Loyola University Chicago School of Law, JD 2022
Cryptocurrencies have often been associated with illegal activities due to the fact that they allow users to remain relatively anonymous. This anonymity is possible because, when transacting with Bitcoin and other cryptocurrencies, you can see where funds are being sent but not who sent or received them. However, there are signs that the use of crypto for unlawful purposes may be falling with illicit activity accounting for just 0.34% of all crypto transactions last year – down from roughly 2% a year earlier. Despite this improvement, cryptocurrency regulation appears to remain a top priority for federal lawmakers. One such example of this is the proposal of an anti-money laundering rule which would require people who hold their cryptocurrency in a private digital wallet to undergo identity checks if they make transactions of $3,000 or more. But Congress does not appear to be stopping there. As cryptocurrencies surged in value in recent days, lawmakers jumped to introduce two new bills aimed at advancing regulation of these precarious digital assets.
Eliminating barriers to innovation
On March 9, Congressional lawmakers introduced H.R. 1602, also known as the Eliminate Barriers to Innovation Act of 2021. The bill, introduced by Representatives Patrick McHenry (R-N.C.) and Stephen Lynch (D-Mass.), calls for the establishment of a working group composed of industry experts and representatives from the U.S. Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) to evaluate the current legal and regulatory framework around digital assets in the United States. Ultimately, the goal of the legislation is to clarify when the SEC has jurisdiction over a particular cryptocurrency (i.e., when it is a security) and when the CFTC has jurisdiction (i.e., when it’s a commodity).
The bill requires Congress to create the working group within 90 days of its passage. The working group would then have a year to publish a report analyzing current regulations and the impact that any lack of regulatory clarity has on cryptocurrency markets. The report would include how other countries are progressing and how the United States’ current regime impacts its competitive position in the global marketplace. The bill also calls for the report to recommend standards for the management of the encryption keys, cybersecurity, and custody of the cryptocurrency. Finally, the report would propose best practices regarding cryptocurrency fraud, investor protection, and efforts to combat money laundering.
Defining digital tokens
On the same day, H.R. 1628, also known as the Token Taxonomy Act, was reintroduced. The bipartisan bill aims to define digital tokens like Bitcoin and Ethereum and ensure that they are not classified as securities under federal law. The bill was initially introduced in late 2018 and reintroduced in 2019. However, this latest iteration may face heavy opposition from consumer protection groups and states that have introduced their own regulatory frameworks for digital assets.
The Token Taxonomy Act would define a digital token as assets whose creation and supply are not controlled by a central group or single person. To qualify as a digital token under the bill, the transaction history must be able to resist modification or tampering. Additionally, the digital token must be capable of being transferred between persons without an intermediary. Digital assets that fit within the bill’s definition of a digital token would be excluded from the definition of a security under federal securities laws, including the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940. The legislation would also amend rules for taxing virtual currencies, including treating exchanges of virtual currency as tax-exempt and ensuring certain virtual currencies held in individual retirement accounts are not treated as distributions. If passed, The Token Taxonomy Act would also afford regulators such as the Securities and Exchange Commission much needed clarity on how best to enforce securities laws as it relates to cryptocurrency tokens.
Additional regulation might be on the horizon
Amid the introduction of these bills, industry insiders such as Jesse Powell, CEO of bitcoin exchange Kraken, warned there could be additional cryptocurrency crackdowns on the way. Overall, this onslaught of legislation takes aim at establishing an organized, comprehensive regulatory framework for digital assets in the United States. But given the erratic and unstable nature of cryptocurrency, it seems unlikely that regulatory uncertainty will be resolved anytime soon.