There was a common thread among the testimonies at the Legislating Certainty for Cryptocurrencies Congressional roundtable last week. Before the bipartisan panel, regardless of their field—whether it be cryptocurrency exchanges, business advisory firms, law, or from an interested advocacy group—the message to the federal government: “Either you come up with some rules or we wither away.”
The powers that be heard the message. Roundtable industry participants and members of Congress alike left the hearing with a sense of what needs to be done to promote and foster blockchain and cryptocurrency. Yet as far as cryptocurrency-sector stakeholders are concerned, the takeaway may have veered from what they expected: they themselves may need to step in and provide the guidance to the government; not the other way around.
Generally speaking, this past week’s hearing, a Congressional call to the SEC, and three new draft bills notwithstanding, the US government has been giving the cryptocurrency sector mixed signals. Given what has seemed to be a perpetual gray area on the status of ICO regulations, crypto industry players are wary of forging new paths, lest the system consider any such forays a misstep, subject to penalties.
The CEO of a major cryptocurrency trading platform noted during the Congressional hearing that international-domiciled fundraises of late have been outpacing US-based ones thanks to a perceived lower threat of regulatory enforcement. With no concrete guidance from policymakers, the legal status quo poses a threat to US economic stability and innovation. A clear regulatory environment would pave the way for the US to become, for example, a safe harbor for security token activity, where investors can enter the market with a sense of reliance.
Yet the present regulatory murkiness poses threats beyond being a proving ground for the latest crypto coin. Players based abroad could wield assaults such as a 51 percent attack on US-owned blockchain systems, meaning foreign actors could seize control of networks.
The popular image of cryptocurrency is often aligned with libertarianism. (There is at least a kernel of truth to this label. Case in point: look no further than the Free State Bitcoin Shoppe in Portsmouth, New Hampshire.) In case you need a refresher on high school political science, libertarians tend to be wary of government intervention. That is to say; they wouldn’t be advocating for regulation at all—never mind knocking at Congress’s door asking for it. Granted, not all in the cryptocurrency arena are staunch proponents of a world without dollars. But even the most die-hard anti-interventionists would likely admit to their pro-regulatory counterparts that a safe and secure environment would allow their interests to flourish.
Granted, nine months of technological advances on the blockchain and cryptocurrency markets would be the rough equivalent of nine years of change on Wall Street. And in Washington, the legislative process tends to be a good five years behind whatever issue is being legislated. When it comes to developing a regulatory framework for cryptocurrency, the onus lies squarely on industry stakeholders to devise a plan.
At BX3 Capital, we have devised draft regulatory and tax frameworks for the US cryptocurrency industry. Both plans take existing structures set in place by the SEC and IRS and build them out to take them into the next generation of assets:
Regulatory Framework For Cryptocurrency:
- Regulation Crypto: In the spirit of Reg A and Reg D, ICOs would have to register with the SEC at the outset, as well as to a funding portal. This would provide a central clearinghouse with details on new launches. On the other side of the coin, potential investors would be subject to the usual anti-money laundering and know-your-client rules.
- Aggregate Amount Raised: Every ICO would have a clearly defined hardcap for investors’ reference and smart contracts would be deployed to ensure funds are used for their intended purpose. Time- or milestone-based payouts from escrow accounts could also be put in place to encourage best practices.
- Accredited investors: Some 90 percent of US households don’t meet the threshold to qualify as an accredited investor. Yet why should economic security be the domain of the 10 percenters? College students who spend their spare time following and tracking cryptocurrency more likely than not have a better grasp on the asset class than the typical family office staffer, never mind the adviser at a brokerage branch in a suburban strip mall. The draft framework suggests broadening the financial stipulations as to who can take part in cryptocurrency investing.
- Number of investors: An ICO would be open to an unlimited number of investors, as under existing guidelines, though the draft framework would require a minimum number of investors, determined by a ratio of dollars to investors.
Tax Crypto Framework:
- Filling a need: Out of some 70,000 pages of the US tax code, only six are dedicated to cryptocurrency. BX3’s draft framework steps in to fill this gap in an increasingly timely issue for investors and their tax professionals.
- When an ICO resembles an equity—that is with dividend payout and/or voting rights—tax treatment should be as an equity. Just as an initial public offering is not a taxable event for the issuer, nor should an ICO.
- Like-kind exchange provisions: One downside of the 2017 tax reform was adding the word “real” before “property” in the like-kind exchange provisions of IRC Section 1031. For cryptocurrency investors, this four-letter change was cumbersome, as the like-kind exchange rules were a tax workaround for the asset class. For the sake of economic expansion, the IRS should strike “real” from Section 1031, as it would allow for free exchange between cryptocurrencies, a possible hedge against volatility.
- Reporting: There should be certain stipulations in place for cryptocurrency issuer, investor, and transactional reporting, such as name and value of token, as well as the associated exchanges.
These frameworks were devised to instill confidence in the market for investors and token issuers alike, which in turn will help to foster economic growth and keep cryptocurrency investment flourishing stateside.
Granted, at its very nature, cryptocurrency is a forever-moving target in terms of development and intricacies. When you consider the often- burdensome processes to effect change in Washington, the federal government has made the most of the crypto toolkit at its disposal.
It is therefore incumbent on us—the industry stakeholders—to bring ideas and frameworks to the table to bolster the knowledge base on hand. Otherwise, we will continue to wander aimlessly, risking potentially irreparable harm to the US.
Article By Anne Szustek Talbot, BX3 Capital
Anne Szustek Talbot is the director of content at BX3 Capital, a business advisory firm providing guidance to firms looking to make inroads into the blockchain/cryptocurrency space. At BX3 it is our responsibility to work exclusively with clients and partners who reflect our core principles of collaboration, ethics, and transparency.