Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.
Uniform Law Commission
Over the past year, the nonprofit Uniform Law Commission (ULC) has been steadily working to draft legislation meant to harmonize state laws focusing on the regulation of bitcoin and other digital currencies. The ULC’s drafting committee most recently met October 28-29, 2016 in Minneapolis, and could be prepared to vote on a such a draft by the end of next summer. The latest draft of the ULC’s model legislation is available here.
State regulators and legislatures would ultimately have to adopt the ULC’s proposal (or incorporate some of its suggestions piecemeal) before any of the provisions can be enforced.
Despite the ULC’s harmonizing attitude, a number of states have separately pursued a proactive approach towards digital currency regulation, either by bringing digital currency regulation under existing state statutes (as in North Carolina), or by drafting regulations from scratch (as in Florida, and most notably, New York).
IRS Inspector General
Two and a half years after the IRS first declared its intention to oversee and tax digital currency transactions, the Inspector General of the IRS warned that there is little evidence that the agency took the steps necessary to deliver on its broad strategy.
In 2014, an IRS policy release proposed to tax bitcoin as a kind of property and to help taxpayers voluntarily comply with their tax obligations for retail purchase transactions related to (but not necessarily made with) virtual currencies. The policy was intended to help the IRS close the tax gap surrounding virtual currencies by bringing these kinds of transactions under the agency’s supervision.
The Inspector General’s report noted that agency had failed to implement its strategy, in part, because the IRS had failed to provide adequate information to help taxpayers voluntarily comply with their tax obligations, and had failed to respond to the proposals and questions made via public comment.
As a consequence, the report noted that “until a comprehensive virtual currency tax strategy is developed, the IRS is open to the risk that undetected noncompliance of virtual currency taxable transactions will result in an increase to the Tax Gap.”
The Inspector General’s report concluded by identifying management oversight and internal controls as two potential solutions to ensure that the strategy is properly developed and implemented.
This week, Senegal became the second nation in Africa to issue its own national digital currency (Tunisia was the first). The currency, dubbed the eCFA (electronic Central African Franc), was developed in partnership between ECurrency Mind Limited and Banque Regionale des Marches, and issued in compliance with the e-money regulations of the Banque Centrale des Etats de l’Afrique de L’Ouest (the central bank of the Western African Economic and Monetary Union).
In contrast to other virtual currencies like bitcoin, the eCFA is considered a fiat currency because it is both backed by a central bank and because its value will be kept at parity with its physical counterpart, the CFA Franc. Although only authorized financial institutions can issue this new e-currency, it remains unclear how the central bank will keep track of the coins and what level of cryptography will prevent the coins from being counterfeited or compromised.
Last week, the Swiss Federal Department of Finance (FDF) outlined its plan to regulate fintech with the aim of introducing draft legislation to parliament by mid-2017 after a public consultation. The plan’s stated aim was to help the country draw in more fintech companies by virtue of an accommodative stance aimed to reduce barriers to market entry for fintech firms.
The FDF’s plan will make the Financial Market Supervisory Authority the primary regulator of fintech firms working in Switzerland. The plan also called for the creation of a new license to be created specifically for fintech companies along with a regulatory “sandbox” for experimental firms.
The European Parliament’s latest proposed budget includes both language and funds for the creation of a dedicated task force focused on the uses and risks associated with digital currencies. As proposed, the working group will develop a regulatory framework for the economic block, helping the EU boost its institutional knowledge of the technology while also exploring the technology’s possible applications for government.
The task force will be “staffed with regulatory and technical experts, in order to build up technical expertise, regulator’s capacity and develop uses cases, especially for governmental applications, in the field of distributed ledger technology.” Before the measure goes into effect, the budget proposal is subject to debate and final approval by the European Commission.
This week, the Australian Attorney General’s Department published a consultation document outlining the Government’s intention to revise the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act, or the Act) to incorporate regulations relating to convertible digital currencies, with an emphasis on those activities undertaken by digital currency exchange providers. Proposed revisions include amendments to ensure that new digital wallets which store digital currency are comprehensively captured by the scope of the AML/CTF Act. Similarly, the Act’s definition of e-currency would be expanded to include digital currencies which are not backed by a physical commodity, with strategic carve outs for non-convertible digital currencies that pose a low risk of being used in money laundering schemes.
Drafts of the proposed legislation are expected to begin by the middle of 2017, with a stated aim of openly soliciting and incorporating public comment. The legislation is expected to be completed by 2018.
Although the announcement clarified a rough timeline for the publication of the revised law, it failed to indicate how the new law might be drafted or what kinds of companies and currencies might be targeted.
The Australian government’s attention to fintech has been steadily increasing. Prior to this week’s publication, the Australian government’s most recent fintech announcements have included proposals to reduce the tax burden on imposed bitcoin activity and create an overarching legislative framework to govern how the country’s financial industry might begin to integrate block chain technology.
For a comprehensive list of developments please see our Virtual Currencies: International Actions and Regulations.