Since its inception, cryptocurrencies have brought excitement and controversy to the financial scene. On the one hand, this new and volatile asset class has been lauded for its decentralized nature. On the one hand, it has been heavily criticized for its lack of regulatory oversight and high volatility, which has led people to compare it to the digital wild west. Bitcoin’s constant volatility ETH price stands as evidence of this uncertainty.
There is no denying that despite the promise of quick and high returns, instability and speculation have dominated the market. This has been demonstrated by the many incidents that have occurred in the crypto space lately, the FTX crash being the most recent example. If the risks posed by cryptocurrency trading and investing have been under the radar for a while, the rapid expansion of the cryptocurrency market over the past few years has completely changed the game. With the increase in adoption and popularity came increased scrutiny by governments and regulators, and thus the issue of regulating digital currencies came into question.
The conversation surrounding cryptocurrency regulation and what that might mean for the industry has divided the cryptocurrency community into two camps. There are those who agree that regulation is necessary to help the industry mature, establish its legitimacy and ensure greater market stability. In contrast, others say that the regulations may have a detrimental effect on cryptocurrencies by hindering innovation and changing the principles of finance of decentralization and self-custody, which is what drew people to cryptocurrencies in the first place.
It is difficult to know which party is right and what can be done to find a middle ground. What is certain, however, is that regulation is already underway, and stakeholders on both sides should tread carefully before making a decision.
Encoding is already regulated to some extent
Despite popular belief, crypto is not as wild and free as some people think it is. It is true that the idea behind digital currencies was to create a type of asset that would circumvent traditional financial institutions and completely remove middlemen from the equation. The bitcoin white paper proposed an electronic payment system that would allow two parties to conduct transactions with each other without the intervention of a third party.
Cryptocurrencies have been able to do this to some extent, but given the current crypto environment, it is clear that they have not been able to put their vision into practice and reach full decentralization for all intents and purposes. Cryptocurrency users may not have to deal with banks or other traditional financial institutions, but many of them rely on intermediaries such as cryptocurrency exchanges or cryptocurrency payment services to cash in on their digital assets. This directly contradicts the idea of a fully decentralized and self-governing financial system.
People choose to use these platforms and services rather than engage in peer-to-peer transactions because of the convenience and accessibility they provide. In the United States, cryptocurrency exchanges are legal entities and fall under the regulatory scope of the Bank Secrecy Act (BSA). This means that they need to comply with a set of rules and regulations set by the local authorities in order to offer their services to consumers. So, regulations are already part of the picture in the crypto space.
Moreover, users are required to pay taxes on cryptocurrencies because the IRS classifies digital currencies as property. While the act of buying cryptocurrency is not taxable, you do have to pay capital gains taxes if you sell your crypto assets and make a profit on it, just as if you made a profit trading traditional assets like stocks or bonds. Also, if you accept crypto payments to provide a job or service, you will have to pay income tax on it.
The challenges of regulating crypto assets
For now, digital currencies remain in a gray legal area. While governments and regulators around the world recognize the need to develop viable regulatory frameworks for cryptocurrencies, they are not entirely sure how to do so, as they are dealing with a fairly new and very complex asset class.
Different countries have different approaches in this regard. China has completely banned the use of digital currencies, declaring all cryptocurrency transactions completely illegal and blocking access to foreign exchange platforms. On the other hand, Japan has shown its support for digital currencies by legalizing Bitcoin. Similarly, El Salvador has adopted bitcoin as legal tender.
In the US, things seem to be a bit piecemeal, as there are different agencies taking different positions when it comes to regulating cryptocurrencies. The lack of consensus among regulators creates confusion among stakeholders and leaves many loopholes and loopholes that can be exploited to their disadvantage. Until lawmakers can come to an agreement and develop a unified legal framework, many of the issues that plague the market will remain largely unaddressed.
How regulations may affect the industry
There is still a long way to go for governments to find solutions to all the challenges posed by crypto regulation. However, sooner or later, the crypto space will become regulated, and this is bound to benefit all parties involved.
Tighter regulation of cryptocurrency exchanges will make the market safer, as it will protect investors and traders from scams and fraud and reduce the impact of external factors. Excluding bad players from the market may make investing in cryptocurrencies more difficult, but it will also ensure greater stability in a space that has been dominated by uncertainty.
As a direct result, people will become more interested and confident in investing in cryptocurrencies. Knowing that they have a strong regulatory framework in place to protect them from potential threats and risks will entice more investors to enter the market and add cryptocurrencies to their investment portfolios. A greater number of investors translates to a greater volume of capital flowing into the market, which supports further innovation and industry growth.
Cryptocurrency regulation is difficult, but necessary. The rise of digital currencies calls on governments to take action in this regard and speed up the process, so we will definitely see a lot of interesting developments in this field in the near future.