China has declared all financial transactions involving cryptocurrencies illegal and is issuing a nationwide ban on cryptocurrency mining. Does this make crypto illegal in China? Not exactly. China’s stablecoin, the digital yuan, aka e-CNY or DCEP (digital currency electronic payment) and sometimes referred to as a “digital RMB,” has the same value as all other forms of CNY and is legal tender. So China hasn’t really outlawed crypto; it has outlawed crypto it doesn’t control.
The crypto markets took a small hit when China made its latest proclamation but promptly bounced back. Most hodlers (slang for people who are long on crypto) I’ve spoken to shrugged it off. Some went as far as to say China getting out of the crypto biz was good for DeFi writ large.
If China forces e-CNY on its population, the Chinese government’s control over its people will be complete. Take a moment to imagine the kind of surveillance capabilities a government-controlled cryptocurrency would enable. Now imagine that same government outlawing paper money and requiring that all business be transacted with its stablecoin.
A quick note: The information contained herein is for informational purposes only. I am not a financial advisor and nothing herein should be construed to be financial, legal, or tax advice. Trading cryptocurrencies poses considerable risk of loss and you should seek the counsel of a licensed financial advisor before investing in any crypto or DeFi project.
Does the United States Have a Stablecoin?
Yes and no. There are stablecoins backed by the US dollar including Circle (USDC), Gemini Dollar (GUSD), Paxos (USDP), TrueUSD (TUSD), Tether (USDT), and Binance (BUSD). No. They are not backed by the US government. In July 2021, Treasury Secretary Janet Yellen told regulators that the US government must move quickly to establish a regulatory framework for stablecoins. Policy recommendations are expected by December 2021.
Will Crypto Be Regulated by the SEC?
The regulatory mandate of the United States Securities and Exchange Commission (SEC) is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The SEC oversees financial instruments that it deems “securities,” which include stocks, bonds, mutual funds, derivatives, hedge funds, and ETFs.
Unfortunately, the SEC is sending mixed messages about how it determines which cryptocurrencies may fall under its jurisdiction. Traditional assets have to meet the four major criteria of the Howey Test to be considered a security. The questions are pretty straightforward. Is there an investment of money? Is that investment in a common enterprise? Is there an expectation of profits? And is the expectation of profits created by a third party?
Clearly most cryptocurrencies meet the first three criteria. You will invest money in a named coin and you will expect to make a profit. But the vast majority of crypto and DeFi projects are decentralized, and there is no one third party creating the expectation of profit. So the vast majority of cryptocurrencies do not meet the Howey Test standard and therefore should not be regulated by the SEC. At the moment, both bitcoin (BTC) and ether (ETH) are not under the jurisdiction of the SEC.
Problematically, SEC chair Gary Gensler is on record with several different positions, so there’s no way to tell what he’s actually thinking or what he may plan to do. In his written Testimony Before the United States Senate Committee on Banking, Housing, and Urban Affairs Mr. Gensler identified some areas of concern, which include the following:
- The offer and sale of crypto tokens (ICOs)
- Crypto trading and lending platforms
- Stable-value coins
- Investment vehicles providing exposure to crypto assets or crypto derivatives
- Custody of crypto assets
When pressed by Senator Pat Toomey (R. Pa.) during the hearing, Mr. Gensler was unable to explain why stablecoins should be classified as securities despite not meeting all the criteria of the Howey Test.
What about Taxes?
The IRS is still trying to figure out how to tax crypto transactions. The tax code is inconsistent, and you should check with your accountant about your specific situation. Lawmakers in Washington are trying to close the “wash rule” tax loophole that allows crypto investors to take advantage of tax-loss harvesting to reduce capital gains tax. But since the loophole is still open, the volatility of the crypto market is a veritable playground for financial engineers and savvy investors. (Again, I am not offering any financial, legal or tax advice. Just information.)
What’s Next?
There is no question that regulators around the world are highly focused on crypto and DeFi. The decentralized nature of cryptocurrency and DeFi projects makes them hard to regulate. Mr. Gensler may have been speaking for every government when he testified that existing regulations don’t quite work for crypto because they were “written in a bricks and mortar time, and now we’re in a digital time.” If regulation has to wait for government legislators to catch up to technology, we’re going to have some time on our hands.
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Author’s note: This is not a sponsored post. I am the author of this article and it expresses my own opinions. I am not, nor is my company, receiving compensation for it. I am not a financial advisor. Nothing contained herein should be considered financial advice. If you are considering any type of investment you should conduct your own research and, if necessary, seek the advice of a licensed financial advisor.