What Are the Laws for Cryptocurrency?

Bitcoin and cryptocurrency are now more popular well-known and accepted investments as well as a method of payment. PayPal currently offers cryptocurrency as well as Mastercard plans to incorporate cryptocurrency into its payment system.

Despite the increasing popularity of cryptocurrency, there are very only a few consumer protections and rules for cryptocurrency. However, there are no consumer protections or regulations for. In general there is a Commodities Futures Exchange Commission (CFTC) regulates trading in spot markets and cryptocurrency futures and spot markets, while the Securities and Exchange Commission (SEC) monitors emerging cryptocurrency, such as Initial coin offerings (ICOs), to ensure they’re not intended as securities. We’ll look at the issues that surround the laws governing cryptocurrency, as well as what’s waiting to be regulated.


What Is Cryptocurrency?

Cryptocurrency is a form of virtual currency that is used to make payments and various financial transactions. Bitcoin is, perhaps the most popular cryptocurrency was launched in the year 2009. In the present, there are over 4400 cryptos in the marketplace. Bitcoin however, remains in the top position, and is by a long shot favored with an estimated market share of five times that of the closest competitor. 

It is sold, bought online and then transferred and is stored within electronic wallets. Digital wallets are stored by an exchange, or any other financial service that manages cryptocurrency transactions as well as purchases and sales. Digital wallets may also be without hosting, allowing the user to transfer cryptocurrency payments directly from one’s bank account directly to another. There aren’t banks or financial intermediaries involved in these transactions and transactions are mostly private.

Investors can store cryptocurrency in a digital wallet and indirectly by buying an investment security such as that of the Grayscale Bitcoin Trust.


Current and Proposed Cryptocurrency Regulations

In the United States, regulations regarding cryptocurrency are mostly just suggestions and are based on the Bank Secrecy Act (BSA) from 1970 as well as the Patriot Act.


The BSA demands U.S. financial institutions to aid in the prevention and detection of terrorist financing.

In the wake of the 2001 attacks on the World Trade Center, U.S. financial institutions were required by amendments to BSA and Title III of the Patriot Act to actively identify, report and deter terrorist-orchestrated money laundering activities.

The Financial Crimes Enforcement Network (FinCen) is the U.S. Treasury agency responsible for implementing the Bank Secrecy Act and collecting and sharing information on financial crime.

FinCen issued guidelines in 2013 that included cryptocurrency exchanges (places that allow you to buy and sell cryptocurrency) as a money transmitter, which makes these entities the subject of BSA in addition to Patriot Act rules. 


The year 2019 saw $119 billion in crypto-related transactions that were suspicious have been reported FinCen. 

The month of December, 2020 was when FinCen introduced new regulations that would target cryptocurrency money laundering. The new rules will require money transmitters to recognize and record every party involved to cryptocurrency transactions that are more than $3,000 made with an unhosted wallet or a wallet located in an “problematic” country that is listed by FinCen. If the transaction is more than $10k, a transmitter will need to disclose the addresses and names of all recipients and payors to FinCen. This proposed rule is similar to those for banking wires. 

It is believed that the Biden administration has halted all rule changes pending which means there’s no action taken regarding this FinCen proposal. In an interview on February 20, 2021 in a CNBC interview CNBC, Treasury Secretary Janet Yellen expressed her concern about the fact that Bitcoin can be considered “inefficient,” and that it is utilized “often for illegal finance,” so it would appear likely that there will be additional regulations for cryptocurrency in the near future. 


Legal Concerns Around Cryptocurrency Use

The U.S. Attorney General’s cyber-digital task force report for 2020 has identified 3 areas that are of particular concern regarding cryptocurrency usage:

  • Use of cryptocurrency in direct ways can result in financial terrorism and crimes
  • Utilizing cryptocurrency to hide funds and to avoid taxes
  • The theft of cryptocurrency and investment fraud.

The most prevalent legal concern with cryptocurrency is the degree of anonymity it can provide as they provide a safe setting for criminal activity. The cryptocurrency makers are offering an anonymity enhanced cryptocurrency (AECs) such as Monero, Zcash, and Dash specifically designed to make it more difficult to track transactions.


Silk Road

A single of the more famous examples of how crypto can be used for criminal activity is the well-known black-web market Silk Road. Silk Road was in operation from 2011 until 2013 as a market place for counterfeit documents, drugs ransomware, as well as other illegal products and services. Silk Road was designed to make use of bitcoin as a method of payment to conceal the identities of users. Ross Ulbricht, Silk Road’s founder, was found guilty in 2015 of a variety of charges that included distribution of narcotics and conspiracy to be involved in money laundering.


Cause for Caution With Crypto Investing

The same characteristics that make cryptocurrency attractive are in part the reasons why investors should be wary. The anonymity of transactions can make cryptocurrency exchanges an easy attack target because it’s difficult to trace and recover bitcoin in the event of it being stolen.

There was a breach at the Mount Gox cryptocurrency exchange was compromised in 2014, and investors suffered losses of hundreds of millions of dollars worth of bitcoin. The holders of their cryptocurrency on the exchange had very little recourse.

It isn’t legal tender anyplace inside the United States and isn’t backed by the federal government nor a central bank. The value of cryptocurrency is dependent on demand. As an investment option, bitcoin, a cryptocurrency, has yielded huge returns. However, cryptocurrency can also be extremely unstable, making its worth as a currency uncertain.

If FinCen’s proposed regulations are approved the cryptocurrency exchanges will be considered to be money transmitters and consumer protections will be provided at the state at the state level. The federal regulation for money transmitters are mostly focused on the financing of terrorists and money laundering. There are no state – or federal financial guarantors of cryptocurrency exchanges similar to that of FDIC.


North American Association of Securities Regulators recognized cryptocurrency as a danger for investors in the year 2018.

The Commodities Futures Trading Commission, SEC and FINRA have released fraud warnings regarding cryptocurrency’s initial coin offerings and other investments in cryptocurrency. In March, the New York State Attorney General straight-forwardly advised the investors of March 20, 2021, that “cryptocurrencies are risky and unstable investments that can result in devastating losses in the same way as they may yield rewards.” 


Key Takeaways

  • Although Bitcoin and other cryptocurrency have produced a dazzling return for investors There are huge dangers and regulatory concerns to be aware of. There are few protections for investors and consumers which cover cryptocurrency, as well as the exchanges that handle cryptocurrency.
  • U.S. regulators and law enforcement are concerned about the anonymity of cryptocurrency transactions. Proposed FinCen regulations concentrate specifically on using “unhosted’ digital wallets that have no effect on the typical investor. The goal is to stop illicit use of cryptocurrency using exchanges.
  • As cryptocurrency gains greater acceptance and more widespread use in the financial system, worries from those in the Biden government and police officials will result in additional regulations.
the authorAaron Krause

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