Our previous article considered the technology behind cryptocurrency. This article will focus on the legal framework governing the industry. The cryptocurrency market is subject to a patchwork of inconsistent legislation and regulations that continue to evolve, leading to uncertainty about its future. While the blockchain industry has grown for years, regulators have not kept pace with this growth, making the desire for regulatory clarification greater now than ever before.
This lack of uniformity has led to uncertainty. The decentralized and anonymous nature of cryptocurrency has also created difficulty for the Internal Revenue Service (IRS), who treats cryptocurrency as property, relying on investors to provide a transaction history to calculate taxes. Additionally, some tax consequences that arise for certain types of trades in traditional stocks may apply differently to analogous cryptocurrency trades. In an effort to address these inconsistencies, the U.S. Treasury Department is in the process of developing proposed cryptocurrency regulation. One example of this is the Treasury Department’s expressed desire to have cryptocurrency transfers with a market value of $10,000 or more reported to the IRS. Also at the federal level, in April 2019, the Securities and Exchange Commission (SEC) issued guidance attempting to regulate some cryptocurrencies by explaining how digital assets might be declared securities, with a follow-on Risk Alert being issued in February 2021. One of the most prominent enforcement actions by the SEC in the cryptocurrency space is the $1.3B action against Ripple Labs, Inc. for its issuance of the XRP cryptocurrency; however, the SEC recently announced a $2B action against individuals affiliated with an entity called BitConnect.
At the state level, cryptocurrency regulation varies greatly, with some states, like New York, imposing strict laws, that have driven many providers out of such markets, while other states have no specific laws regulating cryptocurrency at all. While a Uniform Regulation of Virtual-Currency Business Act has been proposed in several states, it has yet to gain widespread adoption. Virginia currently does not regulate cryptocurrencies directly; however, the Virginia Bureau of Financial Institutions does require entities that swap fiat currency, government-backed currency such as United States Dollars (USD), for cryptocurrencies to be licensed as money transmitters under Va. Code 19 § 6.2-1900, et seq. Such laws initially resulted in a division in the cryptocurrency market between “transmitters”, which swap fiat for cryptocurrency and “exchanges”, which swap cryptocurrencies for other cryptocurrencies, though the divide between the two is becoming more blurred as exchanges become licensed, and as transmitters add currency types and crypto-to-crypto swapping to their platforms.
Cryptocurrency transacts differently than fiat currencies. Unlike traditional fiat currency or brokerage accounts, where transfers from one entity to another can take days or weeks to process, cryptocurrency transfers are done through a system of online wallets, sometimes wholly controlled by the wallet-holder. Rather than transmitters or exchanges (crypto-brokers) being required to set up their own transfer processes, the transfer infrastructure is created within the blockchain technology itself. Crypto-brokers generally send and receive cryptocurrency using the existing protocol for wallet transactions on their platforms. This permits users to transfer tokens from one crypto-broker to another almost as fast as the technology will permit. Without unified regulation, it is easy to understand how these transactions and any accounting for taxation purposes is difficult to regulate.
 Virtual Currencies, Internal Revenue Service, https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies (last visited May 26, 2021).
 Greg Iacurci, Bitcoin crash opens door to a tax loophole for investors, CNBC (May 25, 2021 1:10pm) https://www.cnbc.com/2021/05/25/bitcoin-crash-opens-door-to-a-tax-loophole-for-investors.html.
 The American Families Plan Tax Compliance Agenda, U.S. Dep’t of Treasury, https://home.treasury.gov/system/files/136/The-American-Families-Plan-Tax-Compliance-Agenda.pdf.
 Bill Hinman, Statement on “Framework for ‘Investment Contract’ Analysis of Digital Assets”, U.S. Securities and Exchange Commission, (April 3, 2019), https://www.sec.gov/news/public-statement/statement-framework-investment-contract-analysis-digital-assets.
 The Division of Examinations’ Continued Focus on Digital Asset Securities, U.S. Securities and Exchange Commission (February 26, 2021) https://www.sec.gov/files/digital-assets-risk-alert.pdf.
 SEC Charges Ripple and Two Executives with Conducting $1.3 Billion Unregistered Securities Offering, U.S. Securities and Exchange Commission, (Dec. 22, 2020) https://www.sec.gov/news/press-release/2020-338.
 Attorney General James Warns Investors About ‘Extreme Risk’ When Investing in Cryptocurrency, Issues Additional Warning to Those Facilitating Trading of Virtual Currencies, New York Attorney General (Mar. 1, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-warns-investors-about-extreme-risk-when-investing; see also Attorney General James Ends Virtual Currency Trading Platform Bitfinex’s Illegal Activities in New York, New York Attorney General (Feb. 23, 2021), https://ag.ny.gov/press-release/2021/attorney-general-james-ends-virtual-currency-trading-platform-bitfinexs-illegal.
 Gary De Waal, Cathy J. Yoon, Louisiana Serves Up New Virtual Currency Business Law Cajun Style, National Law Review, (July 30, 2020) https://www.natlawreview.com/article/louisiana-serves-new-virtual-currency-business-law-cajun-style.
 Fiat money is government-issued currency unbacked by any physical commodity, like gold or silver, wherein its value it derived merely from the fact that the government that issued it. Fiat Money, Investopedia, https://www.investopedia.com/terms/f/fiatmoney.asp (last visited May 26, 2021).
Notice to Virginia Residents Regarding Virtual Currency, Virginia State Corporation Commission, https://scc.virginia.gov/getattachment/1bb52b42-9a10-45a2-ba48-b352e48b6d2e/virtcur.pdf; see also Va. Code 19 6.2-1900 et seq, https://law.lis.virginia.gov/vacode/title6.2/chapter19/section6.2-1900.
 Prominent platforms that act as both transmitter and exchange include Coinbase, Bittrex, Binance, and Kraken.
 Link to full Disclaimer: Information on Vandeventer Black’s website is for informational purposes only; the information is general and may not reflect the current state of law. Contents are provided “as-is.” Information on this website should not be considered professional legal or financial advice and should not be acted on without consulting a qualified lawyer or other professional in the appropriate jurisdiction.