Bitcoin and cryptocurrencies have become more popular and accepted as a means of investment and payment. PayPal now offers cryptocurrency, and Mastercard plans to include crypto in its payment network.
Despite their growing popularity, cryptocurrencies have few consumer protections and regulations. In general, the Commodity Futures Exchange Commission (CFTC) regulates cryptocurrency futures and spot markets, while the Securities and Exchange Commission (SEC) oversees emerging cryptocurrencies.
Including Initial Coin Offerings (ICOs), to ensure that they are not. securities. We’ll take a look at the legal issues surrounding cryptocurrencies and what’s needed for regulation.
What Is Cryptocurrency?
Cryptocurrency is virtual money that can be used for payments and other financial transactions. Bitcoin, the most recognized cryptocurrency, was introduced in 2009. There are more than 4,400 cryptocurrencies on the market today. However, Bitcoin remains the most popular with a market share five times larger than its nearest competitor.
Cryptocurrencies are bought, sold, transferred online and stored in digital wallets. Digital wallets can be hosted on exchanges or other financial services that handle payments, purchases, and sales of cryptocurrencies. Digital wallets can also be unhosted, allowing the owner to send cryptocurrency payments directly from one party’s wallet to another. There are no banks or other financial intermediaries involved in hostless transactions, and transactions are often anonymous.
Investors can hold cryptocurrencies directly in digital wallets, or indirectly by purchasing securities such as the Grayscale Bitcoin Trust.
Current and Proposed Cryptocurrency Regulation
Currently, cryptocurrency regulations in the United States are only proposed and based on the Bank Secrecy Act of 1970 (BSA) and the Patriot Act.
Following the 2001 attacks on the World Trade Center, US financial institutions were required by the BSA and amendments to Title III of the Patriot Act to proactively detect, report, and deter terrorist money laundering.
The Financial Crimes Enforcement Network (FinCen) is the US Treasury agency responsible for enforcing the Bank Secrecy Act and collecting and sharing financial crime intelligence.
FinCen issued guidance in 2013 to include cryptocurrency exchanges (places where crypto can be bought and sold) under the definition of money transmitters, subjecting them to the BSA and Patriot Act regulations.
In December 2020, FinCen proposed new rules targeting cryptocurrency money laundering. Under the new rules, money transmitters will be required to identify and keep records of all parties involved in cryptocurrency transactions above $3,000 in non-deposited wallets or located in FinCen-listed “problem” countries. If the transaction is over $10,000, the transmitter must report the names and addresses of all payers and payees to FinCen. The proposed rules are very similar to bank wire rules.
No further action has been taken on the FinCen proposal because the Biden administration has frozen all pending rule changes. However, Treasury Secretary Janet Yellen, in an interview with CNBC in February 2021, expressed concern that bitcoin is “inefficient” and that it is “often used for illicit financing,” so additional regulation of the cryptocurrency is likely. some point.
Legal Issues Regarding the Use of Cryptocurrencies
The 2020 report of the US Attorney General’s Cyber Digital Task Force identified three areas related to the use of cryptocurrencies.
- The direct use of cryptocurrencies can be used to commit crimes and finance terrorism
- Using cryptocurrencies for money laundering and tax evasion
- Cryptocurrency theft and investment scams.
In general, a common legal concern about cryptocurrency is the certain level of anonymity that cryptocurrency can offer because they create the perfect environment for criminal activity. Cryptocurrency developers are now offering anonymous cryptocoins (AECs) such as Monero, Zcash, and Dash to make transactions more difficult to track.
Silk Road
One of the most famous examples of how cryptocurrencies can be used to commit crimes is the infamous dark web marketplace Silk Road. From 2011 to 2013, the site operated as a marketplace for drugs, counterfeit documents, ransomware, and other illegal goods and services.
This site is specifically designed to use Bitcoin as a means of payment to hide the user’s identity. Silk Road founder Ross Ulbricht was indicted in 2015 on charges of drug trafficking and money laundering.
Reasons to Be Cautious in Crypto Investments
The same characteristics that make cryptocurrencies so attractive also make investors wary. The anonymous nature of transactions can make cryptocurrency exchanges a target for hackers, as bitcoins are difficult to trace and recover if stolen.
Cryptocurrency exchange Mount Gox was hacked in 2014 and investors lost hundreds of millions of dollars in bitcoins. Those who held their crypto on the exchange could not get any help.
Cryptocurrencies are not legal tender anywhere in the United States and are not backed by any government or central bank. Its value is based on demand. As an investment, cryptocurrencies such as Bitcoin have brought significant returns, but cryptocurrencies are highly volatile, making the value of the currency questionable.
Finally, if FinCen’s proposed regulations are implemented, cryptocurrency exchanges will be regulated by money transmitters and consumer protections will be at the state level. Federal regulation of money transmitters primarily focuses on money laundering and terrorist financing. There is no state or federal financial guarantor for cryptocurrency exchanges like the FDIC.
The Commodity Futures Trading Commission, the SEC and FINRA have issued fraud alerts related to cryptocurrency initial coins and other cryptocurrency investments. In March 2021, the New York State Attorney General strongly warned investors that “cryptocurrency is a high-risk, volatile investment that can lead to very rapid losses while making profits.”
