As an emerging currency, cryptocurrency promises a lot of benefits. However, even with its benefits, experts believe that there needs to be a regulation that ensures smooth operations in the industry. Currently, cryptocurrency regulations are quite blurred and rapidly changing, so every investor requires a good understanding of existing rules to remain alert as they trade. Let’s take a look at cryptocurrency regulation.
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What Is Cryptocurrency Regulation?
Cryptocurrency regulation is the procedural and legal structure governments put in place to shape the several facets of digital currency. Accessed by different administrations, cryptocurrency regulation currently ranges from comprehensive rules for blockchain users to complete bans on its use and trade. Cryptocurrency regulations usually address how the digital asset is created, sold, bought, and traded. Additionally, government bodies and agencies also dictate its integration with current financial systems.
The Need for Regulation
The gospel of cryptocurrency revolves around its ability to protect the security and privacy of individuals against corporations and governments. Since this is how cryptocurrency came about, many individuals maintained a carefree attitude to building and investing in the community. So far, cryptocurrency must accept that the consumer protection industry won’t sit back as certain people take advantage of innocent investors in what is currently a $1 trillion industry.
The need for regulation comes from the need for a restriction due to faulty and misrepresentations of token designs, ponzi-based projects, and initial coin offering scams that could cost investors billions of dollars. With recent bankruptcies, heightened by the FTX collapse, the need for regulation in the volatile cryptocurrency industry becomes more essential.
Cryptocurrency Regulation in the US
In the United States, there isn’t a clear cryptocurrency regulatory landscape since it is still evolving. Several government agencies usually deal with cryptocurrency based on their assessments of its characteristics. Sometimes lawmakers chip in, and states can create their own rules. Let’s take a look at how some agencies have interpreted cryptocurrencies:
- The Securities and Exchange Commission (SEC): For the SEC, cryptocurrency is a security. As a security, the SEC requires that every offering qualified as an investment contract should be formally registered. In 2023, the SEC took regulation enforcement by filing lawsuits against companies such as Coinbase.
- The Commodity Futures Trading Commission (CFTC): The CTFC believes that digital assets are similar to commodities such as gold, or oil. They define commodities as an asset that supports future contracts, and the agency already regulates an active market for crypto futures. The CFTC also initiated actions against unregistered Bitcoin futures exchanges.
- The Internal Revenue Service (IRS): The IRS says digital assets are properties. This is done in a way that means every trade, purchase, or sale with cryptocurrency can be taxable, and capital gains tax rates can be applied. The IRS began to treat crypto as a property in 2014.
International Cryptocurrency Regulations
Several countries across the globe have formulated different rules for digital assets. Below are some countries that have begun to regulate cryptocurrency:
- The United Kingdom: While the United Kingdom regulates cryptocurrency companies, it doesn’t have any rules for cryptocurrency itself. However, the Financial Conduct Authority ensures that cryptocurrency companies are not used for terrorist financing and money laundering while the Advertising Standards Authority is aimed at regulating cryptocurrency advertisements. Additionally, the UK sees cryptocurrency as a capital asset for tax.
- Canada: In Canada, cryptocurrency exchange-traded funds operate on the Toronto Stock Exchange. However, trading platforms are regulated through registration with provincial agencies. Also, cryptocurrency investments are categorized as money service businesses and are also taxed like every other commodity.
- El Salvador: Located in Central America, El Salvador is the first country to utilize Bitcoin as a legal tender. It is used throughout the country and is also accepted by merchants. Tax payments are also collected in Bitcoin and foreigners don’t need to pay tax income on bitcoin gains.
- Switzerland. Cryptocurrency regulation in Switzerland is progressing. In 2020, lawmakers passed a law on distributed ledger technologies (DLTs), which introduced the ‘DLT securities’ concept and allowed tokenization for financial instruments, claims, and rights. In Switzerland, taxpayers might owe wealth tax or income tax on their crypto holdings.
The Benefits of Cryptocurrency Regulation
Implementing cryptocurrency regulation comes with several benefits. Some of them are:
Improved Investor Protection
Regulation of cryptocurrency has enhanced the protection of investors. With regulation, scams, Ponzi schemes, and fraudulent activities can be reduced with strict compliance demands on cryptocurrency businesses. Successively, this action boosts investor’s confidence and encourages increased cryptocurrency adoption.
Individuals intending to monitor their cryptocurrency portfolio’s value might find a BTC to USD converter helpful. It allows an easy conversion of Bitcoin’s holdings into US dollars, giving the investor a well-defined understanding of their investment worth in traditional currency.
With a well-defined and clear regulation framework, the door would be opened to institutional investors like banks, pension funds, and asset management firms for entry into the crypto market. With institutional participation, there will be mainstream acceptance, liquidity, and stability which in turn would create job opportunities for those financial professionals with cryptocurrency, compliance, and blockchain technology expertise.
Challenges Associated with Regulating Digital Assets
Even with the clear need for regulation in the cryptocurrency sector, some drawbacks accompany regulating cryptocurrency. Some of these drawbacks include:
- Restricts market access: With cryptocurrency regulation, some investors might not have full access to cryptocurrencies and other digital assets.
- Suppress Innovation: When compliance requirements and strict rules are created, it would construct or slow down the pace of blockchain innovation.
- Regulation may lead to challenges in enforcement across different jurisdictions: When all government agencies and law-making bodies create their cryptocurrency policies, it might be very challenging to enforce these regulations.
- Could result in increased cost of business: Adhering to cryptocurrency regulations could mean that businessmen and investors would have to spend money on time-consuming compliance processes and infrastructure.
- Regulation could affect cryptocurrency’s financial performance: Extensive rules that govern the cryptocurrency industry might likely impact digital assets’ financial performance.
Since the inception of the first cryptocurrency Bitcoin in January 2009, government and regulatory agencies are still creating rules that govern its usage. The aim is to protect businesses and individuals from fraudulent activities and ensure there is a method of preventing illicit usage of cryptocurrency. There exists progress among several countries, but it is a slow and contentious one. Regulating cryptocurrency is advantageous, but its complex rules and lack of regulatory clarity have made it a slow process.
Also Read: How To Get Into Cryptocurrency