Since their inception, cryptocurrencies have brought both excitement and controversy to the financial scene. On one side, this new and volatile asset class has been praised for its decentralized nature. On the other side, it was heavily criticized for the lack of regulatory oversight and high volatility, which led people to compare it to a digital Wild West. The constant fluctuations in Bitcoin and ETH price stand as proof of this uncertainty.
There’s no denying that despite the promise of fast and high returns, the market has been dominated by instability and speculation. That has been made pretty clear by the numerous incidents that have occurred in the crypto sphere recently, the FTX collapse being the latest example. If the risks posed by crypto trading and investing went under the radar for a while, the rapid expansion of the crypto market over the past few years has changed the game entirely. With increased adoption and popularity came increased scrutiny from governments and regulatory bodies, and so the issue of regulating digital currencies was brought into question.
The conversation surrounding cryptocurrency regulation and what that would mean for the industry has split the crypto community into two camps. There are those who agree that regulation is necessary in order to help the industry mature, consolidate its legitimacy and ensure greater stability in the market. In contrast, others are saying that regulations might have a detrimental effect on crypto by hindering innovation and altering its funding principles of decentralization and self-custody, which is what attracted people to crypto in the first place.
It's difficult to tell which party is right and what can be done to find a middle ground. But what is certain is that regulation is already underway, and stakeholders on both ends need to tread carefully before making a decision.
Crypto is already regulated to some extent
Despite common belief, crypto is not as wild and free as some make it out to be. It’s true that the idea behind digital currencies was to create a type of asset that would circumvent traditional financial institutions and completely eliminate middlemen from the equation. Bitcoin’s whitepaper proposed an electronic payment system that allows two parties to conduct transactions with each other without the intervention of a third party.
Cryptocurrencies have managed to do that to some degree, but looking at the current crypto environment, it’s clear they weren’t able to put their vision into practice and reach full decentralization for all intents and purposes. Crypto users may not have to deal with banks or other traditional financial institutions, but many of them rely on intermediaries such as crypto exchanges or crypto payment services to utilize their digital assets. This directly contradicts the idea of a totally decentralized and self-governing financial system.
People choose to use these platforms and services instead of engaging in peer-to-peer transactions because of the convenience and ease of access they provide. In the US, crypto exchange platforms are legal entities and fall under the regulatory scope of the Bank Secrecy Act (BSA). This means they need to comply with a set of rules and regulations set in place by local authorities in order to provide their services to consumers. Therefore, regulations are already part of the picture in the crypto space.
What’s more, users are required to pay taxes on crypto because the IRS classifies digital currencies as property. While the action of purchasing cryptocurrency is not taxable, you do have to pay capital gains taxes if you sell your crypto assets and make a profit out of it, just as you would if you made a profit from trading traditional assets like stocks or bonds. Also, if you accept crypto payments for providing a job or a service, you’ll have to pay income tax on it.
The challenges of regulating crypto assets
For the moment, digital currencies remain in a grey legal area. While governments and regulatory bodies around the world recognize the need to develop viable regulatory frameworks for crypto, they’re not quite sure how to go about it, as they’re dealing with a fairly new and extremely complex asset class.
Different countries have different approaches in this respect. China has completely banned the use of digital currencies, declaring all cryptocurrency transactions strictly illegal and blocking access to foreign exchange platforms. Japan, on the other hand, has shown its support for digital currencies by legalizing Bitcoin. Similarly, El Salvador has adopted Bitcoin as a legal tender.
In the US, things seem to be a bit fragmented, as there are various agencies taking different stances when it comes to regulating crypto. The lack of consensus between regulatory bodies creates confusion among stakeholders and leaves many gaps and loopholes that can be exploited to their disadvantage. Until lawmakers manage to reach an agreement and develop a unifying legal framework, many of the issues running rampant in the market will remain largely unaddressed.
How regulations might impact the industry
There’s still a long way to go until governments are able to find solutions to all the challenges posed by crypto regulation. However, sooner or later, the crypto space will become regulated, and that is bound to bring benefits to all parties involved.
Stricter regulation of crypto exchanges will make the market a lot safer, as it will protect investors and traders from fraud and scams and minimize the influence of external factors. Removing bad players from the market might make it more difficult for people to invest in cryptocurrencies, but it will also ensure greater stability in a space that has been dominated by uncertainty.
As a direct consequence, people will become more interested and confident in investing in cryptocurrencies. Knowing they have a strong regulatory framework to protect them against potential threats and hazards, more investors will be tempted to enter the market and add cryptos to their portfolios. A larger number of investors translates into a higher volume of capital flowing into the market, supporting further innovation and the growth of the industry.
Crypto regulation is tricky but necessary. The rise of digital currencies calls for governments to take action in this respect and rush the process, so we’re definitely going to see a lot of interesting developments in this area in the near future.