With cryptocurrency prices remaining so volatile, even a whisper about a new law can send prices into a downward spiral. At this stage, just the news of impending regulation can seem more powerful than the regulation itself, but as world governments begin to adapt to the changes brought by blockchain, regulation is poised to become a significant force for both users and the economy as a whole.
Of course, people have been predicting that regulation would be the downfall of Bitcoin practically since 2009. Though regulations in Asia and Europe have impacted Bitcoin’s overall market value, the full crack-downs envisioned by early adapters haven’t materialized. Still, is this just a time lag as regulating agencies slowly come around to the revolutionary potential of blockchain? If 2017 was the “year of the ICO” and newly widespread awareness of cryptocurrency, 2018 could be the year of massive institutionalization and regulation.
Why do governing bodies want to regulate cryptocurrency?
“Regulation” can mean many different things to different sides of the blockchain industry. Targeting central exchanges, or how new ICOs can market to consumers, is very different from attempting to regulate cryptocurrency itself.
Some of these measures are ostensibly intended to protect consumers, and this brand of oversight is arguably urgently needed. Fraud is rampant in the cryptocurrency space. With so many new coins and new interest generated by the sky-high prices of late 2017, new coins spring up every day. Scams have already cost investors more than a billion dollars, mostly in the beginning of this year.
Furthermore, the majority of ICOs fail – either because they’re fraudulent, fall short of funding targets, or don’t deliver on their intended purposes. Right now, anyone can write a whitepaper and make millions from underinformed investors. Regulation could put key barriers to entry on this field, crack down on price manipulation, and protect consumer investment from fraud.
There is also a push towards cracking down on the use of cryptocurrency for illicit activity, spurred by worries about funding terrorism, money laundering, tax evasion, and smuggling. These efforts raise red flags for those who believe in the libertarian side of cryptocurrency’s decentralization and demand less reliance on centralized institutions.
What laws are in place now?
Some laws already on the books can be adapted to apply to cryptos and ICOs. In the U.S., governing authorities can’t seem to agree even on what cryptos are or how they should be classified.
The IRS calls cryptos taxable property and has released guidelines on how to deal with them (to see how to deal with taxes as a crypto investor, see article here). In Arizona, you can now even pay your taxes in crypto, indicating that acceptance of the currency is becoming increasingly widespread.
The Commodities Futures Trading Commission (CFTC) calls cryptocurrency coins commodities, but has so far only organized meetings to discuss changing the rules for cryptocurrency derivatives clearing.
The U.S.’s Security Exchange Commission (SEC), on the other hand, has insisted that everything crypto-related, from exchange to wallets, should be considered securities. Already, the SEC has halted several fraudulent ICOs, released a statement warning consumers, and hinted at more regulations to come. Recent cryptofund subpoenas indicate their plans enforce their rulings increasingly aggressively.
In the rest of the world, the regulatory landscape varies. East Asia in particular serves as an interesting test case for regulation.
The most famous crackdown, of course, is happening in China. In early 2018, the PRC banned ICOs, seized bank accounts associated with exchanges, and tried to stop Chinese companies from moving abroad to pursue cryptocurrency elsewhere. While unusual, this makes political sense for a country both attempting to stop money from leaving the economy and to shut down shadow-lending and internal economic corruption.
Japan, meanwhile, might offer a sneak peak at the future of cryptocurrency regulations globally. After half a billion USD was stolen from Coincheck, the Japan-based exchange, Japan unveiled the first crypto-exchange governing authority this month. The Japanese Cryptocurrency Exchange Association (JCEA) will define and enforce best practices in the industry.
What will the result of this be in 2018?
Lawmakers in the U.S. and abroad currently (and unsurprisingly) seem most concerned with preventing illicit activity and ensuring that capital gains made through crypto assets are properly taxed.
Eventually, the likely result of a global regulatory framework will likely be increased identity verification – complete loss of anonymity – on online exchanges. Digital currency exchanges will likely be hardest hit by this. Following South Korean and Japanese examples, tax authorities will likely also introduce crypto-focused tax rules. be required to conduct extensive customer KYC checks and tax authorities will introduce cryptocurrency-specific capital gains tax rules.
The global climate towards crypto as a whole seems if anything to be warming: over 100 countries are already experimenting with digital currencies in favor of eliminating their paper fiat currencies, especially as the value of cryptos increases relative to local currencies and the U.S. dollar. the upcoming G20 summit will agree on a global regulatory framework in July. In 2018, central banks will also begin purchasing cryptocurrencies to bolster their foreign reserves, indicating further institutional willingness to adapt to cryptocurrency.
Is Regulation Contrary to Decentralization?
The overall regulation news is positive for most investors: while new laws might cause short-term price shocks, regulati0n in the long run indicates both increased consumer safety and increasing mainstream acceptance of cryptocurrencies.
On the other hand, this mainstream acceptance also indicates a return to centralized control of online assets, something which flies in the face of what many believe to be the true purpose of cryptocurrency as a way to democratize the monetary system and resist government control of resources.
For example, as the public sector appropriates blockchain technology to create their own digital currencies, they may be able to simply tip the regulatory field in their favor, outcompeting private sector coins. While this might be great for the future of blockchain technology in general, and even for many investors, it’s less great for the democratic dream of Bitcoin’s creation.
Regulation is and will remain the subject of passionate debate, but what it actually means for the future of crypto trading remains to be seen. One thing is for certain, however, and that is that 2018 will see significant changes in this landscape.