This article is the first in a series of Luxor’s research on the regulatory environment of cryptocurrencies in specific regions. This series of articles will discuss the legislation, policies, and taxation trends of the cryptocurrency industry in different countries, focusing on the development of cryptocurrency mining in that country.
Although the issuance and control of cryptocurrency does not depend on a central agency (such as Bitcoin), the attitude of the country or state, the regulatory environment, and political intervention have a significant impact on the actual application of cryptocurrency, market prices, and mining dynamics. To give just one example, the previous global renewed focus on Bitcoin energy consumption and two regulatory announcements in China have led to a more than 50% correction in the Bitcoin market price. These events and other similar events reinforce the notion that for countries where cryptocurrency is widely used and mining activities are frequent, the industry will benefit greatly from a predictable and stable government regulatory framework.
In this bull market, governments around the world have continued to increase their interest in regulating cryptocurrencies and have begun to issue guidance documents other than their original tax laws. The effect of supervision varies with jurisdiction and jurisdiction method, which is more obvious in the mining industry. Recent legislation passed and pending in various countries around the world has had a substantial impact on the mining industry. Therefore, as we continue to deploy capital to the mature cryptocurrency mining sector, we must incorporate regulatory factors into our model. We will discuss cryptocurrency mining regulations, regulatory agencies, legality of cryptocurrency itself, and taxation policies in specific jurisdictions based on different jurisdictions.
In the United States, we have conducted an in-depth study of the rapidly developing regulatory environment in the United States. This article will first provide an overview of U.S. regulations, and then further analyze some of the most compelling cryptocurrency states in the federal state.
Since the beginning of this bull market, thanks to the relatively stable political and regulatory regulations in North America, as well as the rapidly maturing public and private capital market structure, the focus of cryptocurrency mining (especially Bitcoin mining) has begun to shift to North America. From May 17 to 21, 2021, China’s regulatory news of “combating Bitcoin mining and trading” has been irresistible. In order to understand what this specifically means for the U.S. cryptocurrency mining industry, and to understand which states in the U.S. are ready to benefit the most from this event, we should first discuss the macro-level regulatory environment.
In general, the generally applicable rules for cryptocurrency mining in the United States are simple: if you are allowed to own cryptocurrency in a state, you can also mine cryptocurrency in that state. At the state and sub-state levels, there are many differences in the details of mining permits, ranging from high prohibition to support. For example, Arizona passed a bill in 2018 to restrict miners from mining cryptocurrency in private homes; and New York is currently considering suspending all cryptocurrency mining operations for three years. On the other hand, Kentucky recently passed two bills aimed at incentivizing cryptocurrency mining, providing strong property, electricity, and wage tax exemptions or tax rebates for the commercialization of cryptocurrency mining.
Although several cryptocurrency projects are responding to litigation (such as SEC v. LBRY and SEC v. Ripple) due to their characteristics similar to securities, in general, the U.S. government still takes a positive stance on the legality of cryptocurrencies. In the United States, whether the tokens of a particular blockchain project should be classified as securities generally depends on the application results of the Howey Test, but the existence of legal gray areas is still obvious . The US Commodity Futures Trading Commission (CFTC) determined in 2014 that Bitcoin and other virtual currencies are defined as commodities under the Commodity Exchange Act (CEA). In 2018, the CFTC went further and confirmed its right to supervise cryptocurrencies as “commodities” stipulated by the CEA through the CFTC v. My Big Coin Pay, Inc. case.
In addition to the Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury has also played a key role in issuing guidelines for cryptocurrencies, especially in combating their illegal use.
Another organization under the U.S. Department of the Treasury, the Office of Foreign Assets Control (OFAC), has taken the lead in enforcing the U.S. sanctions law by continuously updating the OFAC Specially Designated Nationals (SDN) list (including the digital currency wallet addresses of prohibited individuals, companies, and entities) . Recently, Marathon Digital Holdings (NASDAQ: MARA), a large North American listed company, has mined the first “OFAC-compliant” block (block 682170), which means that its fund pool has reviewed the SDN list from this block Transactions. The Marathon seems to be catering to prudent investors by taking the lead in mining “compliant” blocks and is trying to stay ahead of regulators in terms of compliance. This can be seen as a pre-emptive KYC/AML case applicable to the mining sector, and it is also the first example to adopt this method.
Know your customer (KYC) and anti-money laundering (AML) requirements have always been the main content of the US crypto financial services industry. Any Coinbase or Kraken account registrant is required to provide personally identifiable information (PII, which usually includes ID number, self-portrait, and government ID photo) to meet KYC/AML regulatory requirements. In view of the role of the mining industry in generating cryptocurrency, we expect that as Bitcoin enables some entities to circumvent US financial controls and the energy demand it generates increases, regulatory agencies will increasingly scrutinize mining. Perhaps one day, miners and mining pools under pressure will only mine “green blocks” (blocks mined by carbon-neutral or fully renewable mines) and/or OFAC-compliant blocks (verified to exclude SDN Block of any transaction on the list or other sanctions list). Some people even speculate (or hope) that although the technical feasibility of maintaining a meaningful separation of “clean UTXO” (unused transaction output) and “unclean UTXO” in a way that generates a clean premium remains to be confirmed, through these “cleanliness” The block reward of “block” will have a premium for Bitcoin entering circulation one day.
Taking a step back, Marathon’s OFAC compliance blocks and the narratives surrounding clean and compliant blocks more generally show that the regulatory environment in the United States is becoming more and more complex. At the same time, US investors, miners and mining pools are paying more attention to these. develop.
Although a large number of institutions have participated in the supervision of the U.S. cryptocurrency ecosystem, the uncertainty of supervision is still high. Regarding Bitcoin trading, Gary Gensler, the chairman of the US Securities and Exchange Commission, in his testimony to Congress, emphasized his concerns about lack of supervision and lack of protection for investors. In his testimony on May 6, he stated that, in fact, Congress has the responsibility to provide regulatory clarity, and neither the SEC nor the CFTC can adequately do this, especially with regard to cryptocurrency exchanges. Some people in the Bitcoin industry support stronger supervision (especially large financial services companies, which will benefit significantly from greater regulatory certainty), but maybe they have been affected by previous scandals such as GameStop/Melvin Capital/Robinhood, and there are also some people. Think that “investor protection” is a euphemism for “price manipulation and irresponsibility” by regulators.
The lack of national regulatory or legislative frameworks has not prevented individual states and affiliated state jurisdictions from acting independently in the crypto field. The recent legislation, supervision, and investment actions in the bitcoin mining field have been particularly eye-catching. Below we will introduce some of the most notable examples.
With abundant hydropower infrastructure and cheap electricity, Washington State was once a hot spot for enterprise-level Bitcoin miners and individual miners. However, during the 2017-2018 bull market, multiple public utility districts in eastern Washington state chose to increase electricity prices and issued a ban on cryptocurrency mining to curb mining activities in the region. Due to the sharp rise in electricity prices, the megawatt-scale mines that signed power purchase agreements became unprofitable overnight. Various cities and county-level agencies have expressed concerns, ranging from concerns about power outages in coal mines, to concerns about fires and environmental issues. Except for a few large mines with good resources east of the Cascade Mountains, Washington State is now generally considered unsuitable for Bitcoin mining.
New York State is home to one of the largest mines in the United States (Greenidge Generation). As more and more people worry about mining conflicts with the state’s aggressive environmental goals, the state recently introduced a bill seeking to suspend all cryptocurrencies. Three years of mining. The bill will force all crypto mining operations to close and conduct an environmental impact study at the same time. Therefore, it has threatened Greenidge’s recently approved plan to increase the capacity from 19MW to 106MW by 2022. According to reports, environmental groups Earth Justice and Sierra Club are pushing to ban the state’s lobbying activities for cryptocurrency mining, on the grounds that allowing Greenidge’s expansion could trigger about 30 other similar companies in New York. Followed by power plants. In response to this legislative proposal, Greenidge Generation announced its plan to purchase carbon offsets to achieve full carbon neutrality by June this year. This is worth noting for several reasons: First, it proves that mainstream mining companies can quickly respond to changing regulatory winds in a way that is not common in most industries-from the announcement of the bill It only took a week to release its carbon credit program; moreover, it showed that, given Bitcoin’s current profitability, the miners are financially sound. The speed with which Greenidge announced the transition to carbon neutrality shows that achieving full carbon neutrality is economically feasible.
It remains to be seen how Greenidge’s statement will affect the passage of the bill, but this incident highlights the instability of New York’s cryptocurrency regulation and its possible huge impact on the mining industry. Some insiders in the cryptocurrency trade association worry that the suspension order in New York is just the first shot. For them, if New York’s regulators successfully shut down the cryptocurrency mining industry, these opponents will continue to export the rules of the game to other regions, and this will be a period of freedom for the cryptocurrency mining industry. This type of legislation and regulatory dissemination is not without precedent. For example, the cryptocurrency regulatory framework in Wyoming has provided a rough blueprint for several other states and cities that are striving to explore the benefits of overall regulatory cryptocurrency.
Whether this game rule will spread remains to be seen, but the suspension bill is consistent with the general cryptocurrency regulatory environment in New York, including the much-maligned “Bitcoin License.” Although its lead author, Benjamin Lawsky, the former head of the New York State Department of Financial Services (NYDFS), has high hopes for the Bitcoin license, due to its “too broad and poorly defined rules”, the Bitcoin license does not stimulate Other states follow suit, but it is more like a counterexample of “how to avoid misregulation of the cryptocurrency industry at the state level”. In general, the cryptocurrency regulatory environment in New York is considered by many to be cumbersome and excessively restrictive, which seems to be driving some cryptocurrency companies and enthusiasts to leave and seek more oasis elsewhere in the United States. Currently, the most eye-catching of these oasis is Texas.
The regulatory environment in Texas looks very different from that in New York. Recently, thanks to its business-friendly regulatory and tax environment, as well as its renewable and natural gas energy infrastructure, Texas has become a mecca for Bitcoin mining. With natural gas becoming a rich source of “ESG-friendly” off-grid electricity, wind and solar capacity increasing (although still scarce), and support from current and former Texas politicians, Texas is gaining shelter within its jurisdiction Bitcoin mining company known to the public. Although miners are mainly attracted by the cheap and abundant electricity in Texas, the regulatory environment is also a big incentive. Aiming to advance blockchain-friendly legislation, an industry association called the Texas Blockchain Council was recently established and has promoted two bills in the Texas legislature, one One item is awaiting committee allocation, and the other is awaiting a vote in the House of Representatives. The list of Texas-based Bitcoin mining companies or companies that are setting up operations there is growing rapidly, including Bitmain, Blockcap, Argo Blockchain, Great American Mining, Layer 1, Compute North, BIT Mining, and Riot Blockchain. The predictability of regulations and laws, as well as the abundance of renewable energy and natural gas energy, make this trend likely to continue to grow in the coming years.
Kentucky is another state that has recently made headlines due to its friendly Bitcoin regulatory and tax environment. Governor Andy Beshear recently signed two bills designed to incentivize Bitcoin miners to invest in businesses in Kentucky. Both Senate Bill 255 and House Bill 230 are designed to achieve this goal. The SB255 Act is for mines and managed projects with investment of more than US$1 million and other conditions (defined as “alternative fuel facilities”, “energy-saving alternative fuel facilities”, “renewable energy facilities” or “carbon dioxide transmission pipeline” projects) Provide tax incentives. These incentives are strong, including (pages 10-11) 100% reduction in sales tax and use tax paid for the purchase of tangible personal property for the construction or renovation of eligible projects; 80% reduction of separation tax; 100% reduction of corporate income tax collected; and authorization of the company to conduct wage assessments of 4% of the total wages paid to employees. These two bills entered into force on July 1 this year. It should be noted here that the recent expansion of ESG promotion in the Bitcoin mining field and the fact that 73% of Kentucky’s electricity generation in 2019 came from coal indicate that Kentucky may face some resistance in attracting Bitcoin mining activities.
Wyoming is becoming a national leader in innovative cryptocurrency regulation. The state’s friendly policy environment for cryptocurrencies is partly attributed to politicians like Senator Cynthia Lummis (R-WY), an outspoken Bitcoin advocate and possibly the first official Twitter profile picture in history. Paste the incumbent U.S. senator with Laser Eye (the latest trend among North American cryptocurrency enthusiasts) Residents of Wyoming also played a role in pushing the state’s legislation in favor of encryption. For example, Caitlin Long, the founder and CEO of Avanti Bank and Trust Company, ended his decades of working on Wall Street and worked in the Wyoming Blockchain Working Group, helping legislators draft 13 blockchain and The laws related to cryptocurrency provide the state with a business-friendly regulatory framework. This comprehensive set of laws clarified the property rights of digital assets, created a financial technology “sandbox” to encourage innovation, and created a new type of deposit institution specifically designed for the cryptocurrency industry. Both Kraken Bank and Avanti Bank are newly established “state government chartered deposit institutions” and are currently conducting compliance checks with various federal bank regulatory agencies.
Outside of the financial services and custody industries, Wyoming was the first state to provide a legal framework for decentralized autonomous organizations (DAOs), recognizing them as a new type of limited liability company, and simplifying the legal procedures for forming DAOs. Finally, in April of this year, Wyoming Governor Mark Gordon signed a bill to exempt the tax on standard natural gas used to power Bitcoin mining operations. This legislation will provide additional incentives for oil and gas producers to work with Bitcoin mining companies to monetize oil well by-products (natural gas) and turn the drag on the balance sheet into a source of income.
As mentioned above, most of the developments in Wyoming have occurred at the state level, and the biggest news in the cryptocurrency sector in Florida comes from the city of Miami. Here, Mayor Francis Suarez is trying to position the city as the new US technology and cryptocurrency center. At the city level, Mayor Suarez has issued several important announcements. He plans to use Bitcoin as a payment method for municipal transactions, including allowing Miami City employees to pay with Bitcoin, and Miami residents using Bitcoin to pay for their property. Taxes and city fees. When it comes to mining, Suarez has repeatedly stated that he hopes to use the city’s nuclear power capabilities to make Miami a center of “green” Bitcoin mining. In an interview with Newsweek, Mayor Suarez showed his intention to compete with other cryptocurrency-friendly states. He said that he proposed this resolution, “because we are paying attention to states such as Wyoming to ensure that we have the most advanced cryptocurrency. law”.
In February, the Miami City Council voted in favor of the resolution proposed by Suarez. Recently, the small city of Miami Lakes became the first city in Florida to actually start accepting cryptocurrency services and fees. Although the resolution to allow cryptocurrency payments has been passed in Miami, the plan seems to be still in the planning stage. At the same time, in early May, Miami proposed to establish its own cryptocurrency working group to study the feasibility of allowing residents to use cryptocurrencies such as Bitcoin, Litecoin, and Ethereum to pay taxes and services. There is also a proposal in the resolution to authorize the task force to propose other cryptocurrency initiatives. According to Suarez’s recent statements and appearances, this task force may cooperate with local leaders in states such as Texas and Wyoming and leaders in the Bitcoin mining industry when conducting preliminary research.
This spring, the mayor of Jackson, Tennessee, Scott Conger, was the second US mayor to add laser eyes to his Twitter profile picture. This coincided with his announcement that he intends to pay city employees with Bitcoin. He said it is possible Started mining and holding Bitcoin on Jackson’s balance sheet.
Similar to Wyoming’s own legislation, North Dakota Senate Bill 2328 was passed with 44-3 votes last month, which will cut the state’s mining tax on oil wells installed with natural gas combustion mitigation systems. The bill is currently under consideration in the House of Representatives. Also worth noting is Williston, North Dakota, which recently became the third city in the country to accept cryptocurrency to pay utility bills. A cryptocurrency custodian bill and a bill to study “virtual currency business activities” are also in the North Dakota legislative pipeline.
Finally, in a symbolic move, the Louisiana House of Representatives recently passed Resolution No. 33, which “praises” various well-known characteristics of Bitcoin, including being a “citizen of the world to protect themselves from currency devaluation.” Important tool”. Although this resolution has no actual impact, it is worth noting that its wording is intended to “encourage state and local governments to consider how to help them benefit from the increased use of this new technology.”
Bitcoin from the bottom up
Bottom-up innovations in the regulatory field are driving the use of cryptocurrency in the U.S. federal system. Municipalities at and below the state are formulating regulatory frameworks and learning from each other, which is in sharp contrast with the current situation in China.
The competition among American states to attract Bitcoin mining business is heating up. In the next few years, how various jurisdictions use opportunities to shape the Bitcoin mining landscape in North America will be an interesting and noteworthy phenomenon. State-level regulatory decisions and legislation have had a substantial impact on private and public capital markets, and industry analysts are now adding regulatory risk factors and giving more weight to their valuation models. Those public mining companies that see their valuations fluctuate drastically due to the political winds in their states are increasingly motivated to choose and move to more stable and predictable regions. The constant flow of miners to Texas and cryptocurrency companies settled in Wyoming proved to be happening.
In the global mining landscape, more and more investors want to deploy capital in the United States because of the environmental sustainability, regulatory predictability, and friendly tax treatment discussed above. Now, in the mining industry, it is not uncommon for investors to be tired of traditional mining hotspots such as Kazakhstan, Russia, and China and tend to the United States and Canada. To be sure, with the continuous launch of wind, solar, hydropower and combusted natural gas, the opportunity to obtain cheap renewable energy in North America continues to increase, but as we have recently seen in China, legal and regulatory issues Consideration is also very important. Specifically, due to the mature contract law in the United States, the emerging cryptocurrency-specific regulatory framework, and the world’s leading property rights in the United States, the consideration of legal recourse is often given top priority. This will have a trickle-down effect in the US federal system. As FDI’s interest in the United States increases, those states with existing favorable regulatory and taxation frameworks, coupled with abundant cheap and clean power infrastructure, will serve as pioneers in this incredibly capital-intensive field. Greatly benefited.
All in all, the competition among states for the advantages of cryptocurrency and mining, as well as the growing interest of mining businesses and investors around the world in the United States, is very promising for North America to continue to become a global leader in the cryptocurrency mining industry. Most importantly, we believe that these developments are beneficial to the health and continued decentralization of the Bitcoin network and other proof-of-work cryptocurrency networks. Our views may be subjective, but Luxor will be optimistic about the long-term development of North American mining.
Authors: Alex Brammer, Lin Qian
Translator: Wu Ao
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/cryptocurrency-regulatory-environment-series-the-united-states/
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