Where is the US Bitcoin regulation heading? Two states declare that direct Bitcoin transactions are not money transfers and are not subject to regulation and taxation

Financial regulation of Bitcoin and other cryptocurrencies is changing in some parts of the United States. Texas and Illinois recently announced that direct Bitcoin transactions are not subject to money transmission regulations, which means that Bitcoin is not subject to taxation, regulation and KYC policy requirements. At the same time that the IRS has asked the Bitcoin exchange Coinbase to provide it with user information for Bitcoin tax research, it seems that the issue of Bitcoin taxation in the United States is complicated.

Marco Santori, a bitcoin expert and head of the financial technology practice at law firm Cooley LLP, revealed that Illinois has formally proposed new bitcoin guidelines and is seeking feedback from various bitcoin experts, cryptocurrency professionals and law firms.

In the proposed new guidelines, Illinois noted that while exchanges are money transmitters and are required to hold fiat currency to provide to buyers, selling or buying Bitcoin directly is not money transmission. The guidelines also state that crypto-to-crypto trading is not money transmission. Therefore, in Texas and Illinois, platforms like Shapeshift will not be included in the money transmission regulatory framework.

Given that the money transmitter regulatory framework only applies to organizations that hold custody of user funds, either Bitcoin or fiat currency, a decentralized exchange like Bitsquare would not be considered for KYC policies or money transmitter regulations.

Earlier this year, peer-to-peer exchange Bitsquare introduced bitcoin-fiat currency trading pairs, offering an alternative to traditional bitcoin exchanges for users concerned about KYC policies and strict regulatory requirements.

Under the regulatory frameworks of Texas and Illinois, peer-to-peer Bitcoin exchange platform LocalBitcoins is also not subject to money transmission regulations, and users can freely trade between Bitcoin and fiat currencies without regulation.

However, Santori noted that buying and selling bitcoin through bitcoin kiosks and bitcoin teller machines (BTMs) are still regulated because they are connected to the back end of bitcoin exchanges. And, because bitcoin kiosks and BTMs hold custody of the fiat currency provided to the seller, they still fall under the scope of money transmission regulation.

Currently, Bitcoin and cryptocurrency transactions are still considered money transmission by the Uniform Money Services Act (UMSA), regardless of whether there is an intermediary or third-party institution transmitter. Therefore, based on the basic regulatory framework established in Washington, most states in the United States still treat Bitcoin-fiat currency transactions as a form of money transmission.

As Bitcoin continues to increase its market capitalization, develop an international user base, establish itself as a global digital currency, and regulators continue to learn about the cryptocurrency space, more and more states and countries will begin to pass workable and practical regulations, just like Texas and Illinois have done.