Cryptocurrencies can bring the benefits of competition to currencies, which have long been subject to a government monopoly. Competition not only has the potential to provide currency that better suits individuals’ needs, but lessons learned from competition could also strengthen the dollar and preserve its status as the world’s reserve currency.
Unfortunately, several laws place barriers in the way of such competition. First, laws governing coins and currency may deter both the development and use of cryptocurrencies. Both the Federal Reserve and Treasury Department recognize that “there is no federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services,”2 but legal tender laws remain a center of confusion. These laws denote the acceptability of U.S. coins and currency for the payment of taxes, fines, and contracts, but many believe that they mandate the use of U.S. dollars and prohibit private businesses from refusing to accept them.3 This misunderstanding, which arises from the statute’s failure to define what it does and does not mean in practice, may stand in the way of widespread use of cryptocurrency in commercial transactions.
Coinage laws, written largely to prohibit the counterfeiting of U.S. coins, may also limit cryptocurrencies. The statute vaguely prohibits coins that have a “resemblance or similitude” to U.S. coins and coins of original design from being used as money. While these statutes apply to physical coins made of metal, the risk—alluded to during a congressional hearing with the U.S. Senate Committee on Banking, Housing, and Urban Affairs4—that they could be amended to include digital coins could deter both development and use of cryptocurrencies.
Second, subjecting cryptocurrencies to capital gains taxes impedes cryptocurrency’s use as money. Because capital gains tax rates are structured to incentivize long‐term holding, capital gains taxes penalize people for using cryptocurrencies as money for everyday purchases. Moreover, capital gains taxes impose a heavy—and at times impossible—administrative burden both on those who attempt to use cryptocurrencies as money and on those newly tasked with reporting cryptocurrency transactions to the Internal Revenue Service.
Taken together, these issues put a thumb on the scale against the use of cryptocurrencies as money and limit their potential competitive benefits.
More broadly, regulatory uncertainty hinders cryptocurrency development. Because a crypto token can alternatively be seen as a commodity, a security, a currency, or perhaps something else entirely, the application of existing laws and regulations to crypto projects is not always clear. A legal landscape characterized by this uncertainty, or that prioritizes legacy regulatory formalities regardless of their practical relevance to cryptocurrencies, risks becoming inhospitable for both entrepreneurs and users. Such a landscape would be detrimental to technological innovation, capital formation, and consumer welfare.
Resolving whether cryptocurrencies are regulated under securities laws or commodities laws is a prerequisite to addressing other questions about how to regulate the exchange of cryptocurrencies and their general interactions with the financial system, including questions about custody and accounting.
Where crypto entrepreneurs sell tokens to the public to finance the development of their projects, it is reasonable to ask whether, when, and how securities laws apply to these sales. While several federal bills touching on these questions have been introduced—and the Securities and Exchange Commission has engaged with the issue in enforcement actions and informal guidance—no law or formal rule decisively clarifies the application of securities laws to cryptocurrencies.5
Securities laws evolved in no small part to address the risks posed by managerial bodies possessing information that investors do not and those bodies’ capacity to act at odds with investors’ best interests. The archetype of a covered entity under securities laws is a centralized enterprise with a corporate form, headquarters, and managerial hierarchy. But cryptocurrency projects aspire to upend this historical template, eschewing not only the physical plant of a 20th-century enterprise but also, more importantly, a managerial body exercising ongoing control over the project. Thus, a core innovation of decentralized cryptocurrencies is mitigating third-party risks through technology.
When a cryptocurrency project does not involve third-party management or control, applying legacy securities laws is both legally inappropriate and practically ineffective at addressing potential harm. But when a cryptocurrency project does involve third-party managerial control and when other criteria under securities case law are satisfied, applying safeguards designed to mitigate risks is appropriate.
Nonetheless, applying the existing securities registration and disclosure regime to crypto projects could create compliance costs that foreclose an important means of financing a cryptocurrency’s development and thereby achieving decentralization. Accordingly, even where securities laws are appropriately applied to centralized cryptocurrency projects, the disclosure framework ought to be narrowly tailored to the specific risks of cryptocurrencies: fraud, deception, and manipulation by developers, sellers, and promoters who remain actively involved in the management of a cryptocurrency project.
