2020 Crypto Macro Trends – Part 1: Evolving Regulatory Landscape

All eyes are on the prices of crypto assets. After the crypto markets rally in 2017, with Bitcoin going from a low of $777 to a high of $19497, the past two years have been marked with down- and sideways markets. But what’s happening in crypto besides wild price action? Read our outlook for the years ahead.

Macro Trend 1: Evolving Regulatory Landscape

Crypto assets started up as a hobbyist project have turned into a hundreds of billions valuation global behemoth. Native decentralized crypto assets like Bitcoin and Ether are non-localized, meaning they are not located in any jurisdiction and not under the control of any one entity. How do countries try to regulate this growing phenomenon?

Legal Status of Crypto Assets

What is a crypto asset? Maybe a type of foreign currency? Maybe a commodity? Maybe a security? Who gets to decide for each crypto assets, and which government agency is to set the rules?

What is Bitcoin legally speaking?
What is Bitcoin? Legally speaking, is it a commodity, a currency, or something else?

According to the classification of crypto assets, rules for taxation, transfer and custody are implied.

These questions of classification, taxation and regulation have been keeping law makers awake and crypto enthusiasts on their toes. We will take a look at how different regions have decided to tackle the problem and where they are going.

Crypto Assets in the USA

The government agencies in the US act largely independently of one another and each issue their own guidance and rules on dealing with crypto assets.

The US Treasury classifies Bitcoin as virtual currency, which their arm of FinCEN follows (“Convertible Virtual Currency”, CVC), requiring exchanges and other virtual currency business to register as Money Transmitters or Money Services Businesses. The IRS taxes CVC as property, meaning each exchange between virtual currency and Dollars must be documented and the gains/losses are taxed. On the other hand the CFTC classifies Bitcoin as a commodity in addition to a CVC. The SEC, however, has stated that Bitcoin is not a commodity. It’s also not a security, but other crypto assets may be securities, which the SEC decides on a case by case basis.

USA agencies classifying crypto assets
Transcript from linked video by Cointelegraph from 5:45 to 6:13: “The main four agencies regulating crypto assets cannot come to an agreement. While the SEC defines them as securities, the CFTC considers them commodities. The IRS sees them as property, and FinCEN implies they are money.” [paraphrased for brevity]

It’s a tricky situation for both businesses and individuals dealing with crypto assets. Especially since FinCEN MSB registration varies by state, handling US customers is burden for many crypto businesses.

For this year, Congress is working on the “Cryptocurrency Act of 2020” looking to define what crypto assets are and separate the duties of the agencies clearly. In its current form the bill recognizes three classes of crypto assets:

  • crypto-currencies
  • crypto-commodities
  • crypto-securities

There three classes match nicely with the three agencies, currency dealings are handled by FinCEN, commodities by the CFTC and securities by the SEC. The bill might create a clear regulatory framework for the years to come, creating the foundation for a flourishing crypto business eco-system.

Crypto Assets in the EU

The European Parliament has not passed specific legislation regarding crypto assets. The regulation is delegated to it’s member states. However, converting between traditional currencies like Euros and cryptocurrencies like Bitcoin is not subject to VAT in the EU.

Logo of EU Commission
While the regulatory framework is still unclear, the executive European Commission already offers grants and prizes to Blockchain projects.

Classification, taxation and regulation of crypto assets is down to the member states; however money transmitters like exchanges must adhere to the EU-wide anti-money-laundering directives (4MLD/5MLD), which again are enforced on a national level. 5MLD does define virtual currencies and custodian wallet providers to customer and proposes rules for them.

Crypto Assets in Germany

Germany’s central bank, the Bundesbank, classifies Bitcoin as neither virtual currency nor digital money, but as private money. Whereas the BaFin calls Bitcoin a unit of account.

As by EU guidance, converting between Euros and Bitcoin is not subject to VAT. Profits from trading crypto assets are taxed as income, according to the individuals income tax rate for the corresponding tax year. For crypto assets held longer than the speculatory time frame of one year, profits are exempt from tax. As such, crypto assets are subject to the same tax regime as foreign currencies.

With Germany’s implementation of 4MLD/5MLD, effective January 2020, businesses dealing with Bitcoin and other crypto assets must apply for a license by the German banking regulator BaFin. The term used in German laws is “Kryptowert” (“crypto valuable”) that is trying to encompass all crypto assets. In particular, the custody of crypto assets for consumers requires a license may be difficult to obtain for many crypto start-ups. Since many crypto business models rely on holding crypto assets for customers at least for some short amount of time, it seems that a most business are effected by this regulation. As such, a grace period for existing custody providers is currently active.

BaFin Logo
The German banking regulator BaFin issues guidance for crypto assets.

Germany is implementing guidelines quickly and offers regulatory certainty moving into 2020. The door is now open for traditional financial institutions to offer crypto related services. At the same time, start-ups are discouraged from continuing operations under heavy regulatory load. If start-ups might benefit from relocating to elsewhere in the EU, or if many EU countries will follow the general idea of the German implementation, is yet to be seen.

Summary

Governments across the world are dealing with the implications of new asset class of crypto assets. Most important are the classification of these assets, their tax treatment, and the rules to their custody and transfer.

Currently, the worldwide regulation, even within countries, is still a wild cluster of different views of government agencies. Moving forward into the 2020s sensible definitions will prevail, logical taxation will spread and protective but not overly restrictive rules for custody and transfer of crypto assets will develop.

We believe the both the US and Germany are heading the right direction of regulating crypto assets. But they need to be careful not to push start-ups and innovators into less regulated territories. After all, crypto assets are 100% digital and non-local. And they will stay this way.

Contact author: Paul@f5crypto.com

Disclaimer
The information contained in this article may be outdated, misrepresented or outright incorrect and does not constitute legal counsel of any kind. It is highly advised to seek legal counsel on all legal matters prior to taking any action.

Paul Otto is a managing director at F5 Crypto Capital GmbH. The views and opinions expressed by Paul are solely his own and do not necessarily reflect those of F5 Crypto Capital GmbH. This post is for informational purposes only and should not be relied upon for investment decisions.

The author may hold long or short positions in the assets discussed.



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Paul is Managing Partner and Co-Founder of F5 Crypto Capital. His analytical mind led him to be one of the most successful online poker players for years. Paul holds a university math degree and has expertise in financial and discrete mathematics.

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