Federal regulators are playing a game of catch-up when it comes to monitoring the legal and tax effects stemming from the explosion of investment in cryptocurrencies such as Bitcoin, which has more than doubled in price in the last three months to more than $4,000.
In July, the Securities and Exchange Commission issued an investigative report that determined digital tokens sold by a virtual organization known as the DAO were securities. Also last month, the Financial Crimes Enforcement Network took down one of Bitcoin's largest and oldest exchanges, BTC-e, and penalized it $110 million for violating anti-money laundering laws.
"What you're seeing now is the next round of regulatory guidance, and in a sense, starting to fill in some of the gray areas and the gaps that have emerged given the pace of development in this area," said Alan Cohn, of counsel at Steptoe & Johnson LLP and former assistant secretary at the Department of Homeland Security. "You're seeing an advance in the regulatory framework evolving around this new asset class."
The first round of regulations on Bitcoin and other cryptocurrencies took place between 2013 and 2015, when officials several measures to define the rules of the space. FinCEN set out guidelines for applying anti-money laundering and fraud laws in 2013, and in 2014, the IRS declared Bitcoin would be treated and taxed as property. The Commodity Futures Trading Commission in 2015 defined Bitcoin and digital currencies as commodities.
Now, a renewed effort is underway to define the legal and regulatory parameters of the arena.
The SEC's July report served as a warning shot to market participants that offers and sales of digital assets, known more commonly as initial coin offerings (ICOs), might be subject to federal securities laws.
FinCEN's action against BTC-e also included the arrest of one of its operators, Russian national Alexander Vinnik, who has been tied to Mt. Gox, an exchange that went under in 2014 after hundreds of bitcoins housed there were stolen. Vinnik was arrested in Greece at the request of U.S. law enforcement officials and indicted by the U.S. Attorney's Office in the Northern District of California.
The IRS has been trying to compel U.S.-based digital currency exchange Coinbase to turn over information on its customers to identify those not paying capital gains taxes. And the CFTC recently granted trading and clearing platform LedgerX permission to register as a swap exchange facility and derivatives clearing organization.
Representatives from FinCEN, the SEC and the IRS declined to comment.
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