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Hundreds of thousands of Americans are using cryptocurrencies like Bitcoin to buy goods and services, pay bills, gamble online, transfer money internationally and as an investment vehicle, among other things. And that activity is drawing more attention from state lawmakers.
A report last year from researchers at the University of Cambridge’s Judge Business School estimated there were “between 2.9 million and 5.8 million unique users” around the world “actively using a cryptocurrency wallet.” The report further estimated that about 17 percent of those users - somewhere between 493,000 and 986,000 of them - were based in North America. The Cambridge researchers also cited an unpublished report from the Boston Federal Reserve estimating that 0.87 percent of U.S. consumers, or about 2.8 million people, owned cryptocurrency in 2015.
According to the Luxembourg-based cryptocurrency wallet provider Blockchain, there are currently about 200,000 transactions per day on the Bitcoin network, the most active cryptocurrency network by a fair margin. Blockchain estimates that the total value of those transactions is around $460 million per day.
Those numbers are actually rather small in comparison to the usage figures for credit cards. According to a July report from Bitcoin Market Journal, Mastercard has 604 million active users worldwide and 35.7 million just in the United States; Visa has 736 million global users and 336 million in America; and even the payment service Paypal, a relative newcomer compared to the major credit cards, has 235 million active users.
Last year PayPal processed roughly 21 million transactions - about $1.2 billion worth - per day, nearly three times the average daily value and more than 100 times the average daily volume of transactions on the Bitcoin network. And as of 2016, Visa processed an average of 150 million transactions, worth a total of about $24.4 billion, a day, about 53 times and 750 times Bitcoin’s average daily transaction value and volume, respectively.
But cryptocurrency usage is growing rapidly. According to the Cambridge researchers, the number of Bitcoin users increased between 269 percent and 600 percent from 2013 to 2016. By comparison, the number of Paypal users grew about 40 percent over that same period. And in December of last year, when the price of a single bitcoin shot up to $19,499, the number of transactions on the network reached 490,644 in one day, while the transaction value hit nearly $5.8 billion.
That activity has increasingly been drawing the attention of state lawmakers. In 2014 only a couple of states, California and Illinois, introduced bills dealing with cryptocurrencies, according to research by the National Conference of State Legislatures. They included a measure (AB 129) signed into law by California Gov. Jerry Brown (D) repealing a prohibition against “issuing or putting in circulation, as money, anything but the lawful money of the United States.”
Also in 2014 New York and California issued guidelines for sales taxes on purchases made with bitcoin. New York’s approach called for calculating the tax off the value of bitcoin at the time of purchase rather than on the price of the good purchased. So if an item retailing for $100 was purchased with an amount of bitcoin valued at $99.87 at the time of the transaction, the sales tax would be based on the $99.87.
That approach more closely taxes the value transferred by the buyer, Christopher Beaudro, an associate at Eversheds Sutherland US LLP, told Bloomberg Tax. As William Gregory Turner, a tax attorney based in Sacramento, put it to Bloomberg, “New York seems to be treating Bitcoin more like currency than property.”
But Beaudro and Turner both added that New York’s system could be difficult to implement because of the volatility of bitcoin’s price, putting sellers in the position of having to constantly monitor it.
“From a sales tax perspective, this could be an administrative nightmare,” Turner said.
California took the opposite tack from New York by mandating that sales tax be calculated off the list price of the good sold instead of the value of the bitcoin used to purchase it, essentially treating bitcoin like property rather than currency. Beaudro said it seemed like an easier system to administer. And although Turner said it was more of a “ball park” approach, he also said it was more like the position taken on bitcoin by the IRS for federal tax purposes.
In 2015, according to NCSL’s research, more than 10 states introduced cryptocurrency bills or resolutions, several of which were enacted. They included Connecticut HB 6800, allowing additional requirements to be placed on, or licenses to be denied to, businesses applying for a money transmitter license that intend to transmit virtual currencies like bitcoin, and Tennessee SB 674, allowing political candidates and campaigns to accept contributions in digital currencies.
About the same number of states introduced cryptocurrency bills in 2016, although fewer of the measures were enacted. Among the more notable introductions were California AB 1326 and New Jersey AB 2097, both of which were aimed at fostering legitimate digital currency businesses.
The bill volume held pretty much the same in 2017, according to analysis by NCSL and LexisNexis State Net, with 10 states introducing cryptocurrency bills and four of those states enacting such measures. Among the bills that didn’t pass was California AB 1123, which would have established license requirements for virtual currency businesses. The enactments included Illinois SB 868, which added “virtual currency” to the state’s unclaimed property law; North Carolina HB 86, which amended that state’s money transmitters law to accommodate virtual currencies; and Washington SB 5031, which set license and enforcement requirements for money transmission businesses and currency exchanges.
State lawmakers are showing more interest in the issue in 2018, a trend that Heather Morton, program principal in fiscal affairs at NCSL, said in an email that she expected to continue. At least 21 states have introduced and six have enacted cryptocurrency bills or resolutions this year (see Bird’s eye view). As Morton noted, much of the legislation concerns the applicability of money transmission laws to virtual currencies or the addition of such currencies to laws governing unclaimed property. But the measures also address a range of other issues.
A bill (SB 1091) vetoed by Arizona Gov. Doug Ducey (R) would have allowed tax payments to be made with cryptocurrencies. (Similar measures have also been considered or are still pending in Georgia, SB 464; Illinois, HB 5335; and New York, AB 9782). Ducey also signed HB 2601, setting requirements for initial coin offerings (ICOs), the crypto-world equivalent of initial public offerings (IPOs).
A measure (HB 5001) failed to get out of committee in Connecticut that would have imposed a fee on virtual currency transactions.
Bills pending in Michigan (HB 6253, HB 6254 and HB 6258) would add “cryptocurrency” to the state penal code’s definitions of embezzlement, money laundering and credit card crime.
New Jersey is making another run (AB 1906) at the “Digital Currency Jobs Creation Act” it previously introduced in 2016 (AB 2097). New York is also considering legislation (AB 9862 and AB 11018) aimed at promoting cryptocurrency business activity.
Vermont enacted a bill (SB 269) dealing with “blockchain,” the technology underlying Bitcoin and other cryptocurrencies. Washington considered a measure (SB 5264) that would have prohibited marijuana producers from accepting virtual currencies as payment for their products. And SB 111, one of three bills enacted in Wyoming, exempts virtual currencies from property taxes.
All of this state legislative action has come in what has been a relatively quiet year for cryptocurrencies, with transaction volumes well down from their December 2017 peak. Consequently, it wouldn’t be too surprising to see state lawmakers’ interest in cryptocurrencies ratchet up even higher if there’s another spike in cryptocurrency prices.