Cryptocurrencies are rebellious assets. They go against mainstream finance that is based on fiat currencies. Analysts have argued in length that Bitcoin’s fundamentals do not support a higher valuation. Yet, Bitcoin, in all defiance, traded above $60,000 per unit recently before dropping afterwards. Bitcoin, along with other cryptocurrencies are the epitome of change, and governments are hardly prepared for it.
Aside from taxes, governments still lack the tools to regulate cryptocurrencies
Not only are the Fed and other central banks not prepared to deal with cryptocurrency, but they also still do not have the tools to do so either. By concept, cryptocurrencies are not central. Not only do they not fall under the jurisdiction of any central bank, but they do not fall under the control of any central government, either. Cryptocurrencies are extra-national and do not acknowledge political borders. They are built on networks that can extend across several continents. That is why one approach to regulate crypto is to regulate crypto exchanges such as Coinbase, Binance, and others which enable the online trading of cryptocurrencies. Traders can also use contracts for difference to trade the price movements of cryptos on platforms like easyMarkets, which are already regulated.
U.S. regulatory institutions are working on developing a framework
For governments that are stuck with their old systems and ways of doing things, it seems that reining in cryptocurrencies is elusive. Several authorities in the US for example, are working on forming a clear regulatory framework for Cryptocurrencies. Those authorities are the Securities and Exchange Commission (SEC), the Commodities and Futures Trading Commission (CFTC), the federal trade commission (FTC) and the department of the Treasury with its sub-departments. However, this cooperation has not yet been fruitful. No clear rules have been made regarding cryptocurrencies, and politicians do not seem to be in a hurry.
Different countries have different approaches to regulating cryptocurrency. China, for example, had banned initial coin offerings to prevent capital flight and fight potential money laundering. Then recently, China launched its own digital currency, which is an effort to keep developments in this domain under its control. Japan, on the other hand, did not find cryptocurrencies to be illegal.
Regulatory challenges
The challenges in regulating cryptocurrency come from different angles. The first is the fact that governments do not control the supply like they do in the case of fiat currencies (central banks can always print more money or use their monetary policy tools to stimulate inflation or limit it; they cannot do that with cryptocurrency). The second challenge is related to governments’ inability to collect taxes on cryptocurrency holdings when the holder is anonymous. The third, which is mentioned above, is the difficulty of countering criminal activity such as buying illegal items or services online with cryptocurrency. The anonymity of cryptocurrency makes it very difficult for governments to have any level of control.
This is why, in December 2020, the U.S. Financial Crimes Enforcement Network (FinCEN) proposed a new regulation that makes it possible to trace Bitcoin transactions, related to private wallets. Money services providers would be required to “submit reports, keep records, and verify the identity of customers in relation to transactions involving convertible virtual currency (“CVC”) or digital assets with legal tender status”. This should make it easier for the government to identify perpetrators of wrongdoing.
Conclusion
While cryptocurrencies have made some traders rich, they still cause headaches to governments. Many governments have already begun their rulemaking efforts to keep things in check. However, they still have a long way to go.
Story by Anne Holder
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AFP
