If You Build the Blockchain, Regulators Will Come
Op-ed by Ashley Baker published in RealClearFuture.
The hardest part of drafting any new regulation is establishing a definition. In fact, most of the policy work is in the definition and there are alarmingly few policy considerations after something is defined as a covered entity.
The definition of cryptocurrency has already proved problematic for regulators. Essentially, to commodities regulators, virtual currency is a commodity. For bank regulators, it is a bank. For securities regulators, it is a security. For those who regulate money transmitters, it is a money transmitter. For the purpose of property taxes, it is a property. Everyone wants a stake in the new world of virtual currency.
The “default setting” for regulators is to do something. This has lead to a lot of regulatory confusion surrounding cryptocurrency. For example, according to a 2015 Commodities Futures Trading Commission (CFTC) ruling, Bitcoin is a commodity. CFTC’s Director of Enforcement Aitan Goelman stated in a press release:
While there is a lot of excitement surrounding bitcoin and other virtual currencies, innovation does not excuse those acting in this space from following the same rules applicable to all participants in the commodity derivatives markets.
It is pretty easy to classify cryptocurrency as a commodity under the Commodity Exchange Act of 1936, which dictates a list of commodities ending with “and all other goods and articles.” However, according to the Internal Revenue Service (IRS), virtual currency is a property. A 2014 IRS notice stated:
A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property...the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.
However, various state regulators consider virtual currency a vehicle used for money transmission. A money transmitter, as codified by the Code of Federal Regulations in 31 CFR 1010.100 (and applied to state regulations) is:
(A) A person that provides money transmission services. The term “money transmission services” means the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.
(B) Any other person engaged in the transfer of funds.
This creates even more overlapping regulatory authority. The Bank Secrecy Act gives Financial Crimes Enforcement Network (FinCEN) the authority to regulate money transmitters. A FinCEN guidance document declared that cryptocurrency is a virtual currency and is subject to the Bank Secrecy Act of 1970. The FinCEN guidance states:
In contrast to real currency, "virtual" currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency…[virtual currency] either has an equivalent value in real currency, or acts as a substitute for real currency.
It may be helpful to first establish what cryptocurrency is not. It is easily established that cryptocurrency is not a currency and it is not legal tender. “Currency” and “coin” are misnomers in the digital world.
Cryptocurrency could be deemed illegal if it were designed to compete with the U.S. dollar. However, avoiding the potential negative consequences of trusting a third party such as a bank does not imply that competition was an intent. Implementation of the blockchain is not an attempt at counterfeit; it is the execution of a ledger, not an issuance of a currency. Similarly, electronic payment systems have existed for decades without violation of laws or regulations designed to protect the dollar.
If cryptocurrency is not a currency, it is also not legal tender. Title 31 of the U.S. Code does not make a distinction between legal currency and legal tender and the two appear to be treated as the same. Generally speaking, legal tender is any type of currency that cannot be refused in the fulfillment of a debt. This is not true of a virtual currency that is representative of an investment in a larger platform. This would make cryptocurrency an investment contract and thereby merit securities classification.
The Securities and Exchange Commission (SEC), is considering the application of securities regulations. In a recent address at Stanford University, SEC Chairwoman Mary Jo White stated:
We are closely monitoring the proliferation of [blockchain] technology and already addressing it in certain contexts...One key regulatory issue is whether blockchain applications require registration under existing Commission regulatory regimes...We are actively exploring these issues and their implications.
Clearly, federal agencies are rushing to regulate cryptocurrency and each agency is using a great deal of discretion in their definitions.