Blockchain technology seems to be the topic of the day everywhere. Spending on blockchain is expanding exponentially. The International Data Corporation’s (IDC)’s Worldwide Semiannual Blockchain Spending Guide forecasts that global spending on the technology will approach $2.1 billion this year, doubling the $945 million spent last year. Spending in 2021 is expected to reach $9.7 billion. Where are the regulators?
Blockchains – ” distributed electronic ledgers that facilitate decentralized transaction networks” – are roaring down similar tracks to previous dramatic “leaps in technology.” As with automobiles, electricity, airplanes or, more recently, the world wide web, blockchain technology and the interest groups behind it are pressing ahead far faster than regulations and regulators.
Many of those who will one day be responsible for regulation of some sort will likely acknowledge today that they don’t really understand what a blockchain is, or how the technology works. Even people who work with blockchains will likely offer a stuttering response when asked to define the technology.
Regulatory agencies, dealing with a proverbial “moving target” in blockchain technology, are in a seemingly intractable quandary in determining just where blockchain comes into play in the future global economy.
How are U.S. regulators responding?
The potential of Blockchain to streamline financial transactions on a worldwide scale cannot be overstated. Presently, however, most blockchain projects and their corresponding publicity relate to the technology’s underpinning of cryptocurrency, altcoins, tokens or virtual currencies, the most common of which are Bitcoin and Etherium. Accordingly, relevant U.S. regulators have focused initially on protecting the public from traditional market risks and fraud.
Any announcements of intentions by market regulators of the world’s largest economy – the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the Federal Trade Commission (FTC) – cannot, in turn, be ignored by global blockchain advocates and interest groups.
It is very clear that blockchain groups and U.S. regulators will have to find ways to deal with each other in a way that both facilitates the beneficial uses of the technology while protecting the public. Various agencies are wading into the new industry with differing degrees of caution.
Cryptocurrencies and Initial Coin Offerings (ICO)
SEC Chairman Jay Clayton has voiced concern about the offer and sale of cryptocurrency to the public and has highlighted the fact that the SEC has not to date approved any ICO’s. The Chairman has indicated, however, that it will apply the Howey Test to determine whether or not a cryptocurrency sale constitutes a sale of securities.
This means that the SEC will look to the individual circumstances and facts surrounding each transaction to make this determination. It is also clear the SEC is prepared to take action against ICO sponsors if it finds a misuse of an ICO or other fraud.
Taxation on cryptocurrency investments
The IRS will treat ” virtual currency as property for tax purposes.” What this means in practice is that a gain or loss on the sale of virtual currency will be taxed in the same manner as any other property exchange. For example, cryptocurrency is typically treated as capital, an asset, but it also may be classified as inventory if the asset is held for resale.
As early as 2014, the IRS issued guidance stressing that cryptocurrency is treated as property, subjecting it to capital gains and income taxes. Simply buying and holding cryptocurrency does not constitute a taxable event. But this gets tricky. If one uses digital coins to purchase a magazine, for example, after the currency has increased in value, there has been a taxable gain.
Private key security: Is it enough?
Private keys are the designed to be the ultimate protection for spending and sending your cryptocurrency to anyone. The unique aspect of blockchain is the irreversibility of the transaction, which is guaranteed by mathematical signatures tied to each transaction with the use of private keys.
Cryptocurrency exchanges will store private keys on behalf of their users.
While most exchanges do a good job of protecting private keys against cybercriminals, the industry is also a draw for cryptocurrency scams and hackers. And the stakes are high. A loss on an exchange can involve hundreds of millions of dollars.
Conclusion: Mixed messages and needs
It is not surprising that at this stage of the development of a potentially transformative industry, there is no clear plan for setting up a smooth regulatory pattern to enrich the industry while at the same time protecting the public.
At present, it appears there is “more friction than unity between regulatory bodies and industry experts about how the space should develop.” At the same time that many U.S. federal regulators are perhaps overly cautious, some state legislatures are passing laws designed to minimize blockchain industry restrictions and encourage companies to locate in those states.
All of these recommendations, however, seem to support the sentiment for a greater degree of claritywhen it comes to blockchain technology, not just with government officials but with the broader public as well.
