Crypto Confab Weekly: The IRS and SEC Flex Their Muscles Again

Ripple’s Latest Lawsuit

Ripple has found itself embroiled in yet another lawsuit over its cryptocurrency XRP. The lawsuit contends that XRP is an unregistered security and charges Ripple’s senior management with promoting XRP as an instrument for speculation and profits to investors. The SEC’s Howey Test clearly states that an expectation of profits by investors converts a token into a security. 

The suit further claims that XRP has no utility within Ripple’s ecosystem. In past interviews, the company — which has inked partnerships with both local governments and central banks — has claimed XRP can be used to speed up cross-border transfers by eliminating the need for conversion between fiat currencies. But there is little evidence that banks and financial services institutions are buying the claim.

Do these lawsuits translate into an existential threat for Ripple’s XRP? Probably not, at least in the short term, according to Jake Chervinsky, a Washington D.C. -based lawyer specializing in cryptocurrencies. He told journalist and podcaster Laura Shin that Ripple’s high-powered legal team has deployed clever delay tactics so far, and that the case could take several years to resolve.

IRS Warns Crypto-Holders, Again 

The IRS sent out another round of letters to cryptocurrency holders this past week. The letters, also known as CP2000 notices, detail the amounts owed to the agency. Previous letters educated crypto holders only about the existence of possible tax liabilities. 

For some blissfully ignorant crypto holders, the CP 2000 letters may come as a shock. But they can also be viewed as an indicator of the mainstreaming of cryptocurrency as an investment class.

To date, the IRS has primarily applied existing regulations from its toolbox to the crypto ecosystem. Profits from appreciation in crypto prices are treated as capital gains, and airdrops and hard forks are treated as taxable income equivalent to the cost of the cryptocurrencies suddenly made available to investors. But the tax treatment for certain novel aspects of crypto investing is still unclear. For example, it is still not clear how hacks at exchanges or in a cryptocurrency’s blockchain will be treated by authorities in the latest tax code.

Delays and Launches

The SEC kicked the Bitcoin ETF can further down the road, postponing its decision about three Bitcoin ETFs to October. The three filings had been made by VanEck, Bitwise and Wilshire Phoenix Trust. Decisions regarding the ETFs are now due on October 3, October 18 and September 29, respectively. The crypto community believes that a bitcoin ETF will open the floodgates to institutional capital, because ETFs track indexes without conferring direct ownership, thereby providing the benefits of investing in an appreciating asset while minimizing the risks associated with them.

The SEC published a letter in January 2018 outlining its concerns for Bitcoin ETFs. The crypto ecosystem has matured since then and exchanges have taken certain necessary steps to wipe out bad actors. The companies behind the filings have also taken steps to amend their applications or conduct appropriate research to highlight faults in the crypto ecosystem. One of the Bitcoin ETFs filed has a high minimum amount to deter retail investors, and envisages physical settlement of Bitcoin.

The prospect of another delay was, however, compensated by news of a launch date for Bakkt — a long-awaited derivatives platform for trading Bitcoin futures. Bakkt, which is backed by NYSE-owner ICE, announced a launch date of September 23, 2019. The exchange boasts established names in traditional and crypto-trading among its senior management team. Its launch has been in the works since 2018, but has been repeatedly held up due to regulatory hurdles. Bakkt is among a trio of Bitcoin futures trading platforms vying for institutional money. LedgerX claimed to have launched its platform last week, but the CFTC intervened to clarify that the New York-based startup had not in fact received the appropriate approvals. 

SEC’s ICO Crackdown Continues

In a sign that the SEC has not let up its quest to crack down on fraudulent ICOs, the agency obtained a freeze order for the assets of Veritaseum, an ICO from 2017, and its acting CEO, Reggie Middleton. The court order freezes accounts at banks, exchanges and 15 addresses located on the Ethereum blockchain. The agency declared that the ICO was fraudulent and that Middleton had conducted secretive trades to artificially boost the price of VERI tokens. Eight million dollars of investor funds were also missing from the account holding funds collected from the offering. 

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