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Should US States Align on Cryptocurrency Regulation?

 4 min read / 

The US is at once monolithic and factious. It has a federal administration as well as each state having their own separate government. Constitutionally, each of the fifty states and the US as a whole is a sovereign jurisdiction. Each state is structured with an executive, legislative and judicial branch and they have the power to make laws covering anything not preempted by the federal constitution, federal law or international treaties. The role of state governors is like that of the president of the US.

States draw about one-third of their overall revenue from the federal government (it varies by state) and must rely on their own resources for the balance. They compete aggressively to attract businesses, often using generous tax incentives to do so. The latest focus of attention is digital commerce, including cryptocurrencies.

The Problems of Digital Commerce

States experience the same challenges currently being addressed by the EU in finding a way to tax digital commerce efficiently. The focus for states is on sales tax. Brick and mortar sales are the easiest to tax and most states model their digital approach around physical sales. The challenge of levying sales tax on mail order companies forced states to break new ground. They developed the concept of nexus: if a company locates a substantial sales force within a state’s borders, it will have to collect sales tax. The critical issue is not so much whether sales tax is owed by the purchaser, but rather where the state looks to for collection. Corporate tax is another issue.

Some states choose to compete by having no corporate income tax – Wyoming,  Washington, Nevada, Ohio, Texas, South Dakota – while the rest tax corporate income in a range from 1-9.99%. Some states – Wyoming, Florida, Texas, Washington, Alaska and South Dakota – also do not impose a personal income tax. All states – including Washington DC – impose a property tax.

Crypto Challenges

Cryptocurrencies present challenges for states: the regulation and taxation of mining are among them. At least three of the states – Wyoming, Nevada and Washington – competing for business generally by having no corporate income tax are also competing for cryptocurrency businesses.

Wyoming has recently passed five pieces of legislation designed to:

  1. Exempt virtual currency dealers and exchange operators from money transmitter laws
  2. Provide an exemption from securities regulation for tokens that are not deemed a security
  3. Permit storage of corporate records, filings and voting on a blockchain
  4. Permit the creation of digital currency LLCs
  5. Define cryptocurrency tokens as property, exempting them from property taxes

States, such as New York, that introduced a licensing requirement in 2015 have been conspicuously unsuccessful in attracting virtual currency businesses: they granted only three licenses. Delaware created some momentum by allowing the use of blockchain for corporate contracts and corporate recordkeeping. Delaware is significant because of the substantial number – more than one million – of corporations incorporated there. The initiative has since paused to allow a more careful evaluation of the impact on Delaware’s core corporate franchise business, proving that this is a matter more of revenue than principle.

Arizona, Illinois and Georgia have introduced legislation to permit digital currencies as a valid means of payment for taxes and licenses.

Mining

Mining is a separate issue because of the substantial demands on electricity usage that it imposes. New York State’s Municipal Power Agency was recently permitted by the state’s Public Service Commission to impose higher electricity tariffs on cryptocurrency mining companies. Their usage has been driving up utility rates for the non-mining community.

Washington State, specifically the town of Wenatchee, is rapidly becoming, because of its abundant supply of hydroelectricity and a cool climate, the centre of bitcoin mining in the United States. According to a recent article by Politico, by the end of 2018 Wenatchee could account for between 15-30 percent of all bitcoin mining in the world. Not bad for a town of 34,000.

Federal Benefits

The United States has substantial and growing tensions between its states. The divisions are cultural as well as political. Their separate political and business philosophies reflect their cultural and historical differences. States in favour of light governmental and regulation, such as Wyoming and Nevada, suggest some agreement between crypto-politics, and Republican and libertarian thinking. New York’s status as a crypto-hostile state, with the state being strongly Democrat, would seem further evidence of this. Washington State, however, has a mixed history but more recently has delivered its electoral college votes to Democratic candidates. When it comes to business, it seems the ledger on cryptocurrencies and political identity is not yet settled.

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