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Why Are So Many Crypto Exchanges Unavailable in the U.S.?

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It’s all about the regulation of cryptocurrency.

Regulation is a hot topic at the moment as countries around the world struggle to find ways to control the slippery beast that is cryptocurrency. The US already has a number of rules in place, and is likely to offer more.

It is these current regulations, both at the state and national levels, that prevent many cryptocurrency exchanges from operating on US exchanges, as they are required to register as financial services companies (MSBs) and obtain money transfer licenses.

Some international exchanges have decided that the cost and paperwork is not worth the effort. Others provide services that do not comply with US laws.

Here are some of the big hurdles for US cryptocurrency exchanges

1. Know Your Customer (Know Your Customer)

One of the reasons authorities are concerned about cryptocurrency is that it is anonymous. The concern is that it could be used to finance crime or launder money from illegal activities. As a result, US cryptocurrency investors need to fill in their personal information and often upload a photo ID to create an account.

The challenge is that privacy and anonymity are part of the original spirit of cryptocurrencies. Both customers and exchanges are frustrated with the steps involved in the strict know-your-customer (KYC) processes. For example, exchanges may not want to manually verify photo identity and address proof.

As a result, some exchanges choose not to request personal data from customers. These exchanges are not authorized to operate in the United States

2. Derivatives trading

Derivatives are complex financial instruments that allow traders to bet on the future price of a commodity. Traders can sell (bet the price will go down) or buy (bet the price will go up). Cryptocurrency derivatives are growing in popularity all over the world, but they are not something that US retail investors are allowed to access.

Many cryptocurrency exchanges offer derivative trading, including leverage and margin. Investors can use leverage to increase their purchasing power. For example, if you reduce $100 with 5x leverage, you will be able to get a position of $500. However, you may also be exposed to a much higher risk, which is why there are limitations to this type of trading.

The United States will not license cryptocurrency exchanges that offer derivative trading to retail investors. Kraken used to offer limited margin trading to US clients, but from June 23 onwards, only eligible investors can access this service. (Qualified investors need to own more than $10 million in total assets.) CoinBase Pro has also suspended margin trading.

Binance, which has an international website and a US website, is under investigation by the IRS and the Department of Justice, who believe that US customers are using the international website for these types of transactions.

3. Taxes and other reports

Money service companies need to keep detailed records and report any cash transactions over $10,000 to the IRS. US-based exchanges with foreign customers still need to keep track of all customer activities.

The US authorities have tax evasion on cryptocurrencies in their sights, believing that millions of dollars in transactions go unreported. Earlier this year, the IRS obtained a court order to obtain records from Kraken; Similar actions have already been taken against Coinbase. Exchanges need to hand over information on US taxpayers with crypto transactions totaling more than $20,000.

In the future, the government wants to treat crypto transfers like cash. If the new offers are approved, any crypto transaction over $10,000 will need to be reported.

4. Country specific regulations

Different countries have taken completely different approaches to regulating cryptocurrency. That is why you will find that some cryptocurrency exchanges do not operate in every US state.

Some, such as Wyoming, Colorado, and Ohio, have introduced crypto-friendly laws, wanting to attract the burgeoning digital currency industry. Other countries, such as New York and Washington, have strict cryptographic requirements.

New York has led the way in regulating cryptocurrency. Its BitLicense controls how exchanges store currency and which currency exchanges can trade it. Many believe that the New York Framework will serve as the basis for stricter federal regulation.

Are unlicensed exchanges still operating in the US?

One of the many challenges in regulating cryptocurrency is that it is a global industry, and technology makes it easy to access services from all over the world. As such, some consumers in the United States use services that are not licensed as MSB companies.

The United States is cracking down on this type of activity and is likely to intensify its efforts in the future. At the end of last year, the Commodity Futures Trading Commission (CFTC) took action against the digital currency exchange BitMEX – which is not licensed in the US – for allowing US customers to use its service.

It can be tempting to circumvent the rules and use unlicensed services from the US, but it is also risky. Exchanges may freeze access to customer accounts, authorities are actively pursuing tax evasion cases in cryptocurrency, and consumers will not enjoy the same protections.

As cryptocurrency investors, we have to accept that regulation is inevitable. As the industry continues to grow, regulators will not simply turn a blind eye, even if their actions go against the spirit in which Bitcoin was founded. And careful organization is not necessarily a bad thing. It can protect against bad players and prevent us from inadvertently supporting criminal activities.

Buy and sell cryptocurrencies on an exchange chosen by experts

There are hundreds of platforms around the world waiting to give you access to thousands of cryptocurrencies. In order to find the right feature for you, you will need to decide which features are most important to you.

To help you get started, our independent experts have tested the options to bring you some of our best crypto exchanges for 2021. Check out the list here and start your crypto journey, today.

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