Laws, regulations, and standards are changing and being driven by the growth and popularity of cryptocurrency. How people obtain, hold, and transact with cryptocurrency is ripe with potential for innovation as well as regulation. Digitization, automation, AI, and new FinTech greatly impact and alter the financial system and investment industry and companies and governments are trying to keep up.
The recent Infrastructure Investment and Jobs Act (IIJA), signed into federal law November 15th, 20201, requires cryptocurrency brokers to record transactions and track their customers for the IRS, similarly to the current method of requiring brokers to maintain form 1099-B, Proceeds from Broker and Barter Exchange Transactions, for each client. Starting in 2021, Section 80603 of IIJA requires cryptocurrency brokers to disclose the names, addresses, and phone numbers of their customers, the gross proceeds from sales, and any capital gains or losses. This expansion to cryptocurrency tax reporting requirements was controversial and the bipartisan Blockchain Caucus wrote a letter to House lawmakers raising concerns about how the the law “could drive blockchain software development, cryptocurrency mining, and similar opportunities out of the United States”.
The IIJA also amends the anti-money laundering “cash reporting” requirements of 26 U.S.C. § 6050I to encompass transactions in digital assets, beginning in 2024. This requires businesses that receive over $10,000 in cash or digital assets to file a Form 8300 with the IRS. Failure to comply with Section 6050I can result in civil penalties of up to $3 million per year, or higher if the failure is due to “intentional disregard” of filing requirements (see 26 U.S.C. §§ 6721, 6722).
At the annual Securities Enforcement Forum hosted by the SEC, both SEC Chair Gary Gensler and Division of Enforcement Director Gurbir Grewal spoke of investor protection regulations, accountability, and pursuing misconduct. It is clear that the SEC seeks enforcement of current regulations and the creation of new regulations to promote accountability and stability in the cryptocurrency market.
Chair Gensler said, "Without examination against and enforcement of our rules and laws, we can’t instill the trust necessary for our markets to thrive. Stamping out fraud, manipulation, and abuse lowers risk in the system...."
Gensler went on to say, "At the SEC, we follow the facts and the law, wherever they may lead, on behalf of investors and working families. That means holding individuals and companies accountable, without fear or favor, across the approximately $100 trillion capital markets we oversee."
Rules, regulations, and official guidance are not only coming from the SEC, but other agencies will be involved. The Treasury Secretary and the IRS are expected to clarify the scope of the changes to the code the IIJA makes. It is also likely that further laws and regulations will come from the Federal Reserve Board, the Commodity Futures Trading Commission, and the Department of Treasury Financial Crimes Enforcement Network. With these expected changes and guidance, it is crucial for industry participants to be aware of upcoming changes to rules and regulations.