforts of others?
If a cryptocurrency meets these criteria, it is considered a security, and the SEC has the right to sue its developers if it violates any laws.
This is why many Initial Coin Offerings (ICOs) faced legal action from the agency and why the SEC has been embroiled in a five-year battle with Ripple.
While the SEC argues that its approach is to protect investors from scams, many in the crypto industry believe that this approach kills innovation.
Overall, the debate over whether digital assets should be classified as securities remains a hot topic within the crypto space.
The CFTC—Crypto as Commodities
The SEC mostly goes after securities and makes sure that they follow the rules along with their issuers.
The CFTC, on the other hand, does not regulate direct trading of crypto. It is instead responsible for the futures and derivatives markets.
This agency’s major concern is making sure that trading practices remain fair and transparent within these markets.
The CFTC investigates fraud and manipulation, tracking down those responsible and bringing them to justice.
This is also why the SEC has more cases to settle with cryptos and crypto companies compared to the SEC.
The IRS and Tax
The Internal Revenue Service (also known as the IRS) is another major player in the crypto space.
This agency is focused mostly on taxation, as opposed to the other two.
The IRS classifies crypto in general as property—which means that they are subject to tax laws.
It also means that every time a user buys, sells, trades, or spends crypto, they might trigger a taxable event.
For example, when a user sells Bitcoin for profit or exchanges one crypto for another, they just might owe taxes.
This also applies to using crypto to buy goods if the value of the crypto has increased since the time of its purchase.
The IRS is a relatively silent crypto enforcement agency and has been stepping up its efforts in getting taxpayers to report crypto holdings.
FinCEN and Money Laundering
Crypto is anonymous, relatively untraceable, and is therefore perfect for money laundering and other crimes.
This is where the Financial Crimes Enforcement Network (FinCEN) comes in.
The agency is tasked with investigating money laundering and other illicit activities within the crypto industry.
It is especially focused on Money Services Businesses (MSBs) or crypto exchanges and other related platforms.
As such, these platforms must comply with strict anti-money laundering (AML) and know-your-customer (KYC) regulations.
This means that crypto exchanges must register with the regulator, make sure that all their customers complete KYC registrations, monitor transactions for suspicious activity, and report unusually large transactions to authorities.
The main goal of FinCEN is to prevent criminals from using crypto for vices like money laundering, terrorist financing, tax evasion, and other illicit activities.
In all, staying informed about regulatory changes is very important for traders and investors within the crypto space.
