The Rise of Digital Assets: Cryptocurrency Regulations in the USA
Introduction: With the introduction of Bitcoin in 2009, the world saw the genesis of a new era of financial instruments. Cryptocurrencies, decentralized and digital in nature, promise a future of secure, peer-to-peer transactions without the need for traditional financial intermediaries. However, with innovation comes the need for regulation.
The Evolution of Cryptocurrencies in the USA:
- Early Days and Skepticism: Initial perceptions of cryptocurrencies ranged from it being a mere fad to concerns over its potential misuse.
- Growing Popularity: The increasing number of cryptocurrencies, led by Bitcoin, and their surging prices have attracted immense public attention. Here, referencing the “Introduction to Cyber law & Lawyer” article can provide insights into the initial legal challenges.
Legal Challenges and Controversies:
- The Silk Road Incident: The “Silk Road” was an online dark web created to buy and sell legal and illegal products in incognito mode. The website was created in 2011 by its American founder Ross Ulbricht, who was later arrested for the same on 1st October 2013. All transactions were conducted with Bitcoin, a cryptocurrency that aided in protecting user identities and between February 2011 and July 2013, the site facilitated sales amounting to 9,519,664 Bitcoins. This incident has highlighted how cryptocurrencies can potentially be misused for illegal transactions.
- Initial Coin Offerings (ICOs): An ICO is another form of cryptocurrency. A company seeking to raise money to create a new coin, app, or service can launch an ICO to raise funds. Therefore, Interested investors can buy into an initial coin offering to receive a new cryptocurrency token issued by the company. This token may have some utility related to the product or service that the company is offering or represent a stake in the company or project.” As such, there has been a rise in the use of ICOs and an increasing challenge of differentiating them from traditional securities.
1. Silk Road (marketplace) - Wikipedia 2. "Sealed Complaint 13 MAG 2328: United States of America v. Ross William Ulbricht" (PDF). 27 September 2014. p. 6. Archived from the original (PDF) on 20 February 2014.
- Cryptocurrency and Tax Evasion: On understanding how the “anonymity features” can be misused.
The Regulatory Landscape:
- Securities and Exchange Commission (SEC): The stance of the SEC on ICOs and how it differentiates between securities and utilities.
- Commodity Futures Trading Commission (CFTC): Understanding cryptocurrencies as commodities and the associated regulations.
- The Internal Revenue Service (IRS): How are cryptocurrencies taxed? Linking with the “Understanding tax compliances in the United States” article can provide a comprehensive understanding.
- Anti-Money Laundering (AML) and Know Your Customer (KYC) Regulations: Exploring how these traditional regulations apply to the novel domain of cryptocurrencies.
Case Studies:
- In the case of SEC vs. Ripple, the United States Southern District Court of New York, In 2020, heard the matter between the U.S. Securities and Exchange Commission (SEC) who alleged that Ripple, the blockchain developer and creator of the XRP cryptocurrency token, raised more than $1.3 billion in 2013 by selling XRP in an unregistered security offering to investors. Ripple, relying on the previous comments of an SEC director to support its case, argued that XRP should not be treated as a security. On July 13, 2023, the court found that XRP (and thus cryptocurrency) was not a security when sold to the public on an exchange, but it is when sold to institutional investors. Therefore, one can understand why this would lead to confusion when it comes to understanding the legal nuances of why certain digital assets are classified as securities.
3. Initial Coin Offering (ICO): Coin Launch Defined, with Examples, by JAKE FRANKENFIELD, august 18th 2022. Retrieved from: ICOs: What is a Coin Launch? (investopedia.com) 4. U.S. Securities and Exchange Commission. “SEC Charges Ripple and Two Executives with Conducting $1.3 Billion Unregistered Securities Offering.” 5. Ripple-Wells-Submission-Summary-December-2020.pdf (crowdfundinsider.com) 6. U.S. District Court, Southern District of New York. "Securities and Exchange Commission vs. Ripple Labs, Inc., et. al."
Global Perspective:
“In March 2022, the White House issued an Executive Order which emphasized the importance of digital assets and the need for coordination and cooperation between government departments, agencies and regulators. The Order said, “We must reinforce United States leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets.”
The Order took a holistic approach to addressing risks and harnessing the potential benefits of digital assets. It emphasized six key priorities: consumer and investor protection, financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.”
Cryptocurrency has been the talk of the town in the United States of America. Most of the focus has been on the administrative level. In addition to this, a few agencies have ben engaging on the same, namely:
- The Securities and Exchange Commission (the “SEC”),
- The Commodity Futures Trading Commission (the “CFTC”),
- The Federal Trade Commission (the “FTC”) and the Department of the Treasury,
- The Office of the Comptroller of the Currency (the “OCC”) and
- The Financial Crimes Enforcement Network (“FinCEN”) to name a few.
Cryptocurrency is an amazing technology and plays a focal point in the U.S.’s key technological development. There are much-needed clearly defined regulations and various bills have been passed by Congress on the same. However, how much these bills will pave the way in regulating the use of cryptocurrency and keeping in check illegal activities, only time will tell. In addition to this, there is a great significance of international collaboration in regulating a decentralized digital domain.
7. Cryptos on the rise 2022 | Thomson Reuters
“There is no uniform definition of “cryptocurrency,” which is often referred to as “virtual currency,” “digital assets,” “digital tokens,” “crypto assets” or simply “crypto.” The Uniform Law Commission and the American Law Institute amended the Uniform Commercial Code to include Article 12, which defines and governs digital assets specifically. The new article includes virtual currencies in its definition of “controllable electronic records.” Several states have already adopted the amendment. Other jurisdictions have attempted to formulate a detailed definition for the asset class, but most have wisely opted for broader, more technology-agnostic definitions. Those taking the latter approach will be better positioned to regulate as and when the technology evolves.”
Conclusion: As cryptocurrencies continue to evolve, so will the regulations that govern them. For investors, entrepreneurs, and legal practitioners, staying updated on these changes is not just beneficial—it’s essential.
8. Blockchain & Cryptocurrency Laws and Regulations | USA | GLI (globallegalinsights.com)
