When Will the Securities and Exchange Commission (SEC) Get Involved in Cryptocurrency?

I’ve specialized in cryptocurrencies since 2013. Back then, virtual currency was limited to just a few coins, and I found myself structuring companies that would bring partners and assets together to launch new coins[1]. However, in today’s world, it is a little different. It seems that everyone and their brother is doing an Initial Coin Offering (ICO)[2], and even Wall Street has entered the arena with something called Bitcoin Futures. If you know anything about the Market, futures are highly speculative, and adding to that an unregulated industry like crypto creates the perfect recipe for disaster.

My specialty in crypto revolves around designing ICOs that will have a minimal tax impact. However, I can also see many places where this industry needs some oversight, as there are too many ways for someone to lose all their money.

I have clients that are coming to me for crypto advice that have no business messing with crypto whatsoever. In fact, one client wants to act as a broker, for lack of a better word, and do crypto trades for “clients,” charging a 10% commission for doing it. I explained to him that he is selling securities without a license and to stay away from it. At least my clients listen to me; and this one followed my advice to make money: “selling shovels” to those in the crypto industry. This refers to what happened during the gold rush, the people selling shovels to miners make more money than the actual miners. I myself am selling shovels by offering specialized tax services to crypto businesses.

There have been several times that I have been asked to join the team of these clients, those ICO’s that I’ve helped to structure advantageously. However, I have a strict rule; never go into business with clients. Further, just because I know a lot about setting these companies up and how to navigate the landscape, doesn’t mean that I want to speculate with my money. Money is very hard to make, and for me, I am just not comfortable with something that has no regulation.

I am certainly not the only one out there selling shovels to crypto start-ups. There are countless marketers, listing sites, and ICO evaluators who have entered the space to support this growing niche. Many of them are simply get-rich-quick schemes, but others are emerging to help self-regulate the industry by offering independent cryptocurrency research and reporting. By analyzing white papers, websites, security procedures, teams, marketing plans and past ICO data, such companies are able to help guide investors while elevating the quality of the ICO business models – all of this in the vacuum of formal, SEC regulation.

The fact of the matter is that eventually the SEC will step in and regulate these ICOs. However, there is already a movement for these companies to go offshore to the Cayman Islands, where there is no tax, or Singapore with its 15% tax. However, if the person involved in the ICO is a US Citizen or subject[3], then they still have to pay US tax, and could even set up a situation where they have dreaded Subpart F Income[4]. The point is; if the goal is to avoid the reach of the SEC and avoid taxation as much as possible, careful tax planning needs to be carried out; moving offshore is definitely not the cure-all.

What we’re seeing now are US companies setting up their ICO to occur overseas. However, the proceeds from that ICO are then funneled into the US Company, which sets off a disastrous tax scenario. This whole situation can be avoided by setting up a Not-For-Profit company like an IRC §501(c)6, which essentially creates a tax-free ICO. However, if and when the SEC gets involved, even a 501(c)6 can be regulated. Not to mention the various ICOs that have absolutely no tie to the US, except some of the investors who are US citizens or subjects. By forming overseas, these companies will avoid any US regulation when it comes. However, if there is a US management company or affiliate, even a rouge investor that has a tie to the US, the proceeds could still be taxed in the US.

The main point I’m trying to make is that right now the crypto industry is kind of like the Wild, Wild West. It’s imperative that unbiased crypto data and reporting be available to investors to give them some assurance that they are buying into something that is real, not a fly-by-night start up ready to cash in and disappear as soon as the ICO ends. Eventually, I believe the SEC will step in to regulate these ICO’s. Until then, investors should be made aware of the risks and have access to the data they need to make informed decisions.

[1] A slang term for cryptocurrency

[2] Initial Coin Offering

[3] Someone with a green card or meets the requirements to file Form 1040

[4] Subpart F Income is Income derived from a US Company that has a foreign related company, which is taxed by the US