Launchy Regulatory Roundup #8 - Crypto “Brokers” to Face New IRS Rules

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Welcome to our eighth edition of the regulatory roundup. If you know anybody who would benefit from this content, please help us spread the word!

As the year ends, important developments are reshaping the crypto landscape. The US Treasury and IRS are set to introduce new reporting rules for digital asset brokers.

Surprisingly, this pivotal change has received little attention, with only a few CT discussing its implications.

This issue warrants greater focus as it could significantly impact the industry.

In Today's Edition:

• Headline: Crypto “brokers” to face new IRS Reporting Rules by end of year 🚨

• Global Legal Roundup: Mango Markets, Tornado Cash, etc.

• Case Study: MiCA & Crypto firms exodus to the Middle East 🐫 

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HEADLINE

Crypto “Brokers” to Face New IRS Reporting Rules

State of play: The US Treasury Department and IRS plan to release new rules on reporting requirements for digital asset brokers, including cryptocurrencies and NFTs, by the end of the year.

• These rules will cover non-custodial brokers and implement the OECD's Crypto-Asset Reporting Framework, facilitating cross-border information exchange for digital assets.

• US brokers will need to report on foreign customers to comply with CARF, while foreign brokers reporting under CARF won't need to duplicate reports to the IRS.

• In June, the IRS mandated that digital asset brokers report gross proceeds from sales starting in 2026 for 2025 transactions.

• Additionally, reporting on an asset basis for certain digital assets will begin in 2027 and for sales in 2026.

• Further guidance on digital asset transfers is expected in the future.

According to Alex Thorn’s research last year, the IRS Broker Rule will expand the definition of "broker" in the digital asset space, requiring more entities to report transaction details to the IRS.

• The IRS Broker Rule is part of the 2021 Infrastructure Act.

• This includes centralized exchanges, non-custodial wallets, and some DeFi platforms, which must collect KYC data and report gross proceeds using Form 1099-DA starting in 2026 for 2025 transactions.

• While miners and software-only providers are exempt, DeFi platforms face compliance challenges, potentially leading to restricted U.S. access.

What’s Next: The crypto industry will likely push for adjustments to ease compliance, while the Treasury focuses on cross-border reporting standards.

Why it Matters: The IRS Broker Rule aims to bring greater tax compliance to the crypto industry but raises concerns about its impact on privacy, innovation, and the ability of decentralized platforms to operate within the U.S.

Our Take: Decentralized platforms may face heavy compliance burdens, potentially limiting US access or pushing development offshore.

GLOBAL LEGAL ROUNDUP

🇺🇲 Mango Markets Settles with SEC, Agrees to Destroy MNGO Tokens

Mango DAO, Mango Labs LLC, and Blockworks Foundation have settled charges with the SEC over the MNGO token, deemed an unregistered security.

• The entities agreed to destroy their MNGO tokens, request crypto exchanges to cease trading them, and pay $700,000, pending court approval.

• The settlement follows a DAO vote favoring the proposal, and members are uncertain about the project's future without the token.

• The SEC emphasized that all entities offering securities-intermediary functions must register with the SEC, regardless of their structure or technology.

🇺🇲 Tornado Cash Co-Founder Roman Storm to Stand Trial for Money Laundering

A US federal judge has ruled that Roman Storm, co-founder of Tornado Cash, will face trial on money laundering charges starting December 2 in New York.

• The judge denied Storm's motion to dismiss the case, which alleges he facilitated the laundering of over $1B through the crypto mixer.

• Storm faces multiple charges, including conspiracy to commit money laundering and operating an unlicensed money-transmitting business.

• Storm argued for First Amendment protection, but the judge stated that the code's functionality is not protected speech.

🇺🇲 CZ Out, Caroline Ellison In

Changpeng Zhao, former CEO of Binance, was released from custody on September 27, 2024, two days earlier than expected. CZ had been sentenced to four months in prison and fined $50M for failing to maintain an effective AML program.

Caroline Ellison, former CEO of Alameda Research, was sentenced to 24 months in prison for her role in the FTX fraud scheme. In addition, she must forfeit approximately $11B and will undergo three years of supervised release post-incarceration.

🇺🇲 SEC Delays Decision on BlackRock and Bitwise Spot Ethereum ETFs

The SEC has postponed its decision on Nasdaq's proposal to list and trade options for BlackRock and Bitwise's spot Ethereum ETFs, moving the deadline from this Thursday to November 10.

• The SEC also deferred a decision on NYSE American's proposal for options on Bitwise’s Ethereum ETFs, setting a new deadline of November 11.

🇺🇲 Gary Gensler Faces Criticism in Congressional Hearing on Crypto Regulation

During a heated congressional hearing, SEC Chair Gary Gensler faced intense scrutiny from lawmakers over his agency's handling of crypto regulation and the DEBT Box case.

• Tom Emmer questioned Gensler about a federal judge's criticism of the SEC's actions, which included sanctions for bad faith handling.

• While some lawmakers argue that the SEC's rules are unclear and hinder innovation, others believe the agency is fulfilling its duty to protect investors.

• The hearing comes as the crypto industry prepares for upcoming elections, with significant spending on political action committees.

• Lawmakers also challenged Gensler on the SEC's definition of securities, using examples like Yankees tickets and NFTs.

• Gensler maintained that existing laws guide the SEC's actions, while lawmakers called for clearer regulatory frameworks.

🇨🇳 China’s Stimulus Boosts Stocks, Leaves Crypto Market Unchanged

China's recent monetary stimulus has spurred optimism in global stock markets, with significant gains in European and US indices. The Shanghai Composite Index rose over 4% following measures to lower borrowing costs and enhance economic activity.

• However, the crypto market remained stagnant, showing little reaction to the stimulus.

• Analysts from QCP noted a shift in sentiment towards ether, particularly in the derivatives market, where expectations for upward movement are growing.

• Despite the positive trends in traditional equities and commodities, the crypto sector has yet to experience a similar boost.

🇨🇦 Canada Extends Compliance Deadline for Crypto Exchanges on Stablecoin Regulations

The Canadian Securities Administrators (CSA) has granted crypto trading platforms an extended deadline to comply with new stablecoin regulations, now pushed to December 31, 2024.

• The regulations prohibited algorithmic stablecoins while allowing those backed by a single fiat currency to continue trading until the new rules took effect.

• The CSA's extension aims to address technical challenges faced by trading platforms.

• While some exchanges have exited Canada due to regulatory pressures, others like Kraken and Gemini are committed to maintaining a presence in the market.

🇸🇬 WazirX Secures Four-Month Moratorium from Singapore Court

WazirX has been granted a 4-month conditional moratorium by a Singapore court following a $234M hack that affected 45% of its customers' funds. WazirX must comply with conditions including disclosing wallet addresses and responding to user inquiries.

🇰🇷 South Korea Fines Worldcoin $830K for Data Privacy Violations

South Korea’s Personal Information Protection Commission has fined Worldcoin and its developer, Tools For Humanity, 1.1B Korean won ($830,000) for violations related to personal data collection and transfer.

• The fines stemmed from issues such as inadequate consent notifications and lack of age verification.

• Tools For Humanity stated they have since remedied the identified weaknesses.

🇭🇰 Hong Kong to Adopt ESMA Standards for Crypto OTC Derivative Reporting

Hong Kong regulators, the HKMA and SFC, plan to align their crypto OTC derivatives reporting with European Securities and Markets Authority (ESMA) standards by 2025. This includes the use of Digital Token Identifiers to accurately identify crypto-asset underliers.

🇦🇪 Dubai Regulator Tightens Crypto Marketing Rules

Dubai's Virtual Asset Regulatory Authority (VARA) has implemented stricter marketing requirements for crypto companies, mandating a prominent disclaimer about the risks and volatility of virtual assets.

• Additionally, providers must obtain compliance confirmation for any incentives offered.

• This move aims to foster trust and transparency in the market while allowing VARA-licensed providers to expand their services throughout the UAE.

More Regulatory Updates:

• US House Democrat urges Stablecoin Bill compromise.

• NYC’s pro-crypto Mayor Eric Adams indicted on corruption charges.

• NYDFS 'more eager than anyone' for crypto federal legislation, chief says.

• Harris loses 'support' rating from crypto advocacy as grade changes to 'NA.'

• TrustToken, TrueCoin settle with SEC over fraud accusations in stablecoin investing.

CASE STUDY

MiCA & Crypto Firms Exodus to the Middle East

State of play: Europe's upcoming crypto regulatory framework, the Markets in Crypto-Assets (MiCA) bill, could prompt a mass exodus of Web3 firms to the Middle East due to more favorable regulations.

• While MiCA is intended to legitimize the crypto ecosystem, CEO of Fideum, warns it may lead to consolidation among firms, particularly disadvantaging smaller companies.

• Larger European and American crypto company relocating to regions with less stringent regulations.

• Set to take effect on December 30, 2024, MiCA is pushing European financial institutions to prepare their digital asset offerings

• For instance, Societe Generale has partnered with Bitpanda to launch a MiCA-compliant stablecoin, EUR CoinVertible (EURCV).

• Plotnikova expresses concern that the framework will create centralization, making the industry more like traditional finance, where scaling becomes easier for larger firms.

Our Take: This shift could result in larger firms acquiring smaller ones, intensifying competition and limiting opportunities for emerging players.

Take a peek at our referral reward at the bottom of this issue. Share this newsletter and receive our comprehensive database of crypto regulations around the world👇

NOTEWORTHY READS & MEME

• Alex Thorn’s read on IRS broker rule proposal.

• Brandon Malone’s thread on the SEC vs Crypto in numbers.

• Zack Shapiro’s tweet on Roman Storm & Tornado Cash ruling.

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Disclaimer: All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.