Crypto Confab Weekly: Hide Ya Books, Hide Ya Gains, the IRS Is Coming

July 29, 2019

Here’s what’s happening this week:

July 29 — Tether on Trial

The New York Attorney General’s hearing against Tether begins today. The list of charges against the stablecoin is extensive, and ranges from covering up losses and fraud, to illegally serving residents of New York State.

Tether is the world’s most popular stablecoin, but critics charge Tether’s creators with misleadingly claiming that every Tether on the market is indeed backed by an equivalent dollar amount. Bitfinex, the Hong Kong-based exchange that owns Tether, has also had problems establishing relationshipswith legitimate banks.

Bitfinex has argued in court that the NYAG has no grounds to pursue legal action against Tether because it does not serve New York customers. If NYAG wins the case, it could set a precedent for the regulatory authority to investigate other crypto-related businesses that may have customers in the state.

July 30 — US Senate Hearing: Committee on Banking, Housing and Urban Affairs

The Congressional and Senate hearings for Facebook’s Libra project generated a media firestorm. This hearing may not make as many headlines, but it’s worth keeping an eye on. On July 30, the Senate Committee continues its investigation into crypto by “Examining Regulatory Affairs for Digital Currencies and Blockchain.” The hearing will begin at 10 AM EST. Testifying before the committee are Jeremy Allaire, Circle CEO, Mehrsa Baradaran, Professor of Law at UC Irvine and Rebecca Nelson, Specialist in International Trade and Finance at the Congressional Research Service.

Also this week:

IRS Writes Letter to Cryptocurrency Holders

At the end of last week, the IRS sent out warning letters to crypto holders about their tax liabilities. The letter reportedly asks crypto holders to file delinquent tax returns if cryptocurrencies were not reported in an earlier return, or to file an amended return including the exact amount of returns gained from trading between 2013 and 2017.

Why is this important?

The IRS taxes cryptocurrencies much as it treats real estate: applying a capital gains tax to all profits realized at year’s end. But cryptocurrencies are designed for a wide variety of use cases, including purchase of items and as a salary instrument. This can make it difficult to calculate gains. What’s more, financial documentation and data are not standardized around the world, to say the least. For example, the IRS does not have access to data from Bitfinex, one of the world’s biggest crypto trading exchanges, making it difficult for the agency to estimate the total amounts owed by traders.

A Reddit user who claims to have worked with the IRS states that the agency can only make estimates about back taxes. The letter-writing campaign, according to the poster, is an “unethical tactic” by the agency to ensnare cryptocurrency holders by “blindly scaring thousands of people.” The IRS is already in hot water with the crypto crowd for its leaked aggressive surveillance campaign.

SEC Issues Second No-Action Letter

The SEC has just issued its second no-action letter this year, this time to Pocketful of Quarters (PoQ), a gaming startup that intends to issue in-game tokens. The letter, which indicates the commission will not pursue action against the company, is a positive development for the overall token ecosystem as it portends greater clarity regarding regulation among developers.

For the most part, regulators have shied away from offering a clear explanation about the status of tokens and whether they are securities or not. This has resulted in a token market that is prone to booms and busts pegged toSEC crackdowns. While crypto enthusiasts have clamored for new regulations and/or more clarity, the SEC has mostly pointed to the Howey Test, whose criteria is still loose enough to allow the IRS to make seemingly subjective calls.

PoQ’s solution is two token offerings: its utility token, named Quarters (Q1). cannot be resold or traded on exchanges. Its Q2 token can be traded on exchanges.

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