The incredible rise in interest for cryptocurrencies and spectacular volatility in their prices has caught the notice of regulators.
Regulation of Bitcoin and cryptocurrencies in the U.S. is complicated as there is no single federal authority for it. Bitcoin is considered a commodity regulated by the Commodity Futures Trading Commission (CFTC), it is considered a property for tax-purposes by the IRS and Bitcoin futures exchange-traded funds come under the purview of the Securities and Exchange Commission (SEC.)
While these authorities have begun laying out some regulatory framework, there is a long way to go. Even though the actual buying and selling of cryptocurrency with blockchain technology are considered extremely secure, the SEC and CFTC have issued multiple warnings about scams pertaining to cryptocurrency investments.
Let’s take a look at what’s going on now what may happen in the future.
- There's no single regulatory authority for cryptocurrencies and different regulators approach cryptocurrency regulation differently.
- Regulations aim to add investor protection and make the cryptocurrency market less susceptible to manipulation.
- With or without regulation, the cryptocurrency market will remain wildly speculative, and investors should carefully consider their investment goals and risk tolerance before entering a cryptocurrency position.
How Can Bitcoin Regulations Change the Market?
Main drivers of cryptocurrencies such as anonymity and decentralization, and therefore the lack of concentrated regulatory power are contradictory to the very idea of centralized regulation, according to some researchers.And those are exactly the reasons why cryptocurrencies may facilitate money laundering and other crimes and need to be regulated, believe other policy experts.
In the short term, regulations can have a knee-jerk reaction suppress the trading values of cryptocurrency. For example, China banning cryptocurrency transactions in Sept. 2021, saw cryptocurrency markets drop.
But over the long term, regulations if done properly, may have the potential to stabilize the market and reduce some amount of risk for cryptocurrency investors.
Will Bitcoin Regulation Make the Market Safer?
Bitcoin regulation has the potential to make the market much safer. It will still likely be a risky investment, but with protections for investors, it’s less likely that the market will be able to face as much outside manipulation.
Overall, this is a good thing for people who want to invest in cryptocurrency. Safer markets mean more public confidences, which often means prices go up over time.
Bitcoin and Cryptocurrency Regulation: What's Happening?
Cryptocurrencies are a new asset class and with that comes new challenges for regulators. In terms of regulation, it may be as simple as whether its something worth regulating.
Are Cryptocurrencies Securities?
While Bitcoin was deemed a commodity to regulated by CFTC, the SEC is engaged in a legal battle with XRP to determine if XRP tokens are a security and whether Ripple Labs, the company behind XRP, conducted an unregistered securities offering by selling XRP.
Can ICOs Be Regulated by the SEC?
Just like initial public offerings (IPO) are ways for companies to debut shares on the stock market, one way cryptocurrency is sold to investors for the first time is through an initial coin offering (ICO). Like his predecessor Jay Clayton, current SEC Chair Gary Gensler believes that ICOs are unregistered securities offerings that fall within the the purview of securities laws. The SEC has brought a number of enforcement actions against ICOs it believed were unregistered securities offerings.
In October 2021, the President's Working Group on Financial Markets unveiled a report on stablecoins calling for more legislation by the Congress to create a framework for regulators to act within. Stablecoins are cryptocurrencies that typically have their value pegged to a fiat currency such the U.S. Dollar.
In addition to noting the lack of uniform standards for stablecoins, the report also states that the increased use of stablecoins as a means of payment leads creates risks. Three major risk categories identified are–runs on the stablecoin, disruption of the payment system, and concentration of economic power. The Group also recommended more legislation to mitigate those risks, that include:
- Allowing only FDIC insured depository institutions such as banks to issue stablecoins. This would help protect investors in the event of a run on the stablecoin.
- Federal oversight for stablecoin issuers or exchanges that offer custodial wallet services to monitor risk-management systems. This would help restrict lending out of consumer stablecoins by such custodial wallets and help manage the risks of the payment system.
- Restriction on commercial affiliations of stablecoin issuers and custodial wallet providers. This would help limit concentration of economic power. Regulators have in the past frowned upon close ties between stablecoin issuers such as Tether and cryptocurrency exchange Bitfinex, and fined both entities for misleading investors.
Cryptocurrency Tax Regulation
With a parabolic increase in prices for some tokens, investment in cryptocurrencies could lead to big capital gains liabilities.
Starting 2019, the IRS added a line to the Form 1040 asking if a taxpayer had made money through virtual currency.
The tax regulator also published a detailed guide on tax implications for virtual currencies. You could be on the hook to pay taxes if you sold, sent or exchanged (for goods or services) cryptocurrencies. If you received cryptocurrency as remuneration, that would be included in your income as well.
So if you do make money using crypto you may want to declare those earnings before the IRS.
What Should Investors Know Before Investing in Cryptocurrency?
Investing in cryptocurrency can be very tempting. It is reminiscent of the early days of the Internet when everyone was putting money in without any real idea of what they’re doing. Because of the volatile nature of cryptocurrency, it’s important to understand your risk.
It’s a good idea to ask if investing in Bitcoin or other cryptocurrency is a good fit for you and if you’re ready to lose your money. That sounds harsh, but it’s true.
There are tons of upside potentials to cryptocurrency, but the reality is it can all be lost instantly through cybercrime or devaluation.
Cryptocurrency also is very much like a roller coaster. If you enjoy the adrenaline rush and have a high-risk tolerance then it may be a good idea for you to invest in.
The big thing to remember about crypto is that it is risky, as regulatory bodies come in to put in place consumer protection that may become less so, but right now it’s still very much a speculative venture.