Navigating Regulatory Uncertainty in the Cryptocurrency Space
Insights from a recent panel with industry experts at Blockworks’ Digital Asset Summit
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Recently, TaxBit’s Head of Tax Solutions, Erin Fennimore, spoke on a panel on the topic of how digital asset enterprises are navigating regulatory gray areas – alongside Blockchain Association’s Ron Hammond, BitGo’s Michelle L. Neufeld, Mike Castiglione of Eventus, and EY’s Steve Beattie. This article transcribes and expands the experts’ discussion.
To set the stage, Ron Hammond of the Blockchain Association noted the complexity of how key regulators approaching the crypto space and the concern of “regulation by enforcement.” For further context on the panel’s discussion, SEC Commissioner Mark Uyeda recently explained via Barron’s that:
“Market participants have expressed significant concerns regarding the lack of regulatory guidance in this space,’ Uyeda said. ‘There’s widespread concern that the lack of predictability with regard to our regulations may encourage crypto firms to relocate to other jurisdictions.’ A move overseas could kneecap a growing U.S. industry and send substantial asset volumes—and potential tax revenue—abroad.”
On the topic of regulation by enforcement (and in the absence of official guidance), Michelle L. Neufeld of BitGo explained how her firm operates:
“So this concept of regulation by enforcement is not new. I think with the news cycle being what it is every day, we are learning through enforcement actions… We sort of dissect them to create an outline and we compare them element by element to what we do and whether or not those actions are things that we are doing are risks that we're exposed to…
Because I think a lot of dealing with regulators is being able to tell a story about how you decided what your risk appetite was, how you ingested and managed and mitigated risk and why you are where you are.”
In response to Michelle’s points, Mike Castiglione of Eventus elaborated:
“There’s uncertainty in how the rules are still being written of course, domestically, but also this is happening globally. You know, I used to work for the CIA and we talked a lot about making decisions through the fog. Crypto is an emerging policy topic. It's an emerging technology. So it's unlikely that we're going to have perfect certainty even if we do get baseline legislation…"
Building off of Michelle and Mike’s points, TaxBit’s Erin Fennimore offered her perspective:
“What’s unique to the crypto industry is the pace at which the industry is innovating, balanced against the pace of which regulations are actually codified, finalized, and whether or not those are clear to the specific industry.
And that is a really tough balance because companies have a decision to make. If they want to get into this market and they want to put a crypto product out there, there are decisions that they're gonna have to make with respect to regulation – licenses, taxes, reporting that are frankly very gray, right now.
And it's a decision of, do I enter a gray market or do I not? And I think that's really, really tough. Because from a compliance perspective, there are a lot of funds that go into compliance. You have to decide if you're gonna put people or money toward a product, and that's a tough operational decision.
I would say that I think TradFi gives us a lot of historical examples and also sets the stage for why crypto cannot be analogized to the TradFi environment. So TradFi, what does it teach us? It teaches us that regulations are actually helpful and they can allow the industry to innovate. It gives safeguards around consumer protection.
It also gives clarity for taxpayers to know that if they're going to go and make certain investments, then they’re going to receive those tax information returns – and information return as an overall concept is constantly evolving.
But TradFi also shows us that taking those existing rules that are in place for TradFi may not necessarily solve the issues within crypto either. Crypto is very different from the nature of stock and traditional equity. So I think TradFi can provide examples of decisions that we know are more likely than not. It also can point out to regulators why we need to make different decisions as well.”
Relaying Erin’s point, Steve Beattie of EY (one of the world’s leading tax and accounting firms) further explained:
“To your point, this path has been traveled before, and yes it's driven through new technology but the rule book is still pretty much the same. You need to adapt. I remember the days post-9/11 and the USA Patriot act. Everyone wanted a specific rule book. What exactly should I do? How does it apply here?
Well, that's not possible. It's prudential supervision. It's putting out guidance. People start to look to things like the FFIC manual to get some kind of guidance, but I can assure you, there are so many sources of information to pick up the drumbeat here of what the regulators are coming out with.
Look at chair Gensler’s SEC speech on September 8th. If you read it closely, there are some pretty strong warning shots saying ‘we've been putting out guidance, but the guidance he even said explicitly has been coming through enforcement orders…
And he said, ‘If you're not feeling you're getting guidance… Not liking what I'm saying is not the same thing.’ So, hard-hitting comments out there. I think the complexity here though is that we place too much emphasis on the SEC’s view. Is it a commodity? Is it a security right now? You need to be looking across the entire landscape… We actually have had teams whose first role is through a deep study to figure out how this applies to our clients in similar product services, what are the lessons learned?
…We're not gonna get a rule book tomorrow that just says, this is exactly what you should do. And if you do it right, you're gonna have no problem because I agree with the point raised, innovation is happening so quickly. By the way, in any cycle going back decades it starts with rapid innovation. It then leads to a certain degree of standardization. Then in my experience, the regulators start to regulate, and then the fourth leg is they start to enforce.”
As regulators grapple with rapidly-evolving digital assets, Erin Fennimore noted how education is key:
“We have an opportunity to help educate our policymakers because the crypto industry is fast-paced. It's constantly evolving. There are new issues that have arisen with respect to the Web3 ecosystem.
We can help the regulators understand the unique concepts of the digital asset economy so that the regulations are actually helpful and tangibly move us forward to a better position and overall consumer perspective while enabling better transparency and tax reporting.
One thing that's very unique to the digital asset space is that the transactions are in the tens of million. We're not on a limited trading timetable. It's 24 hours a day, every day of the week. It's Auto Bot – you can be trading all the time without doing anything. So the voluminous nature requires powerful technology from the perspective of tax reporting – whether it's at the individual or the entity with respect to information reporting. So that's somewhere where we are also educating and specifically talking with the IRS about. Are there systems in place now that can even handle this type of information and the volume?”
In her closing remarks, Erin concluded:
“We are at the very, very beginning of this entire industry and the corresponding regulations… We hope that the Treasury will release specific regulations, which will help the industry understand if they're going to fall within the scope of the Infrastructure act…
So there's a lot we don't know. And it's important to know what we don't know, but it's also important to focus on what we do. And so what we're hearing from our clients, primarily centralized exchanges and various protocols are, do we have to comply with the Infrastructure act? And hopefully we're gonna have clarity on that. But I would, instead of making statements, I like to pose questions back to my clients: ‘Reading the language as it exists now in the Infrastructure act… Do you think you're gonna fall into the definition of a broker? Are you even ready to identify who your customers are? Are you able to actually capture the voluminous transactions? Do you know where those transactions are coming from? If they're coming on and off your platform?”
