The U.S. state of Wyoming may be the country’s least populous state… but it could soon become the world’s new “crypto valley”.
Thanks to regulation Wyoming passed in March 2018 that made it easier to start crypto-related limited liability corporations (LLCs), crypto entrepreneurs have come running to the state. As many as three new crypto-related LLCs are launching in Wyoming every day.
But that was just the beginning. Wyoming recently passed a new bill that classifies crypto as money. This is important because it establishes a rule that crypto investors who come to Wyoming can count on. And it could impact the future of crypto for decades to come…
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Why Wyoming matters
Wyoming, with less than a 0.2 percent of the U.S. population, certainly isn’t creating rules that the rest of the country is obliged to follow. But other states – and eventually the U.S. federal government – could follow its lead.
You see, the U.S. federal government, its agencies, and U.S. states can’t agree on how to handle cryptos. Right now, four different authorities in the U.S. see cryptos different ways.
The U.S. Securities and Exchange Commission (SEC), which oversees securities markets (like the New York Stock Exchange (NYSE) and NASDAQ), considers virtually all of the more than 2,000 cryptos on the market to be securities.
The SEC makes exceptions for bitcoin and Ethereum, though. And bitcoin and Ethereum make up more than half of the crypto market. That means over half the market is not covered by the SEC, even while the agency has hit much smaller cryptos with hefty fines for being “unregistered securities”.
Another U.S. regulator, the Commodities Futures Trading Commission (CFTC), controls commodity futures and derivatives transactions. It believes bitcoin has more in common with gold than it does with securities. It’s labelled cryptos commodities, and that – according to the CFTC – gives it the power to regulate the industry.
Yet another regulator, the Financial Crimes Enforcement Network (FinCen), sets Know Your Customer (KYC) and Anti-Money Laundering (AML) rules in the U.S., and it considers cryptos and tokens a form of money. FinCen requires crypto companies to register with the government, collect KYC documentation on their customers and report any suspicious financial transactions they encounter.
Lastly, the Internal Revenue Service (IRS), which collects taxes in the U.S., has determined that cryptos are not currencies. Instead, it deems them properties. That means every time a U.S. citizen sells cryptos for a profit, he or she must pay capital gains tax on the transaction.
Put it all together, and you have four different U.S. government bodies that consider cryptos four different things.
On top of that, U.S. states are also regulating cryptocurrencies in their own ways. Wyoming’s pro-crypto policies have attracted a wave of crypto investments. In contrast, New York’s cumbersome regulation is doing the opposite, and driving crypto companies from the state.
New York began setting rules for the crypto industry before most other states had even heard of bitcoin. Its controversial “Bitlicense” – which is a business license for virtual currency activities – went into effect in August 2015.
The cumbersome licensure process has cost some companies more than US$100,000 in fees and legal work and it can take three years or longer for a company to be approved for the license. The result? Fewer than 20 companies have gotten a Bitlicense, and several high-profile crypto companies simply choose not to do business in New York.
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The global battle
The U.S. regulatory landscape is a microcosm of what we’re seeing around the world. Some countries have created crypto-friendly legislation, while others have chosen to over-regulate the industry – to the detriment of the development of crypto industries in those countries.
For example, in 2013, China first created rules around bitcoin and blockchain – the technology behind bitcoin. China has tightened those rules over time. Today, it has a pro-blockchain/anti-crypto stance.
But as the Chinese say, you can’t have both the fish and the bear’s paw.
China’s back-and-forth stance has created a lot of confusion and contradictions surrounding cryptocurrencies, specifically bitcoin. While citizens can own them, they can’t exchange cryptos for real money. That means they can operate crypto miners – the powerful computers that secure the bitcoin network in exchange for a reward – but they can’t swap those rewards for fiat money.
In response, big Chinese crypto mining companies have simply moved offshore.
Banking institutions and their employees are also banned from engaging in bitcoin-related business. So the Chinese crypto exchanges moved offshore, too. Both groups took tax revenues, intellectual property, entrepreneurs and innovative technology with them.
Meanwhile, Japan was one of the first countries to legally recognize bitcoin as a means of payment. That’s helped it become one of the world’s largest crypto markets.
Despite licensure requirements, Japan’s annual crypto transactions are now approaching US$100 billion a year and nearly 3.5 million citizens trade cryptocurrencies there.
In short, crypto regulation can attract new investment or drive it away.
By defining crypto as money, Wyoming is following Japan’s lead. And the state’s rush of new economic activity has gotten the attention of lawmakers across the U.S. This should force U.S. regulators to take a hard look at the results of over-regulation – and hopefully follow Wyoming’s lead.