Wyoming is Leading the Way in Crypto-Friendly Regulations

Yahoo! Finance’s Zack Guzman had an interesting discussion with Caitlin Long, the founder and chief executive officer of the Avanti Financial Group, on Wyoming’s crypto-friendly regulation of Bitcoin. The discussion was held on the sidelines of the Bitcoin 2021 Conference and is the subject of this article.

The discussion comes about at a time in which regulatory authorities are increasingly determined to increase regulation of cryptocurrencies. For instance, since 2014, the Internal Revenue Service (IRS) has taxed cryptocurrencies as assets, rather than an actual currency, like dollars or euros. Owners of Bitcoin and other cryptocurrencies typically hold them as investment property such as real estate or stock shares and the proceeds of the sale of cryptocurrencies are taxed as long-, or short-term capital gains, where any losses incurred can offset capital gains. Yet, many holders of cryptocurrencies do not pay capital gains tax, because the regulations surrounding cryptocurrencies are not widely known or understood. The IRS has used changes to the Form 1040 to make it harder to be ignorant about the tax implication of holding cryptocurrencies.

Another sign of the way that regulators across the world are grappling with cryptocurrencies, are the exploratory discussions being held by the Bank of England (BoE) over whether it should have its own digital currency. One of the motivations behind the BoE’s discussions is that it feels that people should have an option to seamlessly switch to or from a fiat currency.

Earlier this year, Bitcoin and other cryptocurrencies stumbled as China began to tighten the regulatory noose. The People’s Bank of China warned banks about accepting cryptocurrencies as payment or offering specialised services for trading, dealing in or holding cryptocurrencies. At a time of investor uncertainty, the crackdown only served to send cryptocurrencies into freefall.

Part of the appeal of Bitcoin is the promise of freedom from banks, and the financial system. However, as Long persuasively points out, cryptocurrencies cannot escape regulation. We are at a crossroads in which it is becoming clearer with each passing day that regulation is inescapable, and where the quality and nature of that regulation is still up in the air. Calls for regulation have risen and their arrival can only be imminent.

The Federal Reserve is rightly concerned with trying to regulate cryptocurrencies. Yet, the debate is whether new regulations require new rules. You see, if cryptocurrencies are fulfilling a novel function, then they need a new set of rules, however, if they are fulfilling a function for which there are already existing rules and regulations, then, the business of the Fed is to extend old regulations to cryptocurrencies. This question may seem trite but it is a profound question with huge consequences for the kind of regulations that cryptocurrencies will have to exist under. Answering this question determines whether cryptocurrencies need new rules, or simply to be regulated under existing regulations.

The Fed has only hinted that regulations of cryptocurrencies will increase and that it is exploring what path it will take. It’s not surprising then that there is a lot of unavoidable uncertainty over the form that regulation will take. Fed Chairman Jay Powell has begun to talk about cryptocurrency, yet, he has been accused of not paying as much attention to cryptocurrencies as the governor of the BoE, Andrew Bailey. What Powell has done is to telegraph that regulations are there to help industry and innovation, not to stifle it.

Wyoming has stepped into the breach and developed a set of enlightened, crypto-friendly regulations, that are a first for the United States and challenge the notion that regulations and the involvement of banks is necessarily a bad thing for Bitcoin and its kin.

Wyoming’s regulations are an attempt by the state to get ahead of the curve and establish rules for companies accepting crypto, including sneaker shops. The state read the tea leaves and realized that regulation is inevitable. They decided to be a thought leader in the discussion by developing a framework that may prove to be the basis of future reforms nationwide.

As discussed above, one of the key questions surrounding Bitcoin and other cryptocurrencies surrounds what it is and what function it performs in the market. Legally, there is no set definition, even though the IRS’s tax guidance treats it as an asset. Legally, it’s not clear if it is currency, property, commodity or something else. Without answering this question, it is impossible to have clear regulation of cryptocurrency.

Wyoming understood this and gave the first legal definition of cryptocurrency. This definition and the subsequent regulations, gives investors and businesses involved in cryptocurrency, analytical clarity and certainty. It provides courts with a legal framework to adjudicate disputes. It points to how cryptocurrencies may come to be regulated across the country. The surprise really is that no other state has tried this until Wyoming. It’s for this reason Wyoming is widely recognized as a leader in cryptocurrency, a leader that has attracted many businesses into domiciling there.

Wyoming is associated with some of the oldest industries in America, and yet, it has become a champion for cryptocurrencies and blockchain technology. The reforms enacted by the state have resulted in many big crypto companies, such as Cardano, the blockchain platform; Kraken, the crypto exchange; and Ripple Labs, the payment protocol and exchange network company, shifting domicile to Wyoming, leaving traditional innovation centers such as San Francisco.

Wyoming’s special purpose charter has enabled the state to bring cryptocurrencies within the banking system, realizing a goal that the Federal Reserve has for the sector. This has encouraged Wyoming’s special purpose banks to apply to the Fed to be recognized as part of the banking system.

Regulations help the consumer because without regulation, it’s unclear what protections consumers have when dealing with crypto lenders, for example. As cryptocurrency gets bigger, the idea that such a large chunk of the economy is unregulated poses a systemic problem that could someday affect ordinary Americans, even those Americans without any crypto assets. It’s this lack of regulation that results in a kind of wild, wild West in which so many scams and other dodgy activities are carried out.

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