If you have been following financial and tech news in the last few years, it probably seems like Bitcoin, Ethereum, Tether, and Binance Coin have become household names.
You are probably already investing in crypto or own a few coins yourself. In any case, the ballooning popularity of cryptocurrencies means that this market has gotten the attention of lawmakers.
The attention that cryptocurrencies have been receiving from lawmakers and industry leaders means that regulations and rules are on the horizon. These broader and stronger regulations could change the market, potentially attracting more investors and paving the way for wider adoption of crypto – especially the technology that makes it possible in the first place – blockchain.
Whether you are simply curious about cryptocurrencies or have a few coins in your digital wallet, you may want to become aware of some changes on the way.
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Who Regulates Cryptocurrency?
Currently, there is no single agency that regulates crypto. What you have instead is different sets of rules that are developed and implemented by separate agencies.
At the federal level, the chief agencies involved in regulating and monitoring cryptocurrency are :
- Federal Trade Commission (FTC)
- Department of Treasury
- Securities and Exchange Commission (SEC)
- Commodity Futures Trading Commission (CFTC)
- Financial Crimes Enforcement Network (FinCEN)
Each agency treats crypto differently. According to Investopedia, the SEC treats cryptocurrency like a security, while the Department of Treasury treats it like a currency.
According to FinCEN rules, all exchanges must be registered, for the purpose of combating money laundering and the financing of criminal activity.
While there is some degree of coordination among these agencies, the cryptocurrency market in the U.S. remains largely unregulated, with no higher-level oversight.
But, given the rising popularity of crypto, this will likely change in the near future.
Will Cryptocurrency Ever Be Regulated?
According to Investopedia, there are over 8,000 cryptocurrencies out there which partly explains the lack of effective regulation. It is hard for agencies such as the IRS or the Securities and Exchange Commission (SEC for short) to develop rules and regulations that can keep up with such a rapidly evolving field of finance.
While cryptocurrency can transform the fields of tech and finance for the better, there are several problems. Since all activity involving cryptocurrency is digital, crypto is prone to glitches that occur in digital platforms and major cybersecurity risks such as hacking.
Over the years, there have been a growing number of cases. High-profile hacks include:
- KuCoin in 2020 (over $280 million stolen)
- Coincheck in 2018 (over $530 million lost)
- Mt. Gox in 2014 (over $460 million stolen, causing a Japanese exchange to go bankrupt)
But the risk does not end with hackers. The value of cryptocurrencies is known to wildly fluctuate. Within the span of one year, for example, Bitcoin went from $25k to over $60k, plummeting down to around $30k and then shooting upwards in $65k.
There have also been cases of market manipulation that distort the value of currencies and money laundering schemes that have funded criminal activity.
According to one 2019 study, for example, almost half of bitcoin transactions and a quarter of users were associated with criminal activity.
Because of these high-profile issues and risks, there has been discussion of regulating cryptocurrency, in order to protect the interests of investors and control cybersecurity risks.
But, at this point, none of these talking points have turned into concrete action.
Would Regulation Be Bad for Crypto?
That depends. Many people are reluctant to embrace crypto and the technology underlying it because they do not think that they are good investments.
From this perspective, the cryptocurrency market is the Wild West and, unless there is more security and stability assured for investors, they are unwilling to adopt it. The market is too speculative, volatile, and, therefore, too risky.
For others, the technology that makes crypto possible to begin with – the blockchain – is one of the most attractive features. The technology fosters trust among parties and offers transparency in the digital space.
Crypto investors can exchange currencies without the need of a third-party. Unlike fiat currencies, such as the dollar, cryptocurrencies offer a long-term store of value. Maybe there is no need for regulation since the crypto regulates itself.
Cyberpunks and libertarians alike embrace crypto because its market challenges the state’s power to mandate which currencies we use; regulations, on a state or a federal level in the US, would undermine the purpose of cryptocurrency in the first place.
Tesla CEO, Elon Musk, argues that regulations will slow down the market for worse.
As of today, you can find many hot-takes and pieces on why cryptocurrencies should be regulated – as well pieces opposing such a move. Whether or not you think regulation will be bad for crypto, you will likely see more regulation in the future.
What Would Regulation Look Like?
If regulation of cryptos is set in place, you can expect to see changes in banking, cybersecurity, and privacy. Regulation will be designed to prevent tax evasion and protect all stakeholders – especially investors.
The IRS already requires investors to report any transactions involving crypto currencies. As part of the goal of doubling down on tax evasion, the government will likely develop and enforce stronger measures to track activity in this market.
Congress has already proposed tougher rules for tax enforcement.
What does this mean for you? You will need to make sure that you maintain a detailed and accurate record of your cryptocurrencies – or hire a CPA to do it for you.
In order to come up clearer and stronger regulations around cryptocurrency, the agency in charge will need properly classify crypto. Would it be classified as an asset, like a stock or a bond, as the SEC does, or a currency?
In order to determine who will provide the necessary oversight of crypto, lawmakers and the relevant industries will need to decide how to define cryptocurrency.
Should Crypto be Regulated?
Regulation of cryptocurrency has been slow and patchy, but the pace of will likely pick up within the next few years. These regulations could change the way the cryptocurrency market works, potentially making it appealing to and safer for more potential investor.