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The US government could regulate encrypted assets and tokens differently than traditional stocks and assets by modifying the existing securities regulatory framework.
On December 22nd, CNBC reported that two members of Congress – Warren Davidson and Darren Solo – introduced a bipartisan bill called the "Token Taxonomy Act" in an effort to prevent excessive regulation in the cryptocurrency space.
"In the early days of the Internet, Congress passed legislation that guaranteed certainty and resisted the temptation to over-regulate the market: our intent is to achieve a similar victory for the American economy and for American leadership in this innovative space. ", said Davidson.
Once approved, what kind of impact could the Bipartisan Token Taxonomy Act have on the cryptocurrency and blockchain sector?
More clarity, exactly what the industry needs
In a statement, the Blockchain Association – a nonprofit trade association based in Washington, DC that represents many of the largest companies in the cryptocurrency industry like Coinbase, Circle and Digital Currency Group – said the bill provides a definition of cryptographic resources and digital tokens that exclude them from being recognized as security.
Over the past two years, many blockchain projects have left the US market to pursue token sales in regions such as Switzerland and Singapore, which have lenient and flexible policies regarding initial coin offerings (ICOs).
By providing a clear guideline on the regulatory nature of tokens and digital assets, the law encourages blockchain projects to remain within the US market and contribute to the growth of the local cryptocurrency and blockchain industry.
The overwhelming majority of token sales and ICO projects – aside from some selected Telegrams that have led to a sale of private tokens with the approval of the US Securities and Exchange Commission (SEC) – have prevented investors in the United States to participate in token sales due to the ambiguity of existing securities laws.
Even projects such as 0x (ZRX) that have been quoted by Coinbase, a strictly regulated US-based cryptocurrency that eliminates the project from being considered a security, have not allowed investors in the country to contribute to ICO.
"With these clear terms, we can control bad actors while we encourage good ones, giving US-based innovators the framework they need to build next-generation technologies and services rather than doing valuable work at the time. abroad, "said the Blockchain Association.
The bill also provides clarity on the tax policy related to cryptocurrencies for the first time in the history of the market, eliminating the friction between the block networks and users.
Currently, users in the United States are required to declare capital gains taxes on all cryptocurrency transactions – small or large – because the Internal Revenue Service (IRS) of the US federal government has recognized cryptocurrencies as a form Property.
Although the bill does not aim to change the recognition of cryptocurrencies as property, it imposes an exemption for capital gains on transactions that do not exceed $ 600, deeming them as tax exemptions.
The Blockchain Association added:
"In addition, this legislation includes provisions addressing issues related to the tax treatment of tokens.In 2014, the IRS stated that" virtual currencies "are treated as property, which means that capital gains tax must be calculated For all transactions, this adds enormous friction to decentralized networks.The legislation addresses this problem by providing a de minimis exemption for gains below $ 600 and allowing tax-free exchange. "
Decentralization is the key
The bill does not encourage the SEC and other law enforcement agencies to recognize all types of tokens and ICO projects as non-titles. However, it allows the SEC to exercise authority on tokens considered to be securities, based on a newly established definition and guidelines.
On June 14, the head of the SEC of the Corporate Finance division, Bill Hinman, said that a key factor in determining whether a token is considered a security under existing regulations is the level of decentralization of the project.
If a blockchain network is sufficiently decentralized and no central party has control over most elements of the project, including its monetary policy and development, the SEC director said in a speech that the native token of the blockchain network can not be considered a security regulations. Hinman said:
"If the network on which the token or money is to operate is sufficiently decentralized – where buyers no longer reasonably expect a person or group to perform essential managerial or business efforts – the assets may not represent an investment contract. when the efforts of the third party are no longer a key factor in determining the success of the enterprise, the asymmetries of material information diminish. "
On this front, the SEC and the legislators behind the bill agree that, as long as security is sufficiently decentralized, it should be able to continue without the authorities' interference.
Once approved, the bill should allow both issuers of tokens and investors to better assess whether a token is recognized as a security or not, based on recently amended securities policies. The bill could also encourage more companies to register with the SEC to distribute securities through the issue of tokens in a private sale.
Over the next few months, the Blockchain Association, the non-profit organizations and US regulatory authorities will work together to improve the bill and move it forward to obtain approval from the House and Congress.
For a bill that has been going on for several months, the Blockchain Association has stated that it is not perfect in many ways. But, in 2019, industry leaders, experts and legislators will work together to consolidate cryptocurrency and blockchain space policies.
"Like all legislation in the early stages, we expect this bill to be not perfect yet, but what excites us is that it was proposed by a bipartisan team, demonstrating a vision for innovation and responsibility that is shared across the corridor With the new Congress starting in January, we hope digital tokens are an idea we can build on. We want to work together to discuss key issues, ensure adequate consumer protection and work to advance the legislation that represents our collective views, "said the association.
Cryptographic fiscal policy reform is necessary
Cryptocurrencies like Bitcoin are fundamentally, structurally and conceptually different from traditional actions and forms of activity. As such, the Bitcoin market behaves and moves differently from most stocks with extreme volatility and rapid price movements, especially as the market is open 24 hours a day for investors in the global trading market. digital goods.
The problem with cryptocurrency – or with any class of activity emerging in its infancy – is that an investor could record a 300% gain on paper by the end of the year and lose all profits in the following year.
Since losses are not transferred to the next year and cryptographic taxes are calculated in the same way as shares and properties, mismanagement of a cryptocurrency portfolio could lead to a large tax for investors.
On December 21st, the Wall Street Journal reported that investors could use some strategies to lower taxes on cryptocurrency investments, such as the sale and repurchase of cryptographic assets.
Without the implementation of these strategies, the aggressive approach of the IRS to collect taxes from cryptic investors – as evidenced by the order of the federal court which asked Coinbase to provide information on approximately 13,000 cryptocurrency trading accounts worth more than $ 20,000 between 2013 and 2015 – could affect many investors in the future.
Currently, the IRS is evaluating tens of thousands of trading accounts that were traded between 2013 and 2015 to potential taxes on capital gains on cryptocurrency investors. Investors who do not have the know-how on reducing tax rates could be hit hard by the IRS in the future, especially considering that the fiscal policy on cryptography remains the same as that of shares and properties.
If the bill is approved and a new definition is provided to the cryptographic resources, most areas of the asset class, including taxation, are likely to be altered.
From 2017 to 2018, Bitcoin has increased by about 1,900 percent, from $ 1,000 to $ 19,500. Since then, Bitcoin has dropped to about $ 4,000 of about 85%. For a class of assets that tends to increase and decrease in value with margins that are not comparable to the stock market, it is not feasible to rely on the same tax policies.
Even big projects are closing
On December 13, Basis – a stablecoin project funded by some of the world's largest venture capital firms, such as Andreessen Horowitz and Bain Capital Ventures – announced that it will close its operations and return the $ 133 million raised to its investors.
Unlike other widely adopted stablecoins such as Circle & # 39; s USDC and Gemini & # 39; s GUSD, Basis incorporates an algorithm and alters the supply of the token to fit the price of other important cryptographic resources, such as Bitcoin and Ethereum.
In an official statement, the Basis team stated that, ultimately, the closure of the project is attributable to the US securities law.
"As regulatory guidelines began to spread over time, our attorneys reached a consensus that there would be no way to avoid bond status for bond and shared tokens (although Basis would probably be free of this characterization Due to their status as unrecorded securities, bond and share tokens would be subject to transfer restrictions, with Intangible Labs responsible for restricting ownership of tokens to US-accredited investors for the first year after issuance. and for the execution of eligibility checks on international users. "
Based on Basis' statement, it is likely that the SEC and project lawyers felt that it was not decentralized enough, as development was led by a team of developers hired by the company.
The base was considered a promising algorithm-based stablecoin project. However, inefficient regulatory frameworks and securities policies that regard cryptographic assets in the same way as traditional actions and activities have limited the scope of the project.
For the long-term growth of the cryptocurrency industry, the bipartisan bill is essential to define cryptocurrencies in a new way to facilitate the development of blockchain technology and encourage innovation in space. Jake Chervinsky, a government enforcement defender and lawyer for disputes over Kobre & Kim stock, He said:
"The tax taxonomy law would provide exactly the kind of regulatory clarity that the cryptic sector needs – legislation like this is more important than a non-binding guide by agencies like the SEC."
While the timing of the approval of the bipartisan bill is uncertain, industry leaders and experts remain generally optimistic in the first initiative led by members of Congress to effectively regulate cryptocurrencies.
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