Congress has yet to authorize a system to regulate virtual currency. As the CFTC admitted, U.S. law does not provide for ‘direct comprehensive U.S. regulation of virtual currencies. To the contrary, a multi-regulatory approach is being used.
The CFTC, and other agencies, claim concurrent regulatory power over virtual currency in certain settings, but concede their jurisdiction is incomplete. Current law does not provide any U.S. Federal regulator with such regulatory oversight authority over spot virtual currency platforms not involving fraud operating in the United States or abroad. Roosevelt continued to regard the judicial system as an ineffective arena for controlling giant corporations regulation, he believed, promised a far better remedy. He said the design should be to prevent the abuses incident to the creation of unhealthy and improper combinations instead of waiting until they are in existence and then attempting to destroy them by civil or criminal proceedings. Types of regulatory responses to a crisis may vary along many dimensions. These responses may be robust or cosmetic. They may be structural (reorganizing government or instrumental (changing policy tools).
Until Congress acts to regulate virtual currency the following alternatives appear to be available:
- No regulation
This Comment will show that the federal government has no legal basis to prohibit bitcoin users from engaging in traditional consumer purchases and transfers. This Comment further argues that the federal government should refrain from passing any laws or regulations limiting the use of bitcoins . . . applying any sort of regulation to bitcoin use, would be ineffective and contrary to the interest of the United States consumers.
See Nikolei M. Kaplanov, Nerdy Money: Bitcoin, the Private Digital Currency, and the Case Against Its Regulation, 25 Loy. Consumer L. Rev. 111, 113 (2012).
2. Partial regulation through criminal law prosecutions of Ponzi-like schemes by the Department of Justice, or state criminal agencies, or civil substantive suits based on allegations of fraud.
In United States v. Faiella, Defendants are charged in connection with their operation of an underground market in the virtual currency ‘Bitcoin’ via the website ‘Silk Road.’”;
In United States v. Lord, Counts 2–14 charged Defendants with various other crimes associated with operating their bitcoin exchange business.
3. Regulation by the Commodity Futures Trading Commission (“CFTC”).
The CFTC is one of the federal administrative bodies currently exercising partial supervision of virtual currencies. Christopher Giancarlo, Chairman of CFTC, said on Jan. 4, 2018, “One thing is certain: ignoring virtual currency trading will not make it go away. Nor is it a responsible regulatory strategy. The CFTC has an important role to play.”
Administrative and civil action has been utilized by the CFTC to expand its control:
On September 17, 2015, the CFTC issued an administrative order (the Coinflip Order) filing and simultaneously settling charges against Coinflip, Inc. and its chief executive officer. In the Coinflip Order, the CFTC took the view for the first time that bitcoin and other virtual currencies are commodities subject to the Commodity Exchange Act (CEA) and CFTC regulations.
The U.S. derivatives watchdog said on Friday that it has filed charges against three separate virtual currency operators alleging the defendants had defrauded customers and broken other commodity trading rules, in a further sign regulators globally are cracking down on the emerging asset class. The CFTC announced the filing of a federal court enforcement action under seal on January 16, 2018, charging commodity fraud and misappropriation related to the ongoing solicitation of customers for a virtual currency known as My Big Coin.
Legitimization and regulation of virtual currencies has followed from the CFTC’s allowance of futures trading on certified exchanges. In a statement, the CFTC said the Chicago Mercantile Exchange and the CBOE Futures Exchange self-certified new contracts for bitcoin futures products. The Cantor Exchange self-certified a new contract for bitcoin binary options. The futures contracts will make it possible to bet on bitcoin prices without buying the cryptocurrency. Two futures exchanges, Chicago Mercantile Exchange and the CBOE Futures Exchange, as of February 23, 2018, exceeded “$150 million in daily trading volume.” The CFTC has actively policed futures exchanges for violating core principles such as “failing to enforce its prohibitions against unlawful wash trading and prearranged trades.”
4. Regulation by the Securities and Exchange Commission (“SEC”) as securities.
A new division of the Securities and Exchange Commission dedicated to socalled “initial coin offerings” filed its first charges on Friday, targeting a scam that reportedly raised $15 million from thousands of investors by promising a 13-fold profit in less than a month.
In a criminal complaint filed in Brooklyn federal court, the new SEC division, known as the Cyber Unit, describes how Dominic Lacroix sold digital tokens known as “PlexCoins” as part of a purported plan “to increase access to cryptocurrency services” across the world.
The SEC has demonstrated that it intends to pursue enforcement of securities law on certain cryptocurrency transactions, especially increasingly popular InitialCoin Offerings, in response to concerns about fraud and manipulation.
5. Regulation by the Treasury Department’s Financial Enforcement Network (“FinCEN”).
On Jul. 27, 2017, Treasury’s First Action Against a Foreign-Located Money Services Business, U.S. Department of the Treasury, the Financial Crimes Enforcement Network (FinCEN), working in coordination with the U.S. Attorney’s Office for the Northern District of California, assessed a $110,003,314 civil money penalty today against BTC-e for willfully violating U.S. anti-money laundering laws.
6. Regulation by the Internal Revenue Service (“IRS”)
In March 2014, the IRS issued Notice 2014–21, which describes how the IRS applies U.S. tax principles to transactions involving virtual currency. In Notice 2014–21, the IRS stated its position: virtual currencies that can be converted into traditional currency are property for tax purposes, and a taxpayer can have a gain or loss on the sale or exchange of virtual currency, depending on the taxpayer’s cost to purchase the virtual currency.”).
In late 2016, the I.R.S. made it clear that it was searching for cryptocurrency tax evaders: The agency sent a broad request to Coinbase, requesting records for all customers who bought digital currency from the company from 2013 to 2015.
7. Regulation by private exchanges
“There is a growing need for exchange operators to self-police to protect investors from taking on too much risk and other dangers.” See, Asian Review, Japan Tries Light Touch in Bringing Cryptocurrencies out of Regulatory Limbo, NIKKEI, Sept. 30, 2017.
8. State regulations
DFS has approved six firms for virtual currency charters or licenses, while denying those applications that did not meet DFS’s standards. In addition to bitFlyer USA, DFS has granted licenses to Coinbase Inc., XRP II and Circle Internet Financial, and charters to Gemini Trust Company and itBit Trust Company.
9. A combination of any of the above.
Reference: CFTC v. McDonnell, 287 F. Supp. 3d 213 (E.D.N.Y. 2018)
