Andrew Yang, one of the 2020 U.S. presidential candidates who is currently vying for the Democratic Party nomination, will create clearer guidelines for digital assets in order to encourage the 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 regards to when they should be considered a 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 from growing. It also notes the need for the 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 the 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 the 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 said funds to investors following regulatory inconveniences. With specific cases of this occurring in mind, it’s easy to see just how detrimental excessive regulation can be to industrial progress.
While the SEC has previously insisted of need to protect investors through stricter regulations and actions, there have been claims of unfair treatment and confusion, and which SEC and Commodities Futures Trading Commission have been meeting industry representatives to try to 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 though the subsequent guidelines so far issued by SEC. One area of disagreement is how regulators are making a 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 the 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 the 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, the chairman of the Commodities Futures Trading Commission, Christopher Giancarlo, in a Senate hearing, called for a "thoughtful and balanced response, and not a dismissive" set of regulations. Another regulatory commissioner, Brian Quintemz, has also proposed a "private crypto oversight body" or a 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 the rejection of Cameron and Tyler Winklevoss's exchange-traded fund (ETF), one of the SEC commissioners, Hester Peirce, disagreed with the decision saying that the judgment by SEC sent a “strong signal that innovation is unwelcome in our markets.” Due to complexities relating to crypto regulation in the U.S., many blockchain and crypto startups raising investment capital through ICOs now clearly exclude U.S. citizens from participating in their offerings. 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 of 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 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 were 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, which includes 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 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 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 these new 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 the IRS treats taxes cryptocurrencies and crypto tokens. For instance, 21 Congress members wrote to the Internal Revenue Service last April, asking for clarification regarding taxes 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 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 the entire asset class.
Currently, trading one crypto for another or purchasing items with cryptocurrencies triggers capital gains or losses that need to be reported. The Token Taxonomy Act proposed the exemption of crypto-to-crypto exchanges in current tax securities treatment as well as an 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 the lack thereof, 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 use their bank accounts to transact with crypto startups.
Blockchain vast potential
Yang is 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 stocks. The crypto regulations proposed will be a part of larger monetary transformations. Others related ideas of his include getting rid of the penny, which he sees as obsolete because it costs more to make than it is worthy, which means taxpayers 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 and introducing the 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. He also wants to restore net neutrality through better FCC oversight of internet service providers, engender a shift in the tech industry to new quantum resistant security algorithms, and modernize the U.S. electrical grid and encourage renewable energy through tariffs. Finally, Yang proposes paying for body cameras on all police officers, introducing a value-added tax system, investing further in carbon dioxide capture tech and geoengineering to combat climate change, investing further in technology that is meant to monitor border security, and curbing misinformation and foreign intervention in elections by banishing fraudulent social media accounts.
He previously contributed $120,000 to and founded Venture for America (VFA), an accelerator aimed at building new startups in emerging US cities, and last year, he began accepting donations in cryptocurrencies for his presidential bid.