Hope everyone has had a great start to the week 😎
Today is day 6️⃣ of 30 of my writing challenge.
It's only Tuesday and I feel like there's been a months worth of headlines in the last 48 hours.
In yesterday's newsletter, I covered the news regarding SEC suing Binance and did a quick intro into securities vs. commodities. In case you missed it, check it out here:
In fact, at the end of my post, I mentioned this,
In tomorrow's post, I'll go back a decade and cover the history of what's been happening in crypto regulation. There are different case studies such as Bitcoin and Ripple (XRP) that can shed some light on what's ahead. I'll also summarize what steps folks such as Brian Armstrong and Ryan Selkis are taking to defend the crypto industry from the endless attacks by the American government.
I was excited to see all the dive deeper into the regulation work Coinbase and Brian Armstrong have been doing for the crypto ecosystem. And of course, this morning I check Twitter only to see that the SEC decided that Binance wasn't enough and it was going after Coinbase. Yes, you read that right...Gary Gensler and team is suing Coinbase - an American based PUBLIC company registered with the SEC.
So for the post below, as promised, I'll be diving into the history of crypto regulation by the American government and where we stand today. It's important to note that not all politicians are after the crypto market and are in fact looking down upon SEC's actions. However, what the anti-crypto politicians are doing today is ultimately hindering American innovation in one of the most important sectors of tech in this next decade.
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Stand with Crypto
Before I go down memory lane, I want to underscore my point yesterday about a "Unified Crypto". The community is clearly coming to terms with the fact that if we don't all unite as a crypto community, there is no way we stand a chance against the real enemy: selfish American politicians. It's no surprise that the Coinbase team launched a commemorative NFT on Zora called "Stand with Crypto" a few weeks ago. So far, 130,986 people have minted!
Similarly to Binance's response to the SEC, Coinbase came out guns loaded and ready to go. This video by their PR team was fantastic and provided some awesome metrics on the regulation work they've done over the years. Some stats:
The word "staking" was mentioned 57 times in Coinbase's (CB) public S1 report
The CB team met with the SEC 30 times in 2022 for guidance
CB asset team reject 90% of cryptocurrencies pitched to them because they don't pass legal standards
1 million tech jobs at risk of being driven offshore due to America's carelessness
33 countries establishing comprehensive rules for crypto unlike America
Also, it's worth stating clearly that the lawsuits for Binance and Coinbase have some similarities but can lead to totally different results. Binance was charged with clear mishandling of funds, which if proved correctly, could be detrimental to their business in the U.S. On the other hand, the claim against Coinbase is strictly around the topic of what is deemed a security and what is not. Though the crypto industry is united right now, there still is a chance CZ (ceo of Binance) could turn out to be a partial FTX/SBF situation. So let's not rule that out just yet. Also, in terms of updates on Binance, the SEC did file a restraining order to freeze Binance US assets (not Binance.com).
Okay with that being said, let's take a trip back to 2013 🕰️
The post below will be part 1 of the history of U.S. crypto regulation. I cover the key events from 2013 - 2017.
2013: FinCEN & Virtual Currency
On March 18, 2013, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, issued guidance titled "Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies." This was the first attempt by a U.S. federal authority to provide a regulatory framework for virtual currencies.
The guidance defines "virtual currency" as a medium of exchange that operates like a currency in some environments but does not have all the attributes of real currency.
FinCEN's regulations define currency (also referred to as "real" currency) as "the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance."
The guidance also breaks down the participant involved in the currency as:
Users - whoever obtains virtual currency to purchase goods services
Exchangers - engaged in the business of exchanging virtual currency for real currency
Administrators - issues (put into circulation) and has the authority to redeem virtual currency
Exchangers and administrators are considered money transmitters and are required to register with FinCEN. Note that FinCEN is more involved in dealing with money laundering and financial crimes, so the focus was purely on the issuance and supply of the currencies - not things like taxes.
The key takeaway here is that this guidance made it clear that cryptocurrencies were their own category. It set the stage for how other agencies in the future would treat them.
2014: The IRS enters the chat
In April of 2014, the IRS issued Notice 2014-21 which explained, for the first time, how taxes apply to transactions of virtual currency.
The IRS determined that for federal tax purposes, cryptocurrencies like Bitcoin are treated as property. This means that capital gains rules apply to any gains or losses from the sale or exchange of cryptocurrency. Not only from legal currency to cryptocurrencies, but also between different crypto assets as well.
Additionally, miners and anyone else that received crypto as a form of payment would have to report it as income on their W-2.
2015: NY introduces BitLicense
In June 2015, The New York State Department of Financial Services (NYDFS) introduced a regulatory framework known as BitLicense in 2015. This made New York the first state to specifically regulate businesses involved in cryptocurrency operations.
Basically, anyone who did crypto type business in NY was required to get a BitLicense. The issue was that it was a super lengthy, complicated, and expensive process. For example, some application cost would go as high as $100k! Companies had to fulfill consumer protection policies, anti-money laundering rules, and cybersecurity guidelines.
Most people complained that this was an unnecessary difficult process and businesses decided to just back out of the NY market instead of trying to meet all the requirements. This is known as the "bitcoin exodus".
Key takeaway here is that NY's actions forced other states to think about how they would treat cryptocurrencies and gave founders an idea of what's in store.
2015: Coinflip vs CFTC
In September of 2015, Coinflip Inc. launched a platform named Derivabit which let their users trade option contracts on Bitcoin. However, Coinflip had not registered with the CFTC, which is required for any company that operates a commodities exchange.
The CFTC found that Coinflip was in violation of the Commodity Exchange Act (CEA) and declared that Bitcoin and other similar virtual currencies were to be treated as commodities. This meant that the CFTC would handle all Bitcoin related regulation.
Coinflip had to end their operations until they went through all the paperwork with the CFTC. And at that point, this ruling set precedence for any other exchanges and trading platform that offered or dealt with crypto derivatives.
Key takeaway here is that the CFTC declared Bitcoin and other virtual currencies commodities under the Commodity Exchange Act.
2017: The SEC uses The DAO Hack
I won't get into the details of The DAO Hack right now, that's a story that deserves it's own post. But if you're new to crypto, just know that in 2016, one of the first significant DAOs built on Ethereum which acted as a venture fund raised $150 million. However, the DAO was hacked and that led to the SEC finally getting their hands dirty.
After the DAO hack, the SEC launched a full on investigation and came to the conclusion that the DAO tokens were securities and subject to federal law! This was the first time the SEC had made an official stance on the nature of cryptocurrency tokens. By applying the Howey Test (a test created by the Supreme Court to determine whether certain transactions qualify as "investment contracts"), the SEC stated that tokens issued in an ICO could be considered securities if they represented an investment in a common enterprise with an expectation of profits derived from the efforts of others.
They didn't bring any legal action to The DAO but more so used the event to set precedence for future cryptocurrencies.
Key takeaway here is that a digital token represents a stake in a project and the expectation of profit based on the work of others (passing the Howey Test), it could be classified as a security by the SEC, even if it is labeled a cryptocurrency.
2017: Self-Certification of Bitcoin Products
Self-certification is a process by which designated contract markets (DCMs) in the U.S., like the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE), can list new futures or options contracts without prior CFTC approval. The DCM must notify the CFTC that it plans to list a new product and certify that the new contract doesn't violate any laws or regulations.
The self-certification process made it possible for exchanges like the CME and the CBOE to list Bitcoin futures contracts in December 2017, without needing explicit permission from the CFTC.
Key takeaway here is that this decision marked the mainstream acceptance of Bitcoin and paved the way for key institutional investments and set precedence for the Bitcoin ETF.
That's all for today' post! Tomorrow I'll go cover part 2 of the history from 2017 onwards.
If you enjoyed this post, please share with friends :) It's important for folks to be educated about the unclear regulation for crypto in America.
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