Right now, U.S. regulators are raging a quiet war on cryptocurrencies.
Earlier this month, the Securities and Exchange Commission (SEC) released its long-awaited guidelines on digital assets.
Under the guidelines, nearly every cryptocurrency (also known as tokens) that’s ever been offered up for sale is a security. (The SEC does NOT consider bitcoin and Ethereum securities since they’re not operated by a single company or group.) That means those tokens should have registered with the SEC and filed the same sort of rigorous financial statements and disclosures that public companies are required to.
Up to now, token sales existed in a netherworld. Anyone could issue them, anytime. Without guidelines from the SEC, it wasn’t clear that token issuers were breaking any laws. Now, token issuers can’t hide behind unclear regulations. The SEC has made its viewpoint known.
But the SEC is wrong… tokens aren’t like traditional securities.
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Tokens aren’t a certificate entitling you to equity in a company. If they were merely digital representations of stocks, there’d be little need for cryptos at all.
Many are actually tools (hence the nickname, “utility tokens”) that unlock specific functions or services. For example, there are several crypto projects aiming to become the “Airbnb of file storage.” Users could lend out excess storage space on their computers in exchange for tokens. Others could spend those tokens to rent out that space.
But by declaring many tokens securities, the SEC could potentially take action against these projects. They could levy fines against token creators, attempt to shut projects down and even impose jail time on creators and promotors.
This was just the latest shot the U.S. government has fired against cryptos…
War by red tape
Forcing a crypto to register as a security creates layers of costly red tape. Suddenly, many small, community-drive crypto projects will be required to retain lawyers, compliance analysts, auditors and corporate accountants.
While larger crypto projects should have those elements in place, it will likely lead to the closure of smaller U.S.-based projects.
By forcing cumbersome regulations onto virtually every crypto that’s been conceived, the U.S. is stifling innovation.
Meanwhile, countries including the dual-island nation Saint Kitts and Nevis, Switzerland and Gibraltar either allow all forms of token sales (commonly called initial coin offerings or ICOs) or they’ve developed straightforward frameworks for them.
Take a look at the circled window in this photo. A medical experiment commissioned by Adolf Hitler was done here in 1944. Our own US Government has refused to acknowledge the important scientific results of this experiment.
War by taxes
Every trade or purchase that you make with crypto triggers a taxable event in the U.S. It doesn’t matter if you’re buying a US$2 cup of coffee or a US$200,000 Lamborghini… it needs to be reported.
Not only that, you have to show what you paid to acquire the bitcoin you’re spending (even if you acquired it a decade ago).
It’s an accounting nightmare that discourages individuals from buying crypto. And, if they do buy crypto, they’re hesitant to use it because they don’t want to complicate their taxes.
In contrast, many other countries, including Germany, Singapore, Belarus and Slovenia don’t require their citizens to track and file taxes on their crypto transactions (or they set thresholds where taxation begins).
In short, the U.S. is overregulating and overtaxing crypto, and it will fall behind in the global crypto race.
Crypto will force the government to change
Here’s the thing: U.S. regulations may slow the adoption of crypto in the country, but the technology will be so transformative that the government will eventually be forced to change its stance.
That’s because crypto will impact just about every industry in the world.
Crypto’s first killer use-case was giving people the ability to send money across international borders almost instantly at very little cost.
Cryptos are also enabling anonymous loans, automatically-executing insurance claims and self-running companies that share profits with participants.
Smart money sees the opportunity. It’s moving in… and even more will arrive once the operators of the New York Stock Exchange launch a bitcoin exchange called Bakkt early this year.
More companies are also getting involved in crypto… from Facebook, which will soon launch its own crypto, to credit card company Visa, which is launching a crypto-backed debit card.
And more people continue to buy crypto… an estimated 54 million people around the world bought crypto for the first time in 2018.
And while the U.S. is attempting to shoe-horn crypto into regulations that are more than 70 years old, other governments are opening themselves up to crypto companies. Japan, Switzerland, Singapore, Malta and others have all passed pro-crypto legislation. That’s helped them attract some of the world’s largest crypto companies and ICOs.
Zug, a small city outside Zurich in Switzerland, has even earned the nickname “Crypto Valley” because so many blockchain companies have set up there. Altogether, Switzerland’s home to more than 600 blockchain companies, and the top 50 of those companies have a combined market cap of more than US$44 billion.
A glimmer of hope
Some U.S. lawmakers understand how much is at stake. Last week, U.S. Representative Warren Davidson reintroduced the Token Taxonomy Act, which would exempt many cryptos from federal securities laws. It would also create a tax exemption for swapping one virtual currency for another, and it would exempt residents from filing capital gains taxes on cryptos as long as their gains fell below a US$600 threshold.
The bill’s not perfect (and it’s a long way from becoming law), but it would be a huge step in the right direction.
And even if the bill doesn’t go through, I believe the U.S. will be forced to address its outdated laws soon. The userbase and use cases for cryptos are only growing. Other governments are getting onboard. So it’s only a matter of time until the U.S. must change its stance. And when the U.S. does reverse course, cryptos will rocket higher.
Cryptocurrency Analyst, Stansberry Pacific Research