Cryptocurrency and blockchain technology has been a central topic of discussion lately, and they are also now gaining much attention from both U.S. State and Federal governments. Blockchain refers to a storage technology that saves data on a decentralized online network. Crypto is a new form of digital currency, and the Blockchain allows cryptocurrencies to operate without the need for a central authority.
Digital or virtual currency like Bitcoin and Ethereum is a medium of exchange, unlike regular money. Unlike dollars, which the U.S. government or central bank backs, these are strictly digital monetizations–No coins, no cash, no need for banks to be involved. Cryptos are stored in digital “wallets,” which are software or applications installed by users on their smart devices.
These wallets use encrypted information and are predominantly safe from hacking, but what kind of laws pertain to blockchains and cryptocurrency? What is the U.S. government’s take on blockchain currency?
Government Stand on Blockchains
Congress has introduced 30+ bills just in the last year alone focused on crypto and blockchain policy. An Infrastructure Investment and Jobs Act (H.R. 3684) made top news when it tried to call some form of federal cryptocurrency tax into action. There are many administrative attempts by agencies like the IRS to set rules for these blockchains, but very little rulemaking by the government has been put in place. However, the U.S. government plans to use this technology as part of an infrastructure system in the future.
Federal agencies are evaluating these types of tech, looking to improve the blockchains’ overall efficiency and improve transparency and trust in government information sharing. The system may provide us with better alternatives to monetization and currency in the days ahead. Although the federal government’s relationship with crypto is both new and evolving every day, it is surprising that the U.S. government is one of the largest holders of Bitcoin.
As of 2022, cryptocurrencies like Bitcoin fall under the Securities & Exchange Commission (SEC) jurisdiction for investments and the CTFC for regulating any related crypto crimes. The foundation of cryptocurrency is based on the fact that it is entirely decentralized and unregulated by the U.S. government or banks. So it will be interesting to see how future government opinion and action will change in the days ahead. As of this year, crypto transactions using the Blockchain can be done without any third-party interference.
Crypto exchange is entirely legal in the U.S. and is watched over closely by the Bank Secrecy Act, which was established way back in 1970. This act ensures that exchange providers register with FinCEN, implement an AML/CFT program, maintain accurate records, and submit this information to proper authorities. Thirty-three states, including Puerto Rico, have some legislation in the 2021 legislative session, most still pending. Here are just a few examples within the U.S. of blockchain laws and crypto regulations that have been enacted thus far;
Arizona: Created a specified cryptocurrency study committee to oversee regulations in the state.
Arkansas: Under the Uniform Money Services Act, Arkansas clarified all virtual currency exchange is defined as money transmission.
Connecticut: A license is required for any money transmitting, even in the form of digital currencies.
Hawaii: The 50th state in the nation adopted a resolution requesting that some commerce departments require the Hawaii technology development corporations to establish a blockchain working group, to help appropriate funds.
Iowa: There are no exclusions for digital monetization businesses in this state. Under Iowa’s Uniform Money Services Act, a digital coin such as Coinbase has obtained its licenses from the state Department of Banking.
Louisiana: Louisiana Virtual Currency Act provides a licensing plan for all virtual currency businesses working within the state.
Missouri: This state defines any electronic means of transmitting money or paying money as a “check” under the Sale of Checks law.
Tennessee: Tennessee does not yet consider cryptocurrency itself as a “money transmission”; however, the Tennessee Department of Financial Institutions put a Regulatory Treatment of Virtual Currencies Under the Tennessee Money Transmitter Act in December of 2015.
Washington: Virtual and digital currency money transmitting and the computer systems must first be audited and secured by a third party.
Interest in crypto is definitely at an all-time high, and people are eager to learn now about the legal implications of this new form of currency they are hearing so much about. Central banks want to learn about the technology that drives this system. Regulatory agencies and tax authorities want to understand the nature of digital currencies and how to manage them. In the meantime, investors all over are making a good amount of money investing in them. An even better investment is learning the legal risks before a person invests, buys, and sells cryptocurrency.
Regulations of crypto remain in an erratic state. An intelligent investor might report their holdings as a foreign asset to ensure their safety. However, not every country in the world allows the use of cryptocurrencies. Turkey, for instance, does not allow any crypto payments, while some countries in Africa ban all forms of cryptocurrency exchange. One of the most recent bans in the media was in China, which recently banned any financial institutions from providing services to crypto-related transactions.
However, at this point, it is impossible to completely “ban” or “cease” the use of cryptocurrencies. Still, countries vary differently on regulating access to these services or shutting down exchanges. It will be interesting to see how worldwide crypto laws and regulations progress in the decades ahead.
Legal Issues Dealing with the Use of Smart Contracts
What is a smart contract?
Smart contracts are programs stored on a blockchain that run when predetermined conditions are met. They are usually used to automate an agreement’s execution so that everyone participating can be immediately aware of the outcome. When the correct conditions are met, they automate an efficient workflow.
How do smart contracts work?
Smart Contracts work like statements written in code on a blockchain. A network of computers then releases funds to the appropriate parties, and the Blockchain is then updated when the transaction is finally complete. The transaction can not change, and only the parties involved will be granted permission to view the results.
They can implement all the stipulations needed to please the participants and assure them the task will be done right and with a positive outcome. To establish a contract like this, a person must choose how transactions and their data are first represented. Participants in a smart contract must explore all possible exceptions and build a foundation for resolving issues. Once these decisions are made, a developer can program the contract. To make things easy, organizations and businesses that use blockchain technology provide web interfaces, templates, and other tools to simplify the structure of a smart contract.
Why are smart contracts necessary with crypto?
Smart contracts help with accuracy, promote speed, and are built to be highly efficient. Smart contracts are a quick way to get the job done right once a condition is met and the contract is executed timely, especially when filling out a stack of documents manually.
Smart contracts have no third-party interference, and Encrypted records of transactions are shared with the participants only. Furthermore, it eliminates mistrust and creates a feeling of transparency, knowing that no data has been altered for personal benefits.
Smart contracts offer security. Hackers would have difficulty changing anything without having to change the entire Blockchain. Like a chain, each record is connected to the one before it and subsequently recorded on a distributed ledger.
Smart contracts mean saving! These contracts remove the necessity for intermediaries to handle transactions with no fees and no extended time delays.
Global trade can be changed for the good. Businesses will create an ecosystem of loyalty and trust using a blockchain-based platform. To reduce friction by simplifying trading offers to minimize the risk while working through the process. Smart contracts even can expand trade opportunities for banks and other companies.
One crucial bit of information that most want to know is, Are cryptocurrencies taxable by the American government? The answer to this quesion is a resounding YES: Profits from cryptocurrency trading are taxable as capital gains in the United States of America. Crypto-holders’ digital wallets may soon be required by law to file FinCEN Form 114, and this will report taxpayers holding funds in foreign bank accounts.
The IRS has defined these digital currencies as more like property owned than actual money. But each investor will have to report information to a tax agency and are subject to capital gains tax laws, such as each business or individual that has crypto as property will need to keep detailed sales records. Pay taxes on any gains made according to the fair market value of any mined currency at the time of receipt.
As the IRS rushes to catch up and work on enforcing crypto tax laws and blockchain regulations, it is hard to stay on track with the laws that are being passed. There are a few ways you might owe taxes on your crypto. Even trading one crypto for another is a taxable event. This is why keeping flawless and accurate records is so important. You don’t want to end up with expensive penalties.
Even when value skyrockets, buying crypto is not a taxable event. However, if you sell your crypto, you will be paying taxes on that gain. For example, if an individual bought 2000 dollars worth of Bitcoin and sold it later for $3,000, that person would have to report and pay taxes on the difference of one thousand dollars in profit. Luckily, if luck isn’t on your side, and you dispose of cryptocurrency and take a significant loss, you can deduct that amount from your yearly taxes.
Like any crime, it doesn’t pay. You could end up facing thousands of dollars in fines and spend a year or more in prison just for evading crypto taxes. If you fail to report any cryptocurrency sales, it is not always a serious crime but one that carries penalties.
News recently broke out that overnight a potential crime of crypto-theft had occurred. An estimated US$326 million of Ethereum tokens were stolen from a blockchain bridge. Blockchain bridges are quite simply the connected place of two networks sharing information. It makes sense that we will hear more and more of these possible crypto crimes as the industry itself is growing and the pandemic has taken its course.
States and countries alike are adapting as these kinds of crimes seem to rise. In Australia, exchanges must be registered with AUSTRAC in compliance with counter-terror finance obligations and anti-money laundering. Mandatory measures will be taken all across the globe to try and keep these types of crimes on the low.
Every cryptocurrency within the metaverse, each unique digital coin traded, is a step towards a new world. They can’t just put a quick stopper in Bitcoin. Cryptocurrencies will continue to expand and adapt. World governments will also be forced to reevaluate, readjust and evolve with the changes. Cryptocurrency is just a starting point to creating a fully functional global currency system. A system not geared towards the government but instead explicitly designed for its people. For help buying and selling crypto, Unbanked can help you no matter where you are in your investing life.