This article will survey the developing regulation of the cryptocurrency, or virtual currency, industry. It will focus on U.S. federal and state regulatory efforts, which are a work in progress. Future newsletters will continually update these efforts, and report on significant international regulatory developments.

Often described as the wild, wild west, the cryptocurrency environment has belonged to modern-day moonshiners and gold miners; independent, anonymous, private investors thriving in an unregulated, investor-beware, high-risk-high-reward atmosphere. To the dismay of some, the growing popularity of virtual currency has grabbed the attention of regulators. The threat of regulation awakens familiar philosophical adversaries. For example, the IRS demands private information from investors to accurately collect taxes. The investors do not want to reveal private information. As a second, broader example, the government wants to regulate. Businesses, however, claim regulation stifles innovation, costs jobs, and cramps the market.

In addition, mainstream businesses, from major banks to the corner deli, are embracing virtual currency. ATM’s accept cryptocurrency. These companies apply their internal rules and regulations to virtual currency.

The review of the important regulatory efforts begins with a cautionary statement: Cryptocurrency impacts many fields of the law. If you plan to take your business into the world of virtual currency, please first obtain the advice of a virtual currency lawyer.

Let’s start in New York, the financial hub of the United States, then proceed through the federal agencies, Congress, and the courts.


The State of New York regulates the virtual currency industry. These regulations do not apply to the individual investor. However, a virtual currency exchange cannot operate in New York without the permission of the Department of Financial Services.

A virtual currency business may obtain permission in one of two ways. It may obtain a trust company charter which allows it to act as custodian of customer funds like a bank. The DFS granted itBit, a virtual currency exchange, the first charter in 2015, making it the first fully regulated exchange in the U.S.  It granted the second trust charter to Gemini Trust Company.

In the alternative, the business may acquire a so-called BitLicense. Out of 22 initial applicants, DFS had granted three licenses by the August 2017 application deadline. The first BitLicense was granted to Circle in 2015, the second to Ripple, and the third to Coinbase in 2017. Reportedly, the cost in time and dollars caused companies to drop out. According to an article in Coindesk, some members of the virtual currency harshly criticized the expensive licensing procedure while others praised the protection it provides consumers. Several exchanges left New York rather than go through the licensing process.

Nasdaq states that at least five other states have proposed legislation controlling some aspect of the virtual currency industry. The laws differ, and the differences illustrate the problems in regulating the industry. Based on comments from industry spokesmen, business prefers the proposed laws of Illinois and Florida and disapproves of California’s, which mimicked the New York law. According to the Columbia Science and Technology Law Review, several other states have passed, or have pending laws regulating the blockchain industry. At least indirectly, these laws may also affect the virtual currency industry.


            The IRS, SEC, and various agencies with the Department of the Treasury have begun to regulate the virtual currency industry. Congress lags. Hopefully, as the maturation process continues, all interested parties, government and private, will agree upon a uniform definition of terms and a comprehensive set of regulations.


The IRS has spoken on the issue of cryptocurrency in its advisory and its enforcement voices.

First, in 2014, it issued its Virtual Currency Guidance. Importantly, it established that virtual currency shall be treated as property subject to capital gains tax for federal tax purposes and that payments made in virtual currency are subject to IRS information reporting rules.

Second, in November 2016, the IRS obtained a federal court order allowing it to serve a John Doe summons on Coinbase, Inc., requiring it to give the IRS all its user records related to virtual currency transactions. Since then, the IRS agreed to limit its request to records of transactions greater than $20,000, and some Coinbase users have intervened in the lawsuit to protect their privacy. The IRS claims only 802 people reported bitcoin transactions on their 2015 returns. It estimates 500,000 transactions took place.

This legal action continues in the U.S. District Court for the Northern District of California. Involved Coinbase users may have to choose between filing an amended return or risking substantial penalties if the IRS prevails.


In July, the agency issued a report stating that “offers and sales of digital assets by virtual organizations” are subject to federal security laws. The SEC directed this forward-looking report to companies seeking U.S. investors for an initial coin offering (ICO) of equity tokens.

The same day it also issued a detailed Investor Bulletin providing guidance and warnings to companies and individuals considering participation in an ICO.

On August 28, the SEC issued an Investor Alert to warn ICO investors about fraudsters who use the lure of new technologies to scam their victims. “These frauds include ‘pump-and-dump’ and market manipulation schemes involving publicly traded companies that claim to provide exposure to these new technologies.” A prudent potential investor should read both the Bulletin and the Alert.


Controller of the Currency (Treasury)


Keith Noreika, the acting Comptroller of the Currency, told those at a Federal Reserve Bank of Philadelphia event in October, that he was open to cryptocurrency exchanges applying for bank status and that he is considering a nationwide cryptocurrency exchange licensing program to avoid individual state licenses.


FinCEN (Treasury)

In July FinCEN fined BTC-e, a virtual currency exchange, $110 million for willfully violating U.S. anti-money laundering laws. Reportedly, the online, foreign-based money transmitter has ceased operation.


Congress, the preeminent U.S. lawmaker, has been virtually absent from the regulatory process. In May, the Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017, which references digital currency, was introduced in the Senate. It awaits action in the Judiciary Committee. Also in May, the chairmen of three House and Senate committees sent the IRS a letter questioning its tactics in the Coinbase litigation.
If you are looking for an experienced cryptocurrency lawyer, please contact the business lawyers at the Ishimbayev Law Firm, P.C.  at 1-212-220-6548 to schedule a free consultation.