As many cryptocurrency enthusiasts and investors know, the major issue looming over cryptocurrencies is the prospect of future regulation. In most jurisdictions, regulators have taken a relatively light touch so far. Aside from registering with government authorities and complying with money services business regulations, know your customer (KYC) laws, and anti-money laundering (AML) regulations, cryptocurrency exchanges and businesses haven’t had to do too much additional work to comply with government agencies. But that could change if regulators decide that cryptocurrency businesses should be subject to greater scrutiny.
One of the biggest issues is how to classify cryptocurrencies. While Bitcoin has already been declared property by the IRS for tax purposes, other cryptocurrencies may be classified differently. That is particularly the case for cryptocurrencies such as Ethereum and XRP, which combine cryptocurrencies with elements of traditional securities. That, in turn, has brought in extra scrutiny from the Securities and Exchange Commission (SEC), which has deemed initial coin offerings (ICOs) to be securities.
Because of that, cryptocurrency exchanges and wallet providers may very well become subject to securities regulations if they enable users to hold or trade ICO tokens. And if Ethereum and XRP are classified as securities, then companies selling them or allowing their customers to hold or trade them would also become subject to SEC regulations.
With different regulatory authorities potentially classifying various cryptocurrencies differently, there needs to be some sort of regulatory harmonization, otherwise investors will face difficulties in complying with regulations and paying any necessary taxes. If the assets in a Bitcoin IRA are treated as non-security property but those in an Ethereum IRA are treated as securities, that could necessitate two different ways of calculating gains and filing tax returns for two cryptocurrencies that most investors treat as essentially equivalent.
That extends to other regulatory arenas as well, which is why it is promising that the Commodity Futures Trading Commission (CFTC) and SEC will likely cooperate more closely in developing any regulations that might affect the cryptocurrency sector. That would ensure that any new regulations introduced and enacted will be harmonious and not result in any unnecessary confusion for cryptocurrency investors.