Increased Government Scrutiny of Digital Currency Transactions

As digital currencies have become more popular and commonplace, the government has stepped up its efforts to make sure that transactions and offerings do not run afoul of established regulations.

On October 11, 2019, the SEC, CRTC and FinCEN issued a joint statement urging those dealing in digital currencies to comply with obligations under the Anti-Money Laundering (AML) and Currency Financial Transactions (CFT) regulations under the Bank Secrecy Act (BSA) – regardless of what the digital assets are called.

This joint statement was meant as a warning. All cryptocurrency trading exchanges must adhere to AML, CFT and know-your-customer (KYC) practices that apply to most other financial transactions. These include:

• Accurate and complete recording of transactions;
• Knowing who the customers are;
• Independent testing of BSA and AML compliance;
• Stringent personnel training; and
• Prompt reporting of suspicious activity to law enforcement.

These regulations apply to large trading platforms and Initial Coin Offerings (ICO), as well as individuals who trade for their own digital wallets as well as for the general public. These part-time traders are especially vulnerable because they usually do not recognize that they must comply with these regulations.

One must also be aware of federal laws governing “registered money transferor” status – when an individual or company regularly trades in digital currency. In addition to the aforementioned federal regulations, there are a host of state regulations and laws regarding registration and licensing, reporting, and bonding requirements. Digital currency transactions have been scrutinized by the IRS and state taxing authorities since at least 2014, as they are considered taxable events just like any other property transaction. When a person trades in digital currency and realizes a profit, that profit is subject to tax like any other gain.

The IRS sent over 10,000 letters to known digital currency holders over the summer, warning them that in certain cases taxpayers could be subject to criminal prosecution if they do not properly report their virtual currency transactions.

In sum, the IRS is moving to enforce various tax provisions for digital currencies, both administratively and criminally. Those that transact in digital currencies must be aware of and comply with a myriad of federal and state regulations or risk civil and potentially criminal penalties.

Stahl Gasiorowski Criminal Defense Lawyers aggressively defend individuals charged with complex federal and state crimes. Founder Robert G. Stahl is recognized as one of the top criminal defense attorneys in the NY/NJ area for his skills, knowledge and success. To contact the firm, call 908.301.9001 for the NJ office and 212.755.3300 for the NYC office, or email Mr. Stahl at rgs@sgdefenselaw.com.