Andrew Yang, one of the 2020 U.S. presidential candidates and who is currently vying for the Democratic Party nomination, will create a clearer guidelines for the digital assets in order to encourage growth of related crypto businesses, investments and innovation in the sector, if elected president. This is according to his recently published policy statement on crypto-assets.
He promises to promote simpler crypto regulation and a national framework that overrides state crypto regulations. The regulation will clearly define tokens in regard to when they should be considered security or utility tokens, and it will clarify tax implications for those trading crypto. It will also clearly identify which federal agencies should regulate crypto and tokens, provide for consumer protection, and promote nationwide adoption of recognition of protections afforded by a series LLC.
According to the policy released on April 18, 2019, United State regulators, federal agencies and states have failed to develop an appropriate and national and local framework that effectively regulates these emerging assets in order to respond to the quick growth of these assets. United States crypto sector is thus unable to compete with those in other jurisdictions, especially China and Europe.
The policy notes that the current crypto regulation implemented by different federal agencies, and states-based regulations such as New York’s BitLicense, have had a "chilling effect on the US digital asset market" and are preventing it to grow. It notes the need for federal government to create clearer guidelines on how crypto/digital assets are treated and regulated.
Based on a review of the various regulatory-related issues in the U.S. crypto industry today, the policy addresses many related problems in the industry today.
Good crypto regulation framework is lacking
The concerns relating to lack of clearer guidelines and regulations in crypto industry are not new, with crypto industry advocates and members of Congress raising the issue on many occasions, previously. The major points of controversy and lack of clarity are taxation and securities law/regulation as touching cryptocurrencies and digital assets.
There have been concerns on how crypto industry is regulated by US regulators – the Securities and Exchange Commission (SEC) and how taxation is implemented by the Internal Revenue Service (IRS). The development also brought to memories the previous controversies and sharp disagreements relating to regulating of cryptocurrencies and digital assets in the recent past especially in 2017 and last year, which was accompanied/followed by a number of subpoenas, financial penalties to startups, and closures or movement to other jurisdictions by some crypto and blockchain startups that viewed U.S. regulation as unfriendly to crypto.
A number of companies that had raised funds through ICOs also ended up returning investor money following regulatory inconveniences, and many more startups delayed launching their products. It is understandable how all of these had a slowing effects in crypto industry and innovation in U.S. in the recent past.
While SEC has previously insisted of need to protect investors through stricter regulations and actions, there has been claims of unfair treatment and confusion, and which SEC and Commodities Futures Trading Commission have been meeting industry representatives to try resolve and boost understanding: much is to be done given the many difficulties there can be in the developing of new regulations and frameworks for a nascent industry.
A lot of issues remains unresolved even through the subsequent guidelines so far issued by SEC. One area of disagreement is how regulators are making decision on which crypto/token is a security and which is not. SEC has sometimes referred Bitcoin and Ether as securities and later clarifying they are not. Regulators have majorly been basing their decisions on regulatory frameworks applied to traditional assets especially the Securities Act of 1933, the Securities Exchange Act of 1934, and the decades-old Howey test -- these of which many in the crypto industry and community agree are insufficient and cannot adequately deal with issues in crypto industry.
Besides, SEC has issued enforcement actions against different startups so far but these enforcement actions have not clarified all issues surrounding classification of crypto as securities and/or taxation matters. Thus there have been calls within crypto community for a separate and clearer regulatory framework that addresses digital assets even as many have clearly explained that they are not opposed to regulation because it helps deal with fraudulent activity in crypto.
Last year, chairman of the Commodities Futures Trading Commission Christopher Giancarlo, in a Senate hearing, called for a "thoughtful and balance response, and not a dismissive" regulation. Another commissioner Brian Quintemz has also proposed a "private crypto oversight body" or self-regulatory organization. The president and founder of the Chamber of Digital Commerce, in the Senate hearing, described crypto regulation as unorganized and incredibly complicated" and said "it’s really putting the U.S. at risk of falling behind from an innovation and technology perspective," and that there were turf wars between " different regulatory agencies and turf wars between the feds and the states, and none of this is in the best interest of the U.S. or the blockchain technology industry.”
After rejection of Cameron and Tyler Winklevoss's exchange-traded fund (ETC), one of the SEC commissioners, Hester Peirce, disagreed with the decision saying that the judgement by SEC sent a “strong signal that innovation is unwelcome in our markets.” Due to complexities relating to crypto regulation in U.S., many blockchain and crypto startups raising investment capital through ICOs clearly state exclusion of participation by U.S. citizens. Thus it may be that the new proposed transformations may change these and other things.
Guidelines still not clear in regard to classifying tokens as securities
In April this year, SEC released a new token guidance framework for startups looking to issue tokens through ICOs, IEO and STOs. The new guidance tries to provide examples of "what might be a security and also what might not be" in SEC Director of Corporation Finance William Hinman's own words. In the new guidelines, SEC recognized that there will be need to consider other factors as well when determining if a token is a security, in addition to considering the Howey's Test.
Many in the crypto industry welcomed the new guidelines saying it was a movement in the right direction and said that the guidelines indicated SEC was engaged with the marketplace.
However, while additional clarity was welcome, blockchain lawyers, leaders, and regulatory experts pointed areas of concern where there was unanswered questions: one attorney with Carlton Fields and general counsel for the investment bank Athena Blockchain said it remained unanswered regarding when do tokens no longer qualify as securities and when would SEC be able to make that determination.
An attorney with Kobre Kim firm told CoinDesk last month that the framework did not answer questions about federal securities laws how they apply to crypto tokens. Further, it is unclear in the guidelines whether tokens conducted outside the U.S. fall under SEC's jurisdiction, which means there is no clear explanation on how SEC would enforce actions against startups outside the U.S. and those reaching out to U.S. investors.
Another area lacking clarity in the guidelines is how the broad definition of “active participants” might impact crypto projects. The concept of “active participants” (APs) as first introduced in these guidelines, seeks to include actions/responsibilities/efforts of other parties in the evaluating of whether an asset is a security or not in addition to managerial actions/responsibilities. For instance, a token would be classified as a security if purchasers expect to profit from efforts of APs even if they do not expect to profit from managerial efforts. According to one attorney, it is not clear in the guidelines whether promoters, independent activists or shareholders should also be categorized as APS given the narrow definition of APs given by SEC.
Crypto taxation issues not yet clear
It is also not clear to many how IRS itself treats taxation of crypto and tokens. For instance, 21 Congress members last month April wrote to the Internal Revenue Services IRS asking for clarification regarding tax on cryptocurrencies and requested for “guidance on the consequences and basic reporting requirements for taxpayers that use virtual currencies.”
The letter said that "taxpayers deserve clarity on several basic unanswered questions regarding federal taxation of these emerging exchanges of value." According to the letter, it's now five years since IRS released guidelines on the issue but two years ago, the Inspector General for Tax Administration found the 2014 guidance lacking and recommended that IRS should update guidance "to reflect the documentation requirements and tax treatments needed for the various uses of virtual currencies" to which the IRS agreed.
Yang promises to work with sponsors of the Token Taxonomy Act and Wyoming legislators to promote favorable conditions for cryptocurrency trading, innovation, and development. The Token Taxonomy Act was introduced in the Congress last year and seeks to redefine securities in order to exclude cryptocurrencies and digital tokens as securities and introduce more favorable tax treatments for cryptocurrencies.
Currently, trading crypto for another one triggers capital gains or loses and also gains or losses are to be reported for purchases of items with cryptocurrencies. The Token Taxonomy Act proposed exemption of crypto-to-crypto exchanges in current tax securities treatment and exemption for small transactions below a certain threshold, which would allow users to more easily use crypto as a medium of exchange.
Clarity of crypto regulation or lack of it also determines how other industries such as banking treats/handles cryptocurrency startup matters, and recently, some legacy banks, in fear of regulatory-related consequences, have been unable to reach clear decisions on how to treat deposits and participate in other financial matters involving crypto startups as well as how to treat transactions such as when customers are transacting with the startup through the banks' accounts.
Blockchain vast potential
Yang becomes the first presidential candidate among the 18 who are challenging Donald Trump, to publish and announce a specific crypto policy statement. He said in the policy statement that blockchain has "vast potential" and wants regulation to differentiate between crypto used as money and those used as securities like company stock. The crypto regulation proposed will be part of the larger monetary transformations. Others include getting rid of the penny, which he sees as obsolete because it costs more to make than it is worthy, which means tax payers have to pay $70 million a year.
Himself a tech entrepreneur and a techno-savvy candidate, Yang is proposing several other transformations in the technology sector including creating a department of technology to regulate AI, introduce payment of $1000 to all adults as universal basic income to shield them from massive disruption and job losses due to automation related to AI and other techs, restore net neutrality through FCC oversight of internet service providers, shift to new quantum resistant security algorithms, modernize U.S. electrical grid and encourage renewable energy through tariffs, pay for body cameras on all police officer, introduce value-added tax system, invest in carbon dioxide capture tech and geoengineering to combat climate change, invest in technology to monitor border security, and to curb misinformation and foreign intervention in elections by banishing fraudulent accounts on social media.
He previously contributed $120,000 to establish Venture for America (VFA), an accelerator aimed at building new startups in emerging cities; and last year welcomed donations in cryptocurrencies for his presidential bid.