Podcast Summary: The Peter McCormack Show – Beginner’s Guide #8: How is Bitcoin Legal with Peter Van Valkenburgh & Jerry Brito (WBD189)

Release Date: January 28, 2020
Host: Peter McCormack
Guests: Peter Van Valkenburgh & Jerry Brito from Coin Center

In the eighth installment of his Beginner’s Guide to Bitcoin series, Peter McCormack delves into the intricate landscape of Bitcoin’s legality in the United States. Joining him are Peter Van Valkenburgh and Jerry Brito from Coin Center, a leading nonprofit organization focused on public policy issues surrounding cryptocurrencies and open blockchain networks.

1. Introduction to Coin Center

[04:20] Jerry Brito:
"Coin Center is an independent nonprofit based in D.C., focused on the public policy issues that affect cryptocurrencies and open blockchain networks like Bitcoin and Ethereum."
Coin Center acts as a collective advocate, similar to the Electronic Frontier Foundation (EFF) for the open internet, representing the interests of decentralized networks in policymaking arenas.

2. Scope of Discussion: US-Specific Regulations

[05:18] Peter Van Valkenberg:
"Regulations will always be jurisdiction-specific. Our focus today is on the US, but similar regulatory categories exist globally."
The conversation centers on US regulations, emphasizing that while the framework discussed is US-centric, listeners from other jurisdictions should consult their local laws.

3. Classes of Regulation Affecting Bitcoin

a. Investor Protection

[07:21] Jerry Brito:
"Investor protection involves regulating activities like raising money or trading Bitcoin on secondary markets."
This category ensures that entities engaging in fundraising or providing trading platforms adhere to standards that protect investors from fraud and mismanagement.

b. Consumer Protection

[07:21] Niraj Mansinghani:
"Consumer protection applies to businesses that facilitate the movement of money using cryptocurrencies, similar to traditional money transmitters."
Companies like Coinbase holding user funds fall under this regulation, ensuring they operate transparently and securely.

c. Anti-Money Laundering (AML)

[07:21] Niraj Mansinghani:
"AML regulations target activities that involve moving funds, especially across borders, to prevent illicit transactions."
Entities engaged in transmitting Bitcoin must implement measures to detect and prevent money laundering and other financial crimes.

d. Taxation

[07:21] Jerry Brito:
"Tax regulations require tracking and reporting gains from Bitcoin transactions, adding complexity for users and businesses alike."
Bitcoin transactions can trigger capital gains taxes, necessitating meticulous record-keeping by users.

4. Key Regulatory Bodies in the US

[09:28] Jerry Brito:
"Key regulatory bodies include the Treasury Department (IRS and FinCEN), the SEC, and the CFTC, each overseeing different aspects of cryptocurrency regulation."

• Treasury Department: Manages tax policies and anti-money laundering efforts through the IRS and FinCEN.
• SEC (Securities and Exchange Commission): Regulates securities-related activities, including ICOs that may qualify as securities.
• CFTC (Commodity Futures Trading Commission): Oversees derivatives and commodities markets, potentially including Bitcoin trading.

5. Bitcoin vs. Altcoins in Regulatory Terms

[06:41] Niraj Mansinghani:
"While Coin Center primarily focuses on Bitcoin, the regulatory principles often apply similarly to other cryptocurrencies."
However, some altcoins may present unique regulatory challenges, especially those launched through Initial Coin Offerings (ICOs) that may fall under securities regulation.

6. Securities Regulation and the Howey Test

[33:25] Niraj Mansinghani:
"The Howey Test determines if an asset qualifies as a security based on investment of money in a common enterprise with an expectation of profits derived from others' efforts."

• Investment of Money: Present in Bitcoin purchases as users invest funds.
• Common Enterprise: Bitcoin lacks a centralized entity, failing this prong.
• Expectation of Profits: Present as users anticipate value appreciation.
• Efforts of Others: Bitcoin operates on a decentralized network, lacking reliance on a single promoter.

[41:22] Jerry Brito:
"Bitcoin fails two key prongs of the Howey Test—common enterprise and efforts of others—thus it is not classified as a security."
This distinction exempts Bitcoin from securities regulation, unlike many altcoins initiated through ICOs, which often meet all Howey criteria and are thus regulated as securities.

7. Compliance Examples and Implications

[42:39] Jerry Brito:
"Recent SEC actions, like those against Kik and Telegram, illustrate the enforcement of securities laws on ICOs that meet the Howey criteria."
These cases highlight the legal repercussions for projects that sell tokens considered securities without proper registration, emphasizing the importance of compliance.

8. KYC/AML Regulations

[48:04] Niraj Mansinghani:
"KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations require businesses handling Bitcoin to verify customer identities and monitor transactions for suspicious activities."

• Application: Applies primarily to businesses like exchanges and wallet providers.
• Exemptions: Individual users holding their own Bitcoin without engaging in business activities are generally exempt.

[54:48] Peter Van Valkenberg:
"Regulated entities must implement stringent KYC/AML protocols, including verifying customer identities and monitoring transaction patterns."
This ensures that cryptocurrencies are not used for illegal activities, aligning with global efforts to combat financial crimes.

9. Taxation Complexities

[58:51] Jerry Brito:
"Taxation is complicated due to Bitcoin's multifaceted nature as both a currency and an investment asset, leading to varied tax treatments across jurisdictions."

• Capital Gains Tax: Common in the US and UK, requiring users to report profits from Bitcoin transactions.
• Forks and Airdrops: Pose challenges in determining tax obligations, as acquiring new coins from forks can create additional taxable events.

[63:09] Peter Van Valkenburgh:
"Accurate record-keeping is essential for users to comply with tax laws, especially when dealing with complex scenarios like blockchain forks."
Coin Center advocates for clearer tax regulations to simplify compliance for Bitcoin users.

10. Coin Center’s Advocacy and Future Outlook

[64:46] Jerry Brito:
"Coin Center engages in both defensive strategies, addressing misconceptions and legislative proposals, and proactive efforts like advocating for tax exemptions on small transactions."
Currently, Coin Center is working with lawmakers to introduce bills that would exempt minor cryptocurrency transactions from capital gains tax, easing the burden on everyday users.

[66:59] Niraj Mansinghani:
"As a nonprofit, Coin Center relies on donations to continue its advocacy work, ensuring that decentralized networks remain free from overregulation."
Their efforts aim to preserve the openness and decentralization of Bitcoin, preventing restrictive laws that could hinder its growth and adoption.

Notable Quotes:

• Jerry Brito [07:21]:
  "Investor protection involves regulating activities like raising money or trading Bitcoin on secondary markets."

• Niraj Mansinghani [33:25]:
  "The Howey Test determines if an asset qualifies as a security based on investment of money in a common enterprise with an expectation of profits derived from others' efforts."

• Jerry Brito [41:22]:
  "Bitcoin fails two key prongs of the Howey Test—common enterprise and efforts of others—thus it is not classified as a security."

• Niraj Mansinghani [48:04]:
  "KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations require businesses handling Bitcoin to verify customer identities and monitor transactions for suspicious activities."

• Jerry Brito [54:48]:
  "Taxation is complicated due to Bitcoin's multifaceted nature as both a currency and an investment asset, leading to varied tax treatments across jurisdictions."

Conclusion:

This episode provides a comprehensive overview of the legal frameworks surrounding Bitcoin in the United States. Coin Center’s experts elucidate how Bitcoin navigates investor protection, consumer protection, AML, and taxation without being classified as a security. They also shed light on the complexities users and businesses face, particularly regarding taxation and regulatory compliance. Peter McCormack emphasizes the importance for listeners to understand their local regulations and highlights Coin Center’s role in advocating for favorable policies that support the decentralized nature of Bitcoin.

For those seeking to delve deeper into the legal aspects of Bitcoin, Coin Center offers a wealth of resources on their website, coincenter.org. Supporting such organizations is crucial in maintaining the balance between regulation and the freedom inherent in decentralized cryptocurrencies.