Cryptocurrencies, most notably Bitcoin, are digital currencies that operate by storing user transactions on a public ledger. While user information is protected by some of the most advanced encryption possible, transactions are incredibly more simple than traditional currency because they are confirmed by cryptography, which verifies that transactions are indeed legitimate. These transactions are directly peer to peer and are free of third party intervention from banks, financial institutions or government.
However cryptocurrencies are currently held back by a convoluted legal system. Many current digital currencies don’t fit into any clearly defined legal regulations, putting companies in a undesired gray area. Unfortunately, this will drive innovation in the space overseas where less ambiguous laws are in place. This dilemma has been seen before in the 1990s with the internet. Congress, however, passed laws to protect internet companies from this gray area
There are three ways to clarify cryptocurrencies’ legal standing.
The first is by creating federal level regulations for cryptocurrencies. Currently, some cryptocurrency companies need money transmission licenses to operate. Unfortunately for them, almost every state has different rules for these licenses, creating a regulatory minefield. These regulations are often processed through a rules-based approach rather than a principles-based approach which creates rigid responses to legal issues. A principles-based approach would favor cooperative dialog between innovators and regulators to solve legal problems that arise. This can be accomplished by a federal fintech(financial technology) charter. A charter like this could preempt state money transmission regulations and allow them to easily operate in any of the states. A charter like this is necessary for spurring responsible innovation.
The second is by creating a federal safe harbor for cryptocurrency companies. This would mean legally reclassifying cryptocurrencies. This isn’t unprecedented and this reclassification has been seen in the past with the internet. Mentioned previously, these laws protected internet content creators from several skewed legal liabilities. Cryptocurrencies are also quickly becoming a new form of infrastructure for online trust, privacy and commerce. Unfortunately some cryptocurrency businesses require money transmission licenses when they may never need to take custody of customer funds. New rules and boundaries must be made to safely account for the several arising uses of this new technology.
The third and last way is by separating the taxes on cryptocurrencies. They are currently recognized as assets and thus subject to capital gains tax. Users today would have to declare every single transaction–whether they are buying a cup of coffee, or downloading a song–on their IRS tax report at the end of the year because of changes in cryptocurrency prices. This type of reporting creates a complicated system discouraging users from cryptocurrency. Adding a new section in the tax code by simply replacing a few words could easily solve this problem.
Thus by creating federal level regulations, laws, and clarifying taxation, cryptocurrencies could become much more mainstream. Removing these major market barriers will spur innovation and finally create legal certainty for those involved in this currently confusing system.
Sources:
- https://medium.com/the-mission/cryptocurrency-how-does-it-work-207a15ab1
- http://fortune.com/2017/06/01/bitcoin-price-drop-crash-cryptocurrency-mainstream/
- https://coincenter.org/entry/why-we-need-a-federal-fintech-charter
- https://coincenter.org/entry/bitcoin-innovators-need-legal-safe-harbors
- https://coincenter.org/entry/bitcoin-taxation-is-broken-here-s-how-to-fix-it
