The U.S. has developed a patchwork of cryptocurrency regulations in recent years, with legislators at both the state and the federal level taking turns tackling specific areas of the industry.

Several agencies such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) also contend to oversee portions of the growing crypto market.

While these financial watchdogs have issued guidelines, warnings and rules, their efforts have been mostly uncoordinated so far.

As the digital asset market has grown into a trillion-dollar market, lawmakers have realized by now that crypto is here to stay, and there is a need for regulatory clarity. In March 2022, an executive order signed by the president directed key federal agencies to coordinate their efforts at drafting cryptocurrency regulations to protect investors and prevent illicit use without choking innovation.

While federal regulators are working on a national level framework for bitcoin, some states have come forward with their own crypto laws.

Texas and Wyoming passed crypto-friendly laws to attract businesses. The Lone Star State, which has become a bitcoin mining powerhouse after China banned crypto mining, passed the Texas Virtual Currency Act in June 2021 that defined a legal status of cryptocurrencies as a digital representation of value that is used as a medium of exchange, unit of account or store of value and let state-chartered banks offer crypto services to clients. Wyoming’s blockchain legislation, passed in 2019, approved cryptocurrencies as a legal medium of exchange and introduced a banking license system for crypto banks, such as Kraken and Avanti.

Other states opted for a tighter grasp on cryptocurrencies. New York was a pioneer to create its own framework to regulate the industry in 2015, but the infamous BitLicense added such a burden on local crypto businesses that many of them left the state.

If the patchwork of regulation confuses you, here’s the bottom line. Bitcoin is not illegal in the U.S. How you can buy it, what services and exchanges you can use and what you can use it for might depend on which state you are in, however.

At the federal level, there is no singular enforcement agency that regulates bitcoin and other cryptos. The agency that has the authority to regulate a cryptocurrency is usually determined on a case-by-case basis. However, most regulatory activity for cryptocurrencies is overseen by three different organizations:

The SEC’s effort has been directed on the use of blockchain assets as securities and protecting investors, such as whether or not certain bitcoin investment vehicles should be sold to the public, and whether or not a specific offering is fraudulent. To illustrate, it depends on the agency to approve or reject any application for a bitcoin-related exchange-traded fund (ETF).

The CFTC defined bitcoin as a “commodity” and its efforts are mostly focused on monitoring the futures market of cryptocurrencies, a certain type of derivative market that allows investors to speculate on the price without actually buying the underlying commodity. The agency also assumed responsibility for investor protection and has filed lawsuits involving several bitcoin-related schemes.

Beyond the classification of a cryptocurrency, the use of the asset additionally plays a role in determining what agency is responsible for regulation.

In addition to the SEC, CFTC and the IRS, cryptocurrency may also be regulated by:

The FTC is primarily responsible for protecting U.S. citizens from fraud or misrepresentations regarding cryptocurrencies.

FinCEN is the regulatory body that ensures all exchanges and crypto service providers comply with all the necessary anti-money laundering (AML) and counter-terrorism financing measures.

The OCC oversees the federal banking system. In 2021, the agency allowed national banks and federal savings associations to offer certain cryptocurrency-related services, such as custody, if they demonstrated they had adequate controls.

While there’s a long list of federal acronyms responsible for regulating cryptocurrency, actual federal regulations are much more scarce.

The SEC is the primary regulator of securities in the United States. They are responsible for regulating the issuance and sale of any cryptocurrency determined to be a security. A security is vaguely defined by the SEC as an “investment contract,” which, in turn, also needs to be defined by the SEC.

The SEC definition for an investment contract was created from the U.S. Supreme Court decision in SEC v. W.J. Howey Co. in 1946. More commonly known as the “Howey Test” today, the nearly century-old analysis from the Supreme Court is now used to determine whether a cryptocurrency is considered a security.

Under the Howey Test, a cryptocurrency will be considered a security when it is:

If a cryptocurrency satisfies all four requirements under the Howey Test, it will likely be considered a security under U.S. federal securities regulations. This is true regardless of whatever the asset is called or how it was created. The SEC will look to the substance of each transaction, rather than the form of the cryptocurrency.

There is an ongoing debate about what parts of the crypto industry fall under the remit of the SEC. The issue of “substance over form” in securities regulation was a particular focus of the SEC’s regulation of Initial Coin Offerings (ICOs) in 2018. During this time, crypto issuers sought to avoid securities regulation by marketing their crypto as having “utility” or “voucher-like characteristics.” The SEC responded by reiterating that the form of the crypto is irrelevant to the analysis and that regulations are primarily considered with the substance of the transactions.

The SEC also has asserted to regulate decentralized finance (DeFi), a subsector of crypto that offers financial services through self-executing smart contracts, and might be the agency that ends up reining in stablecoins, privately issued cryptocurrencies with a price pegged to U.S. dollar (or other currency). The agency is also pushing for greater oversight on crypto exchanges, claiming the platforms offer tokens that might be securities.

Read more: What Is DeFi?

So, what happens if it is a security? The issuer of the cryptocurrency is required to register the security with the SEC or receive an explicit exemption from the registration requirement. If exempt, the cryptocurrency will only be available for “accredited investors.” Accredited investors are a limited group of individuals who satisfy any of the following requirements:

Being an accredited investor is clearly not for everyone and significantly reduces the number of people who have access to a cryptocurrency. While options such as the use of Simple Agreement of Future Tokens (SAFT) have been considered as an alternative way for crypto startups to raise funds without contravening securities laws, the SEC has yet to make a decision on their validity.

The IRS is the agency that enforces the rules for tax payments. Cryptocurrencies, including non-fungible tokens (NFTs), continue to be treated as “property” for the purposes of tax in the United States and are subject to capital gains taxes.

Read more: US Crypto Tax Guide 2022

As it is likely apparent from the regulatory frameworks discussed above, the federal regulation of cryptocurrencies in the United States doesn’t apply specific cryptocurrency regulations. While this has been the unfortunate standard throughout the history of crypto in the U.S., many advocates are calling on federal regulators to change this.