Introduction

BlackRock

• BlackRock is a leading advisory, investment, and risk management solutions provider. It is a publicly-traded company.
• It acts as a trustee for its clients, making investing easier and more accessible to all investors, from retail to institutional clients.

Revenue Streams

• Its primary revenue streams are outlined below.
• Distribution
• Advisory services
• Securities lending services
• Investment advisory services
• Administration services
• Technology services including Aladdin®, eFront, Aladdin Wealth, and Cachematrix
• Mutual funds, trust funds, BlackRock exchange-traded funds ("ETFs"), and iShares®
• The company also runs BlackRock Investment Institute. Using the company's expertise and network, the institute provides proprietary research on markets, assets, and the global economy.

Target Customers

• Its institutional clients include public pension, corporate pension, insurance, multi-employer and Taft-hartley institutions, family offices, consultants, foundations, endowments, healthcare, and defined contributions.
• It also serves private clients with hedge funds, private credit, real assets, private equity, and investments.

Crypto Initiatives/Solutions

• It started iShares Blockchain and Tech ETF (IBLC) in April 2022. More details on iShares are available here. It tracks transactions between US and non-US companies.
• BlackRock also plans to launch iShares Future Metaverse Tech and Communications, an ETF serving metaverse companies.

• It recently started a bitcoin private trust for institutional clients in the US.

Crypto Partnerships, Acquisitions, and Investments

• BlackRock registered two funds to invest in Bitcoin in January 2021.
• BlackRock revealed that it invested $24 million in FTX shortly before the crypto exchange's recent collapse. The investment was made through billionaire funds managed by BlackRock.
• BlackRock was a backer at Circle's $400 million funding round in 2021. BlackRock also became a strategic partner with Circle, managing a fund for Circle's reserves.
• In 2021, BlackRock joined Axoni for equity swap trading on its blockchain platform. Axoni's equity-swapping platform, Veris, allows users to swap, match, and confirm trade terms.
• It partnered with Coinbase in August 2022. The partnership connected Coinbase Prime and BlackRock Aladdin to allow institutional clients using Aladdin to access crypto custody, trading, brokerage, and reporting.

Digital Asset Strategy

• BlackRock has had a long history of poor perception of crypto and blockchain technologies until some executives started bending in favor of crypto. The executives think blockchain assets are durable and could be an inflation hedge.
• Rick Rieder, the CIO, said, "I still think bitcoin and crypto are durable assets. It's a durable business, but there was so much excess built around it."
• It still focuses on investigating crypto and blockchain technologies.
• Its clients are increasingly interested in crypto and decentralized investments, and digital currencies.
• Joseph Chalom, head of global strategic ecosystem partnerships, said that BlackRock's "institutional clients are increasingly interested in gaining exposure to digital asset markets and are focused on how to efficiently manage the operational lifecycle of these assets."

BNY Mellon

• The Bank of New York Mellon is a leading financial company, the first company listed on the New York Stock Exchange (NYSE: BK) over 235 years ago. It provides investment and wealth management solutions in over 35 countries.

Revenue Streams

• It has three primary revenue streams, Securities, Investment and Wealth Management, and Market and Wealth Services.
• Other revenue streams are listed below.
• Issuer services
• Asset services
• Pershing
• Treasury services
• Clearance and collateral management
 
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Target Customers

• It serves corporations, institutions, and individual investors.
• Its institutional clients include alternative asset managers, brokers, dealers, asset managers, banks, corporations, governments, family offices, insurance companies, registered investment advisors, sovereigns, and non-profits.

Crypto Initiatives and Offerings

• Its crypto initiatives began in February 2021 when the company announced its intention to issue, hold, and trade Bitcoin for clients as an asset manager.
• BNY Mellon runs a Digital Asset Strategy fund and a Digital Assets custody platform for select institutional clients in the US. The custody platform supports bitcoin and ether.

• In March 2022, BNY Mellon became the custodian of USDC (the USD coin) by Circle.

Crypto Partnerships, Acquisitions, and Investments

• BNY Mellon has invested in several crypto and blockchain companies. Its investments amounted to $321 million in 2021. These companies include Fireblocks and HQLAx.
• In July 2022, BNY Mellon and Goldman Sachs performed the first securities lending transactions on the HQLAx DLT platform. HQLAx generated ISIN-level securities trackers known as Digital Collateral Records (DCRs) from securities loaned by BNY Mellon and issued a digital copy to Goldman Sachs.
• BNY Mellon joined a $133 million funding round for Fireblocks in 2021. Investing in Fireblocks, BNY Mellon believed digital currencies were new units to help clients transact digital assets.
• BNY Mellon collaborated with Grayscale in July 2021. The collaboration provided Grayscale Bitcoin Trust with fund administration and a transfer agency upon its conversion to an ETF.
• It partnered with Chainalysis to track its users' crypto investments. Chainalysis provides cryptocurrency product tracking and analytics, including Kryptos, KYT (Know Your Transaction), and Reactor.

Digital Asset Strategy

• Its digital asset strategy focuses on establishing trust. BNY Mellon aims to maintain its fame as a trusted asset service provider in crypto and blockchain. It expands its capabilities to meet clients' digital asset needs in a secure, safe, and regulatory-compliant manner.
• Roman Regelman, CEO of Asset Servicing and Digital, said, "With our long legacy of trust and innovation, BNY Mellon is helping future-proof the financial industry by helping bring blockchain and digital assets into the mainstream."

Citi Private Bank

• Citi Private Bank offers customized banking for wealthy individuals and families. Its private banking services connect its clients to global opportunities and a unique network of wealthy peers.
• It has won several awards as one of the best private banks for high net-worth individuals (HNWI) and has some of the world's wealthiest people (such as the Tan and Naughton family) as clients.

Revenue Streams

• Its primary revenue streams are investment, legacy, wealth management, and lifestyle financing services.
• It generates revenue by providing clients with banking, investments, lending, real estate, custody, and wealth planning services.

Target Customers

• Its individual customers are wealthy individuals such as entrepreneurs, executives, heirs, and celebrities.
• Its institutional clients are private equity principals, hedge fund principals, portfolio managers, family offices, lawyers, law firms, accountants, asset managers, and consultants.

Crypto Initiatives/Solutions

• The private bank recently started a digital assets team called the Digital Assets Group to provide crypto solutions for its wealthy clients.
• These digital asset services covering stablecoins, NFTs, central bank digital currencies, and cryptocurrencies currently focus on wealthy individuals. Citi announced its intention to offer bitcoin futures trading for institutional clients, awaiting regulatory approval. It cleared its first bitcoin futures trade in December 2021 through CME Group.
• It won the Private Asset Managers Awards 2021 for its commitment to assisting clients with a holistic asset management strategy and covering alternative investments such as crypto and art.
• CitiConnect® has an API equipped with distributed ledger features to conduct and record transactions.

Crypto Partnerships, Acquisitions, and Investments

• Citigroup has invested in several crypto and blockchain companies, including HQLAx. Citigroup backed HQLAx in a €14.4 million ($17.5 million) funding round in 2021. Most of the other investments were made more than 24 months ago.
• Citi is participating in the proof of concept project run by the US banking community to explore an interoperable digital money platform called the regulated liability Network (RLN) built with distributed ledger technology.
• Citi Securities Services and SETL worked together to bring PORTL, SETL's distributed ledger technology (DLT) into Citi's securities business. The business will benefit from the interoperability and scalability of DLT.
• Citigroup UK partnered with Metaco to pilot digital asset custody services. Citi announced that it would integrate Metaco's digital asset custody tool, Harmonize, into its infrastructure to pilot digital asset custody capabilities.

Digital Asset Strategy

• Its digital assets strategy is to build its digital assets team that provides its clients access to crypto investment opportunities and relevant advice.
• Iain Armitage, Citi Private Bank's head of capital markets, said that Alex Kriete (an investment counselor at Citi Private Bank) and Greg Girasole will "lead the new unit and will be responsible for developing our future product capabilities, client delivery mechanisms, and thought leadership around all digital assets."

Research Strategy

Introduction

Fidelity Investments

• Fidelity Investments is among the major mutual fund firms in the United States. The Boston-based company provides financial products and services to over 40 million individuals.
• The company operates in the US, other North American countries, Europe, Asia, and Australia.
• Fidelity Investments generates its revenue from interests on cash, stock loan programs, order flow payments, price improvements, and portfolio margining.
• The company primarily targets long-term investors seeking comprehensive financial planning for conservative investments such as mutual funds and other income-generating investments.

Digital Asset-Related Offerings

• Fidelity Investments established Fidelity Digital Assets, a dedicated business unit that caters to digital assets. This unit primarily offers digital asset management and custody and trading services.
• The firm emphasizes that it provides digital asset management with a traditional structure, hence increasing security and confidence.

Digital-Asset Related Investments & Partnerships

• Fidelity Investments' digital asset-related investments include its Ethereum Index Fund to provide clients access to Ether. The Fund's minimum investment is $50,000, and so far, it has raised a total of $5 million.
• The company also recently launched the Fidelity Crypto platform, giving customers access to and commission-free trading of Ethereum and Bitcoin cryptocurrencies. Fidelity Investments currently offers this service in 35 states in the US.
• Fidelity Digital Assets recently partnered with Nexo to drive institutional digital asset access by offering lending and custodial services.
• In September 2022, the company also partnered with Citadel Securities to launch a crypto exchange.

Digital Asset Strategy

• Fidelity Investment's digital asset strategy is to leverage blockchain research and development to drive the institutional adoption of digital assets. However, the company aims to become a holistic solutions provider.

• The Fidelity Digital Assets president Tom Jessop recently explained the company's consideration of bitcoin as portfolio insurance.

• He further described the company's position regarding digital assets, saying, "while the markets have faced headwinds in recent months, we believe that digital assets fundamentals remain strong and that the institutionalization of the market over the past several years has positioned it to weather recent events."

Fisher Investments

• Fisher Investments is an independent investment advisory and management firm that manages $197 billion worth of assets on behalf of individuals, families, and global institutions. 
• The Washington-based company serves high net-worth individuals (HNWIs) and institutional clients across the US, Europe, Dubai, Japan, and Australia.
• The company operates four primary business units: "Fisher Investments Institutional Group, Fisher Investments Private Client Group, Fisher Investments 401(k) Solutions Group, and Fisher Investments Private Client Group International."
• Fisher Investments targets HNWIs and institutional investment clients, as opening an account with the company requires a minimum investment of $500,000. Its WealthBuilder account targets investors having up to $200,000 in investable assets.

Digital-Asset Related Offerings, Investments, and Partnerships

• Fisher Investments has not launched any digital asset initiatives or solutions or made any related recent investments, acquisitions, or partnerships.
• The company indicated that it does not disregard any investment option completely, although there needs to be more market history for cryptocurrency.
• Subsequently, Fisher Investments believes that "stocks and bonds are more efficient tools for helping clients reach their longer-term goals."

Digital Asset Strategy

• Fisher Investments follows an overall asset investment strategy that enables clients to meet their long-term goals.
• However, the company does not view digital assets such as cryptocurrency as an efficient tool to accomplish that.
• Fisher Investments said regarding digital assets, "we think cryptocurrencies are a faddish, crowded bandwagon, but if you disagree and want exposure, there are a number of bitcoin-related startups that Fisher Investments’ research has found trade mostly in line with cryptocurrency prices."

Grayscale Investments

• Grayscale Investments is a trusted digital asset investing authority that provides services for digital currency investments.
• The Connecticut-based company provides market intelligence, investment exposure, and products for the emerging asset class of digital currency.
• Grayscale Investments derives its revenue from its investment products: Infrastructure, ETF, and Digital Currency Products such as the Grayscale Bitcoin Trust.
• The company primarily targets institutional investors, advisors, and allocators.

Digital Asset-Related Offerings

• Grayscale Investments has launched several digital asset trusts and funds, including Grayscale Bitcoin Trust, Grayscale Ethereum Classic Trust, Grayscale Ethereum Trust, Grayscale Zcash Trust, Grayscale Bitcoin Cash Trust, Grayscale Digital Large Cap Fund, and Grayscale DeFi Fund.

 

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• The company offers the largest bitcoin fund globally.

Digital-Asset Related Investments & Partnerships

• Grayscale Investments invested roughly $1 billion in 2021 to acquire digital assets such as Livepeer (LPT) and Horizen (ZEN).
• The company also invested around $5 million to obtain Ethereum within 24 hours in 2021. The investment increased Grayscale Investment's Ethereum ownership to 3.17 million ETH.
• Grayscale Investments recently partnered with Foundry to launch Grayscale Digital Infrastructure Opportunities LLC (GDIO). The partnership represents Grayscale's commitment to reducing the crypto investment barrier.

 

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• The company also partnered with Virtu Financial and Jane Street in 2022 to serve as authorized participants for its spot bitcoin ETF pending approval from the SEC. This partnership follows Grayscale Investments' intention to convert its Bitcoin Trust offering to an ETF.
• Grayscale Investments partnered with iCapital Network in 2021 to provide investment advisors access to digital currency investing. The partnership will provide iCapital Network's 6,700 network advisors access to Grayscale's digital asset investment strategies.

Digital Asset Strategy

• Grayscale Investments' digital asset strategy is to leverage an ever-expanding suite of digital assets to enable investors to access the latest innovations. "Grayscale offers digital currency investment products designed to provide investors exposure to digital assets securely and conveniently," according to its investor deck.
• The company believes in the growth of the digital economy and, thanks to its digital asset focus, aims to shape the future of investing. It is worth noting that the company's CEO, Barry Silbert, is a believer in cryptocurrencies and remains optimistic despite the likely most severe to date crypto winter. According to him, the industry "has weathered off previous crypto winters, and while this one may feel more severe, collectively, we will come out of it stronger."
• It leverages a hypothetical diversified portfolio that includes stocks, bonds, and crypto, instead of the traditional 60/40 portfolio, which excludes cryptocurrency.

 

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Research Strategy

Introduction

JP Morgan

• JP Morgan is one of the world's leading wholesale an investment banks. It offers financial services to clients in more than 100 countries. 
• JP Morgan's target customers include institutions, governments, and corporations predominantly in the United States.

• In 2021, the corporate and investment banking segment was the largest revenue source for JP Morgan. The revenue from the segment was $52 billion. 
• The institution's other revenue sources include consumer and community banking ($50.1 billion in revenue in 2021), commercial banking ($10 billion in revenue in 2021), and asset and wealth management ($17 billion in revenue in 2021)

Offerings and Initiatives

• In October 2020, JP Morgan launched Onyx, a blockchain-based system offering payment data sharing and a blockchain network, among other services.
• In March 2021, JP Morgan launched the Cryptocurrency Exposure Basket. It is a "debt instrument that gave exposure to cryptocurrency through 11 Bitcoin proxy stocks."
• In January 2022, Onyx and the Central Bank of Bahrain concluded testing JPM Coin. "Real-time payment services for Aluminum Bahrain" were launched in the United States.
• In February 2022, the bank launched Onyx lounge in a blockchain-based virtual browser called Decentraland.
• In May 2022, JP Morgan "tested using the blockchain for collateral settlements."

Investments and Acquisitions

• In February 2022, JP Morgan participated in TRM's $32 million Series B round. TRM leverages blockchain and advanced analytics in fighting financial fraud.
• In November 2021, it invested in Blockdaemon. Blockdaemon "offers node operations and infrastructure tooling for blockchain projects."

Partnerships

• JP Morgan partnered with NYDIG in August 2021 to offer its clients access to Bitcoin. NYDIG is a cryptocurrency asset manager.
• In October 2022, JP Morgan and Visa partnered to "streamline cross-border payments using their private blockchain networks, Liink and B2B Connect."

Digital Asset Strategy

• JP Morgan is committed to working toward long-term objectives in the blockchain sector. Blockchain technology developed by JP Morgan may eventually link institutional investors with DeFi platforms.
• According to the head of Onyx Digital Assets at JP Morgan, Tyrone Lobban, they think "tokenizing U.S. Treasuries or money market fund shares, for example, means these could all potentially be used as collateral in DeFi pools."
• Their objective is to link assets to DeFi, so that they can "use these new mechanisms for trading, borrowing [and] lending, but with the scale of institutional assets.”

Vanguard

• Vanguard is an investor-owned investment management company. It offers investment advice, various investment options, and insights.
• Its target customers include institutions, individual investors, and financial professionals.

• Vanguard's revenue is primarily from expense ratios of mutual funds and EFTs. These are fees that investors are charged for investing.

Offerings and Initiatives

• In 2019, Vanguard pioneered using blockchain for a core service. While many other financial institutions tested it in small projects, Vanguard applied it "to ingest data for $1.3 trillion worth of funds, or one-quarter of its total $5.2 trillion in assets under management."
• After completing "a successful pilot of using smart contracts to margin a live trade" in December 2021, throughout 2022, Vanguard intends to implement distributed ledger technology across its funds that leverage foreign exchange forwards.

Investments and Partnerships

• Vanguard has not made any investments or acquisitions related to blockchain, distributed ledger technology, or cryptocurrency in the last 24 months.

• In 2021, Vanguard partnered with State Street and Symbiont for a trial for margin calculation of a 30-day forward trade on Symbiont's distributed ledger technology platform called Assembly.
• In September 2022, Vanguard announced participation in a trial program that leverages Symbiont's blockchain to exchange information on corporate actions like dividends and rights issues. Other participating companies include Citi, SWIFT, American Century Investments, and Northern Trust.

Digital Asset Strategy

• Vanguard views cryptocurrencies as highly speculative, with high price volatility and high commission. According to the company, these issues make cryptocurrencies "a problematic investment for long-term portfolios."
• However, Greg Davis, the firm's CIO, notes that the technology behind cryptocurrencies has value and merit. The company uses this technology in its index data for efficiency and to reduce risks.
• According to the CIO, "the challenge we have with cryptocurrency is that it doesn't really have an intrinsic value. It's more of a speculative asset class."

Vast Bank

• Vast Bank is a "locally-owned financial institution based in Tulsa, Oklahoma." It provides its customers with the option to purchase, sell, and store cryptocurrency.
• Its target customers include individuals and small businesses. Its cryptocurrency services are aimed at individuals who are just starting to invest in cryptocurrency.

Revenue Streams

• Vast Bank generates its revenue from loans offered to its clients (e.g., business loans.)
• Additionally, it generates revenue from the 1% transaction fees that the bank charges its cryptocurrency customers.

Initiatives and Offerings

• In February 2021, Vast Bank announced that it was the first nationally chartered bank to offer customers the ability to purchase and hold digital assets from their bank accounts.
• In August 2021, Vast Bank launched its crypto banking service in the United States. The service is available through an app that simplifies the process of buying and selling cryptocurrencies.

 

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• While crypto banking services are the primary way in which the company engages with the space, its partnerships with Coinbase Institutional and Coinbase Custody are supposed to provide a range of supplementary services for investing in digital assets, including "market access to seven exchanges, algorithmic order execution, deep liquidity, and crypto wallet management."

Investments and Partnerships

• Vast Bank has not made any investments or acquisitions related to blockchain, distributed ledger technology, or cryptocurrency in the last 24 months (apart from likely investing in the infrastructure to launch crypto banking, but it was already mentioned above and no specific details are provided).

• In April 2021, Vast Bank partnered with Investr, a social investment app to enable customers to trade and invest in equities, cryptocurrencies, and ETFs.
• As noted above, Vast Bank has also partnered with Coinbase to offer its customers access to various exchanges, including Bitcoin, Ethereum, and Litecoin.

Digital Asset Strategy

• According to Vast Bank's CEO Brad Scrivner, the bank is offering crypto banking services to customers to fill a gap in the industry.
• Vast Bank's board met and decided to "put the customer first and be able to offer things that customers around the country were asking for, which was a national bank that is safe and sound and that they can trust to be able to participate in this digital asset cryptocurrency world."
• Vast Bank is convinced that interest in crypto will grow in the future and the bank is "setting it up as a feature, a facet of banking, for the future.”

Research Strategy

Introduction

Recent Regulatory Movements

• Before November 2021, cryptocurrencies were never explicitly mentioned by name in any legislation in the United States. However, when the Infrastructure Investment Act and Jobs Act was passed in November 2021, it contained sections with provisions applying to cryptocurrencies.

1. The Infrastructure Investment and Jobs Act

• The new law signed by President Biden created a new reporting framework for cryptocurrency transactions. Before the Act was signed into law, Section 6045 of the IRS Code required brokers of "covered securities transactions" to issue Form 1099-B to customers and the IRS to identify the transactions through the broker, the customer's adjusted basis, and the transaction proceeds.
• The Act broadened the definition of a broker to include "any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person." It also included digital assets in the definition of covered securities and defined digital assets as "any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary."

• Before the act, banks and businesses were obligated to report cash transactions over $10,000 to the IRS. The act expanded this reporting requirement to include transactions over $10,000 involving digital assets. These reporting requirements will apply to tax returns and statements after December 1, 2023.  

2. Presidential Executive Order

• On March 9, 2022, President Joe Biden issued an executive order to ensure the responsible development of digital assets. In the order, the president outlined the key objectives his administration has concerning digital assets, including protecting consumers, investors, and businesses; protecting the financial stability of the country and other global economies; curbing the misuse of digital assets; reinforcing the position of the US as a global financial leader; promoting access to affordable and safe financial services, and "supporting technological advances that promote responsible development and use of digital assets."
• The executive order mandated "the Assistant to the President for National Security Affairs (APNSA) and the Assistant to the President for Economic Policy (APEP)" to initiate an interagency process to implement the actions in the executive order. Some of these actions include the possibility of creating "United States Central Bank Digital Currencies (CBDC)" if this is considered to be in the national interest. 
• The March 2022 executive order required the Secretary of the Treasury, in consultation with other secretaries and agency heads, to submit a report to the president within 180 days. This report was to be conceived using the interagency process and would provide insights into the future of payment systems and money and the impact digital assets will have on the US financial system and national security.
• The report would also include the implications the creation of a United States CBDC would have on economic growth and stability, financial inclusion, private digital assets, financial system and democracy, financial centrality, national security, and its competitiveness with foreign CBDCs. The EO also required different secretaries and agency heads to submit different reports to inform the decision to create a US CBDC should one be proposed and the implications of digital assets and CBDCs on specific financial and national security issues.

3. Biden White House Digital Assets Comprehensive Framework

• On September 16, 2022, the White House published a comprehensive framework on the US strategy to develop digital assets responsibly. The framework was a response to the presidential executive order, and it contained new reports with recommendations on how to protect investors, businesses, consumers, the environment, national security, and financial stability.
• In line with the EO, nine reports were submitted to the president with the involvement of experts and stakeholders from government, academia, civil society, and industry, and they discuss a framework the country can use to develop digital assets responsibly and form a foundation for any action on this front.
• The reports recommend that government agencies should start private sector R&D to help US companies gain a competitive advantage in foreign markets. The reports also propose measures to reduce downside risks, such as ensuring existing laws are enforced and developing standards for crypto mining.
• According to the White House, the reports submitted to the president recognize the benefits and risks a US CBDC may have, and they encourage more CBDC research, evaluation, and experimentation by the Federal Reserve and advise the formation of an interagency working group led by the Treasury to support the Federal Reserve.

Current Regulatory Landscape

• Before the Infrastructure Investment and Jobs Act, there was no federal law that specifically regulated cryptocurrencies or any digital assets. Relevant regulations were few and far between and were only limited to pronouncements and statements from the Securities and Exchange Commission, the Internal Revenue Service, and the Office of the Comptroller of the Currency regarding aspects of cryptocurrencies falling under the jurisdiction of each agency.

 

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• The absence of cryptocurrency regulations in the US has not been for a lack of trying by Congress. Members of the US Congress have tried to introduce laws to govern cryptocurrencies by having hearings, holding consultations, requesting comments, and drafting dozens of bills with little success.
• While there were no federal laws that mentioned digital assets specifically, regulatory agencies in the US have argued that cryptocurrencies can be regulated like other assets without Congress having to pass a law. Below are some of these laws

FinCEN's Identity Verification Laws

• Before March 2013, users that signed up for cryptocurrency exchanges did not need to verify their identity. However, the Financial Crimes Enforcement Network (FinCEN) within the Department of Treasury argued that crypto exchanges can be considered Money Services Businesses (MSBs) and are required to have documentation of their customers' identities.
• According to an interpretive guide issued by FinCEN, administrators or exchangers accepting and transmitting convertible virtual currencies are involved in the money service business as money transmitters under FinCEN regulations, and all regulations for typical MSBs apply to them, including identity verification before accepting users.
• Since March 2013, crypto exchanges in the US have been verifying users' identities before allowing them on the platform. According to Security.org, because of FinCEN's identity verification laws for crypto exchanges, new users have to give their name, address, phone number, ID photos, and a selfie before they can be allowed on any platform.

SEC's Crypto As Securities Regulation

• The US Securities and Exchange Commission regulates stocks and securities in the US. According to the SEC, some cryptocurrencies can be considered securities and therefore fall under the commission's regulation.
• However, decentralized cryptos obtained through mining are not securities. On the other hand, if cryptocurrencies are investments by companies to raise funds and if the companies create products to give the cryptocurrencies value, the SEC considers such cryptocurrencies to be securities. In this case, the developers have to register with the SEC and file paperwork to explain how the company plans to give value to the token.
• If crypto developers do not register with the SEC, they have two options: file for a small business exception or move overseas and block US residents from the exchange. When they claim a small business exemption, only accredited investors can use the cryptocurrency.
• Security tokens exempted from filing by the SEC can not be exchanged in US exchanges because most exchanges won't go through the process of verifying whether the investors are accredited. Therefore, only some cryptocurrencies are available on US exchanges as a result of these SEC regulations.
• To determine whether a cryptocurrency is a security, the SEC uses the Howey Test. According to the test, cryptocurrencies can be considered securities if money is invested in a common enterprise and a profit is expected from the efforts of others.

Tax Implications/Regulations

• According to the new Infrastructure Investment and Jobs Act, the IRS requires exchanges to report the profits and losses made from trades on their exchanges. However, even before the new law came into effect, the IRS considered cryptocurrency transactions to be taxable. According to an IRS bulletin, "the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability."
• When people offer goods or services and get paid in cryptocurrency, the crypto must have the same value in fiat money (US dollar) as the goods or services exchanged. If the goods sold are more than the crypto received, the difference can be considered a gift, increasing the buyer's tax liability. If the goods or services sold are worth less than the crypto received, the difference can increase the seller's tax liability.
• When it comes to airdrops, i.e., the free cryptos/tokens developers send to users' wallets to market their tokens, the IRS considers them ordinary income, and they are taxed according to the market price of the tokens when users receive them.
• Finally, when crypto is bought and later sold for a profit, it is subject to capital gains tax. Similarly, if it is sold for a loss, the difference in price is treated as a capital loss. 

Crypto Bills Introduced to Congress

• According to Global Legal Insights, several bills seeking to regulate cryptocurrencies have been introduced in the US Congress, and some of them include:
• The Responsible Financial Innovation Act wants to provide more regulatory clarity for agencies that supervise digital assets markets, provide regulations specific to stablecoins, and make the existing banking and tax laws apply to digital assets.
• The Toomey Stablecoin Bill was introduced by Senator Patrick Toomey to regulate stablecoins and their issues by proposing three options for issuing stablecoins.
• The Virtual Currency Tax Fairness Act was proposed to make cryptocurrency transactions worth below $50 tax-exempt.
• According to Bloomberg Law, there were more than 20 bills introduced in Congress that address cryptocurrencies and digital assets.

 

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State Regulations

• In the US, while many states regulate cryptos using existing money transmitter laws, state governments have enacted laws to regulate cryptocurrencies and digital currencies, and others have proposed regulations yet to pass.
• For example, Alabama is the first US state to treat bitcoin as a currency. It also permits mining and exchanges.
• Also, several states allow exchanges with a license or a permit, including Florida, Idaho, California, and North Carolina, among others.

 

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Future Regulations

• According to regulation experts, policymakers in the US are discussing some regulations that may be implemented in the future. These include regulations to seal the "wash sale" loophole and crypto banking and exchanges regulations. 

1. Sealing the "Wash Sale" Loophole

• The wash sale rule means that if stocks, mutual funds, or other securities are sold at a loss and immediately bought back at a lower price, the loss cannot be claimed for tax purposes. However, the IRS sees crypto as property and not an investment, and the wash sale rule does not apply.
• Therefore, if a crypto's value plummets and the holder sells it at a loss, they can claim the loss for tax purposes even when they immediately bought it back at a lower price. Experts believe this loophole will be the subject of future regulations since the Build Back Better Act tried to make the wash sale rule apply to cryptocurrencies but did not get approval from the US Senate.

2. Crypto Banking and Exchanges Regulations

• Another area for potential regulatory action is in regulating crypto banking and crypto exchanges. Relevant agencies in the US conducted an interagency policy sprint with a focus on cryptocurrencies and digital assets and provided a roadmap for future research and potential regulations.
• The policy sprint highlighted crypto activities banks might be interested in, including banks as custodians of crypto-assets, banks as sellers of crypto-assets, banks as issuers of stablecoins, using crypto as collateral for bank loans, and how banks can hold crypto on their balance sheet.
• According to Security, the policy sprint implies that the US government wants to create legislation for banks to sell cryptocurrencies and also introduce banking regulations to existing crypto exchanges. These regulations may increase the availability of cryptocurrencies leading to a boom in prices. However, if the regulations make the largest banks the largest exchanges, innovation will be stifled, and crypto prices will plummet.

Research Strategy