Why are so many crypto exchanges not available in the United States?
Regulation is a hot topic right now as countries around the world grapple with ways to control the slippery beast that is cryptocurrency. The United States has already put in place a number of rules and is expected to introduce more.
It is these existing regulations, both state and national, that prevent many crypto exchanges from operating in the United States. Exchanges must register as a Money Service Business (MSB) and obtain money transfer licenses.
Some international exchanges have decided that the cost and paperwork is not worth it. Others provide services that are not compatible with US laws.
Here are some of the main stumbling blocks for cryptocurrency exchanges in the United States.
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1. Know the requirements of your customers (KYC)
One of the reasons authorities are concerned about cryptocurrency is that it is anonymous. The concern is that it can be used to finance crime or launder money from illicit activities. As a result, U.S. cryptocurrency investors are required to fill in their personal information and often upload photo ID to create an account.
The challenge is that privacy and anonymity are part of the original philosophy of cryptocurrencies. And customers and exchanges are frustrated with the steps involved in the rigorous Know Your Customer (KYC) processes. For example, exchanges may not want to manually verify photo ID and proof of address.
As a result, some exchanges choose not to ask customers for personal data. These exchanges are not authorized to operate in the United States
2. Trading in derivatives
Derivatives are complex financial instruments that allow traders to bet on the future price of a commodity. Traders can be short (bet on falling price) or long (bet on rising price). Crypto derivatives are becoming more and more popular around the world, but it is not something that retail investors in the United States are allowed to access.
Several cryptocurrency exchanges offer derivatives trading, including leverage and margin. Investors can use leverage to increase their purchasing power. For example, if you deposit $ 100 with 5x leverage, you will be able to take a position of $ 500. However, you would also take a much higher risk which is why there are restrictions on this type of trading.
The United States will not license cryptocurrency exchanges that offer derivatives trading to retail investors. Kraken previously offered limited margin trading to US clients, but as of June 23, only qualified investors can access this service. (Qualified investors must have more than $ 10 million in total assets.) CoinBase Pro has also disabled its margin trading.
Binance, which has an international site and a specific site in the United States, is under investigation by the IRS and the Department of Justice, who believe that American customers use the international site for these types of transactions. .
3. Taxation and other declarations
Money services businesses must keep detailed records and report all cash transactions over $ 10,000 to the IRS. US-based exchanges with overseas customers should always track all customer activity.
US authorities have a firm eye on crypto tax evasion, estimating that millions of dollars in transactions go unreported. Earlier this year, the IRS obtained a court order to obtain Kraken records; it has already taken similar action against Coinbase. Exchanges must pass information on U.S. taxpayers with crypto transactions totaling more than $ 20,000.
Going forward, the government wants crypto transfers to be treated like cash. If new proposals are approved, any crypto transaction over $ 10,000 will need to be reported.
4. Regulations specific to each State
Different states have taken very different approaches to regulating cryptocurrencies. This is why you will find that some cryptocurrency exchanges do not work in all US states.
Some, like Wyoming, Colorado, and Ohio, have introduced crypto-friendly laws because they want to attract the burgeoning cryptocurrency industry. Others, like New York and Washington, have strict crypto requirements.
New York has led the way in crypto regulation. Its BitLicense controls how exchanges store currencies and coin exchanges can trade. Many believe the New York framework will serve as the basis for tighter federal regulation.
Can unlicensed scholarships still work in the United States?
One of the many challenges in regulating cryptocurrencies is that it is a global industry and technology makes it easier to access services from around the world. As such, some US consumers use services that are not licensed as ESMs.
The United States is cracking down on this type of activity and will likely step up its efforts in the future. Late last year, the Commodity Futures Trading Commission (CFTC) took action against the crypto exchange BitMEX – which is not licensed in the United States – for allowing U.S. clients to use its service.
It can be tempting to bend the rules and use non-US licensed services, but it’s also risky. Exchanges may freeze access to customer accounts, authorities actively pursue cases of crypto tax evasion, and consumers will not have the same protections.
As cryptocurrency investors, we have to accept that regulation is inevitable. As the industry continues to grow, regulators won’t just turn a blind eye, even if their actions go against the spirit in which Bitcoin was founded. And careful regulation is not necessarily a bad thing. This can protect us from bad players and prevent us from inadvertently supporting criminal activity.