Are Cryptocurrency Exchanges Regulated?

Cryptocurrency exchanges are basically websites where you can buy and sell cryptocurrencies. Cryptocurrencies have risen rapidly in the last decade. So, how should cryptocurrencies and the exchanges that oversee trades be regulated?

There is no general consensus on any one authority regulating cryptocurrency exchanges. There's a difference in the interpretation of cryptos. Stock exchanges are heavily regulated. The SEC regulates the US securities exchanges. The regulations intend to protect investors from scams and frauds. 

Unlike cryptocurrencies, cryptocurrency exchanges do not have any central regulatory authority. In the US, the regulation for cryptos varies by state. Overall, the regulation of cryptocurrency exchanges is uncertain in the US. There are no formal rules to govern the exchanges. Several federal regulators claim jurisdiction over them due to the lack of a consensus around cryptocurrencies' nature. 

For example, the SEC considers crypto-assets that meet the definition of 'securities' to be under its scope. Cryptocurrency exchanges where tokens are designated as securities should ideally be registered with the SEC or be exempt from registration. They would be included in an alternate trading system. However, there has not been much progress.

As reported by Reuters, the SEC is also concerned that investors assume that cryptocurrency exchanges are regulated by the SEC. Since the SEC doesn't regulate the cryptocurrency exchanges, the assumption could give investors a false sense of security.  

The Commodity Futures Trading Commission (CFTC) describes Bitcoin as a commodity under the Commodity Exchange Act. While the CFTC has limited jurisdiction over spot markets, it broadly regulates the derivatives markets, including futures in virtual currencies. The Chicago Board Options Exchange and the Chicago Mercantile Exchange offer futures linked to the price of Bitcoin. Therefore, the CFTC has much tighter authority in the derivates markets of cryptocurrencies that are considered to be commodities. 

The Financial Crimes Enforcement Network (FinCEN) does not consider cryptocurrency to be a legal tender. However, FinCEN considers exchanges as money transmitters subject to its jurisdiction. Usually, any firm that helps transfer funds from one entity to another requires a money transmitter license. They are required to register with FinCEN as a money service business.  

The IRS considers cryptocurrencies to be property. The gains from investments in these virtual currencies, including Bitcoin, are taxed as capital gains tax. Therefore, businesses transacting in virtual currencies need to keep detailed records of cryptocurrency purchases and sales. They also have to pay taxes on any gains made from the sale of cryptocurrencies for cash or cryptocurrency. The taxes are also levied on the fair market value of any mined cryptocurrency, as of the date of receipt, according to IRS guidance. 

Since there is no federal law on cryptocurrency, the regulatory landscape for cryptocurrencies and exchanges varies by state. For example, Wyoming is one of the friendliest states as far as cryptocurrency and blockchain regulations are concerned. The legislature passed a bill that exempts cryptocurrencies from property taxation. In contrast, Massachusetts has not taken any concrete steps towards regulating virtual currencies or cryptocurrency exchanges. Other states, including New York, have passed restrictive laws.  
 

The U.S. Treasury emphasized the need to regulate cryptocurrency markets to arrest criminal activities. Since the regulations for cryptocurrencies and cryptocurrency exchanges vary widely, investors should be careful when using any such platform.