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BFI Perspectives 

  • Bernarda Pesantez

Regulation Around Crypto: What You Need to Know

At the end of last year, there was an important announcement from the Financial Crimes Enforcement Network (FinCEN) that many might have missed amid the holiday lull. FinCEN, the US Treasury Department’s bureau that monitors potential legal violations of domestic financial laws, has announced its plans to add virtual currencies to its purview, sending a strong signal that the efforts to regulate the crypto space are intensifying.

Overall, this regulatory push has the potential to benefit crypto investors in some ways, but it could also threaten the key advantages that cryptocurrencies offer, like privacy and individual financial sovereignty. It might still be too early to tell how the sector will ultimately be affected and how it might adapt in response.


In any event, what is crystal clear is that US persons should be aware of what their reporting obligations are, or might soon be, as well as how their transactions are likely to be reported. This is why we decided to put together a short introductory overview on this developing regulatory field.


Reporting by US Persons


FBAR: The aforementioned FinCEN notice, released on 31 December 2020, stated the bureau’s plans to require US Persons to disclose whether they hold $10,000 or more in cryptocurrencies in offshore accounts on the FinCEN Form 114 (also known as “Report of Foreign Bank and Financial Accounts ” or “FBAR”).


Every year, US persons must file an FBAR, reporting their financial interests in foreign reportable accounts, if their aggregate value is over $10,000 at any time during the calendar year reported.


Under current FBAR regulations, it appears as foreign accounts only and exclusively holding virtual currencies are not reportable. However, as the notice specifies, this is set to change, as “FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.”


So far, there is no timeline on when the change will take place and reporting obligations will come into effect for crypto holders. Still, it’s important to know this is in the pipeline, especially given the fact that fines for willfully failing to file an FBAR can be as high as 50% of the unreported accounts’ highest aggregate value.


FORM 1040: There have also been notable moves by the IRS relating to crypto and digital assets. Back in 2014, when regulators and tax authorities all around the world were still trying to wrap their head around Bitcoin, the main question on the table was how crypto assets should be classified and treated. That year, the IRS announced its position on the matter by issuing a guidance to taxpayers on how to treat virtual currencies for federal income tax purposes. It confirmed that it considered that Bitcoin and similar currencies are to be treated as a capital asset.


At the end of 2019, the IRS also revealed an important change to Form 1040, which every American uses to file their federal income tax. On the new form, right at the top of the form, there is a new “yes” or “no” question related to crypto holdings and asking the filer to disclose whether they had bought, sold or indeed “acquired any financial interest in any virtual currencies”.


Reporting by financial services providers


Just before the Christmas holidays, FinCEN also released a proposal for a new anti-money laundering (AML) rule for US banks, financial service providers, and “money services businesses”, like Fintech. This new rule would require them all “to submit reports, keep records, and verify the identity of customers” in relation to transactions above $10,000 involving convertible virtual currency or digital assets with legal tender status.


In its official statement, FinCEN cites ‘"national security concerns” and “closing loopholes that malign actors may exploit” as its motivation for proposing the new rule. The bureau also stated it intends to implement it “as quickly as feasible,” but did not provide a specific timeframe. Furthermore, FinCEN invited comments from the public, yet the period that it specified for this feedback was unusually short. It originally gave just 15 days for comments, whereas similar proposals often have reporting periods of three months or more. Still, the volume of the comments was significant and the reactions to the proposed rule was largely negative, mainly citing privacy concerns, implementation challenges, and fears of regulatory overreach. On January 14th, FinCEN extended the comments period for another 45 days.


Key take-aways


As mentioned in the beginning, the regulatory actions have begun, and will likely intensify in coming months and years, bringing both pros and cons to the industry. Like mentioned in one of our recent Blog Posts on crypto regulation, the sector could benefit from clear and supporting rules.


Perhaps regulations could contribute to the modernization of payment and investment infrastructures, while they could also help shore up investor confidence and stamp out some of the “bad actors” that many government agencies and regulators often highlight as the biggest problems in this space. On the other hand, risks can be found in poorly crafted or overreaching rules that could potentially eliminate the most important “USPs” of crypto assets, namely privacy and the ability to conduct a transaction without an intermediary. Or by creating bureaucratic burdens and compliance costs for any financial service business that is involved with crypto assets.


There is still a lot of uncertainty around future regulatory direction and the timing of all the new rules and changes. We might not know exactly when they will arrive, but it does look like they’re certainly on the way, especially as crypto adoption quickly increases, and the use of virtual currencies becomes more “mainstream”. This is why it is very important for crypto holders to stay on top of the latest developments in this field.

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