Why The US Government Will be Forced to Provide Crypto Regulations

After several years of crypto companies requesting clarity from US regulators, notably the US Securities and Exchange Commission (US SEC), the world’s largest economy still lacks clear regulations for altcoins. 
 
Much of this boils down to whether digital assets are deemed securities or commodities in the eyes, whereby trading the latter in the US is controlled by the Commodities and Futures Trading Commission (CFTC). 
 
I recommend this article from Coindesk for an in-depth explanation of these categories and why these classifications are significant from financial and legal perspectives. 
 
Bitcoin is the only one officially listed as a commodity, whereas doubts remain about Ethereum and other altcoins/tokens. More on this later on in the piece.
 
I will cover three reasons why the US Government must get its $h!t together if it wants to be taken seriously as a Bitcoin/crypto and blockchain technology hub. 

1) Brain (and money) drain

Except for (temporary or long-term) capital controls in certain countries–India, Argentina, Russia, and China are notable recent examples–it is straightforward for many people worldwide to relocate to another country.

Between dual nationality, a partner/marriage, golden visas and other available incentives, it can be done for several people considering moving abroad.
 
For individuals whose net worth is primarily tied to digital assets, the relocation process becomes even more seamless, potentially posing a risk of lost tax revenue for the US, UK, Canada, Australia, or other developed nations with high taxes. 
 
Flights are fairly cheap, and many places can be readily accessed by bus, train, or even ferry for more budget-conscious investors seeking to exploit significantly lower tax rates. 

For example, in Europe, you can enjoy the reported benefits of zero capital gains tax (CGT) for cashing out long-term crypto holdings (held for over one year) in Portugal and Germany.

Germany is one of the best countries for crypto investment because it’s listed as private money. This means that as a private investor in crypto you will not be taxed on any crypto held for over a year. 
 
Nomad Capitalist > Germany Crypto Tax Guide 2024

As Europeans with an EU passport from one member state can easily live and work in another EU nation — not to mention several Americans and Canadians with ancestry linked to one of these — you can see how easy it can be for individual investors to move to places where you’re taxed significantly less.
 
Before some American citizens and residents start yelling at me (I am a non-US resident, FYI), I acknowledge there are crypto-friendly states that exempt eligible investors from state taxes. Nonetheless, from my understanding, federal income and CGT still apply. 
 
Moreover, the IRS still demands taxes for worldwide income; this resource is FYRP, if applicable.
 
N.B. This is not taxation or immigration advice. Before contemplating these ideas, speak to a licensed accountant and immigration advisor/lawyer. 

Tying it all back to the USA would lead to a massive money drain and tens of billions of dollars of lost taxes for Uncle Sam, particularly amid a bull market with significant windfalls generated.

Besides the loss of much-needed tax revenue (which, to be honest, equals more money for individual crypto investors), there’s an even bigger issue of a brain drain. 
 
If US policymakers maintain an antagonistic stance against this asset class and fail to provide clear and practical rules, it will also adversely affect US jobs and overall R&D in this sector and the blockchain-tech space. 

2) 2024 shaping up to be the “Crypto Election” 

Donald Trump has drummed up support for his election campaign for ostensibly taking a supportive stance on digital assets, including the enthusiasm for his NFT collection. 
 
Several Democrats are feeling the pressure to cave in and finally support this industry rather than attack it, considering crypto is playing an increasingly important role in US politics. 

46% of likely voters say that they are waiting for additional policies and/or regulation before investing in crypto, and similar proportions (40%) expect their future investment portfolio to include some crypto. 

Grayscale > 2024 Election: The Role of Crypto Report

This is a massive chunk of the voting population, i.e., tens of millions of voters waiting for regulatory clarity before entering the crypto sphere. 
 
Up to 40% of Americans reportedly own crypto. However, this figure varies wildly, with some as low as 16% and 19% depending on one’s sources and methodology used, with sample sizes and demographics being key considerations here. 
 
On the topic of campaigns and the upcoming US Federal Election, trial attorney John Deaton, who was actively involved in campaigning on behalf of many XRP holders in the US SEC vs Ripple Labs lawsuit, will be running as the Republican candidate in Massachusetts to take on the incumbent Senator Elizabeth Warren. 

3) The SEC’s aggressive approach is unsustainable

The SEC has filed lawsuits left, right and centre against multiple companies in this sector.
 
Grayscale, Ripple Labs, Coinbase, Kraken, Gemini, and Binance lawsuits are some of the most high-profile examples in recent years, reflecting the antagonistic stance of the current SEC Chair, Gary Gensler.

The most bizarre one was Coinbase’s lawsuit. The SEC took the exchange to court…after giving it the all-clear to list on the NASDAQ.

Even the former SEC Chair Jay Clayton (who, for the record, started the lawsuit vs Ripple) strongly criticised the Commission’s approach to regulating digital assets under Gensler’s tenure.

Between the US SEC’s losses vs Ripple* and Grayscale to date — an embarrassing result for Gary Gensler — and this aggressive attack on US crypto firms from regulators and some notable politicians, these companies are getting fed up. 

*On paper, it was a partial victory for Ripple. Despite this, I consider it a big ‘L’ for Gensler, who has opted to appeal Judge Torres’ decision last July.
 
Even though the SEC recently approved the listing of spot Ethereum ETFs — four months after giving Bitcoin the green light (which took ages to approve) — the nation is still behind crypto-friendly jurisdictions such as Germany, Singapore, Switzerland, and El Salvador. 
 
Due to the agency’s regulation-by-enforcement approach, many crypto firms have been forced to seek greener pastures elsewhere, which I believe is ultimately for their own good.

Yes, many will remain due to the US’s financial clout, but some will bite the bullet and refuse to deal with this nonsensical style of regulation.

Since bullish sentiment returned to the market around nine months ago (in part due to the growing hype surrounding the eventual listing of 11 spot Bitcoin ETFs), in addition to record amounts of $ for crypto lobbying in the US with the upcoming election, Gensler and his colleagues can only stifle this industry so much without it leading to a massive loss of talent and revenue. 
 
In other words, as time passes, they’re beginning to understand the recalcitrant nature of Bitcoin and the wider industry and know it is here to stay despite ongoing efforts by TradFi reps and certain politicians to stifle progress. 
 
Much of it boils down to BlackRock, Fidelity, and other colossal fund managers aiming to load their Bitcoin and Ethereum bags as much as possible while prices are still relatively subdued. From here, they can offer these assets to their clients at a premium. 
 
For US residents, learn what position your local/preferred politicians have on crypto by checking out this resource from Stand with Crypto.

Additional thoughts 

Even though the tide appears to be changing, it’s not happening fast enough. 
 
Fortunately, there’s been a major step forward to establish pro-crypto legislation, with the US House of Representatives passing the Financial Innovation and Technology for the 21st Century Act, a.k.a. FIT21 (see the link below for the full Act). 
 
https://rules.house.gov/sites/republicans.rules118.house.gov/files/RCP_H4763_xml%20%28003%29.pdf

However, it needs to pass the Senate, and the chances of this occurring are (currently) slim as there’s no companion bill. 
 
This is a real shame because I believe this would have most likely passed with near-unanimous support from Republicans and the high probability of enough Democrat senators crossing the floor to get it over the line. 
 
For example, Democratic senators such as Majority Leader Chuck Schumer, Cory Booker, Kirsten Gillibrand and others realise the need for clear regulations to help this industry move forward in the USA, much to the dismay of their anti-crypto counterparts in the Upper House, notably Senator Warren.
 
I remain hopeful that FIT21 will pass both houses within the next 9–12 months (which should have already occurred, in my opinion). If it doesn’t see the light of day before this year’s election, then I am banking on this getting through if Republicans were to have a majority in both houses. 

Whilst it is almost certain that Ethereum will be considered a commodity (based on the 2018 Hinman documents publicly released last year, alongside the recent spot ETF approvals), doubts remain over other popular altcoins, such as SOL, ADA, MATIC, ATOM and FIL, to name a few. These are alleged securities per Document 1 (Section VIII) of the SEC vs Binance Holdings Limited lawsuit. 

“Putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.”
 
William Hinman (Former Director, US SEC Division of Corporate Finance) > Speech — Digital Asset Transactions: When Howey Met Gary (Plastic), June 18, 2018 

As much as I don’t want to drag politics into this, it significantly influences the trajectory of this asset class and blockchain tech in the US, whether we like it or not. 
 
What happens in the USA still has ramifications on this asset class, let alone across the broader financial sector, despite it representing roughly 4.2 per cent of the world’s population and roughly 25 per cent of global GDP. 
 
Whilst the latter figure is a big chunk of the overall pie, we must do our bit in our respective countries to help promote crypto and positively shape its narrative. It has felt like an uphill battle, albeit with some improvements over the past 12–15 months.

Further reading and additional resources

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Disclaimers

• N.B. None of this is financial, tax or legal advice; I am neither a financial advisor nor a lawyer. You are ultimately responsible for your decisions.

• The opinions expressed within this piece are my own and might not reflect those behind any news outlet, person, organisation, or otherwise listed here.

• Please do your own research before investing in any crypto assets, staking, NFTs or other products affiliated with this space.

• Information is correct at the time of writing.

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