Governments around the world continue to grapple with the idea of virtual currency (cryptocurrency¹). While many have historically taken a laissez-faire approach², the growth, rising prevalence, and use of virtual currencies are forcing governments to issue guidance. Cryptocurrencies create a series of challenges for regulators as they often do not resemble the functions and uses of traditional currencies. The application of existing regulatory frameworks to virtual currency often yields unintended outcomes. While the U.S Treasury’s Financial Crimes Enforcement Network (FinCEN) has historically been hands-off, a New Year’s Eve release of FinCEN Notice 2020-2 is signaling a policy shift.
U.S. persons with foreign bank accounts are required to file FinCEN Form 114 (Report of Foreign Bank and Financial Accounts [FBAR]), if the aggregate value of the foreign accounts exceeds $10,000. Notice 2020-2 acknowledges that the current FBAR regulations do not recognize foreign accounts which hold virtual currency as reportable accounts. However, Notice 2020-2 reveals that FinCEN intends to propose an amendment to the existing regulations and classify virtual currency accounts as a type of reportable account and thus necessitate the filing of FinCEN Form 114.
While this posture is not entirely surprising it does exemplify the challenges in applying existing frameworks to virtual currencies. Different regulatory bodies have taken differing stances on virtual currency. The Internal Revenue Service does not recognize virtual currency as currency and has instead classified it as property due to its lack of “legal tender status”. Recently, the US Securities and Exchange Commission has brought suit against the founders of a virtual currency named Ripple under the premise that Ripple was an unregistered security offering³.
It is our hope that FinCEN’s upcoming regulatory amendments contain clarification on some virtual currency specific issues such as:
- What constitutes a reportable foreign account?
- Is a decentralized currency exchange considered to be a foreign account?
- Does a virtual currency private key constitute a reportable account?
- How will the “residency” of a virtual currency be established?
- What constitutes a reportable virtual currency?
- Are virtual currency tokens a form of virtual currency?
- Are virtual tokens denominating tangible assets considered a reportable virtual currency?
For more information, or if you have any questions on virtual currency FinCEN or tax compliance, please contact your WilkinGuttenplan advisor.