Cryptocurrencies were introduced as a mere innovation but now it has been recognized as a separate financial asset class. With its growing adoption the governments all around the world are focusing on curating a way to regulate this industry.
Cryptocurrency regulations will involve tackling issues like privacy, security, taxation and innovation. In today’s article we will explore the regulatory landscape of cryptocurrencies.
Why Do We Need Crypto Regulations?
Due to its decentralized nature cryptocurrencies often present unique challenges. Other financial systems operate in national borders and they also operate under specific centralized authorities. Cryptocurrencies on the other hand are free to move across borders at any instant which makes it unreachable for conventional authorities. This nature has raised concerns in multiple areas.
- Cryptocurrencies provides it users a pseudonymous identity, which is an attractive attribute for scammers. They often used cryptocurrencies in fraud schemes and scams like fraudulent initial coin offerings, phishing attacks and Ponzi schemes.
- Without regulations there is a high chance of market manipulation, exchange failures and hacker attacks. There are multiple examples where platforms and exchanges collapsed and left users with empty hands.
- Cryptocurrencies has also been associated to illegal activities like terrorism financing and money laundering. Due to difficulty in transaction tracing, it is dangerous to use without any regulations.
- With the increasing use of cryptocurrencies in trading and investments, governments are worried about tax evasions. It is possible that investors will not report their losses and gains correctly as there are no clear guidelines for taxes.
- Cryptocurrencies are becoming more and more intertwined with other financial systems. This has raised a concern that crypto volatility will affect over all financial stability.
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Approaches Towards Crypto Regulations
With above mention concerns different countries around the world have taken multiple approaches to regulate the crypto sector. Some countries outright banned the cryptocurrencies while other implemented advance regulatory frameworks.
United States
The US use multiple agencies to regulate the cryptocurrencies. The SEC or Security and Exchange Commission is focused to regulate ICOs and other crypto assets that can be used as securities. ICOs that go against the regulatory requirements have also faced strict actions.
The Commodity Futures Trading Commission or CFTC has classified Ethereum and Bitcoin as commodities and they also regulate crypto related markets. Its job is to make sure that crypto futures abide by the anti-manipulation and anti-fraud standards. Then there is Internal Revenue Service or IRS that treats all cryptocurrencies as properties for tax purposes. It means that IRS ensures that every crypto transaction is subjected to capital gains tax.
European Union
The European Union is trying to balance customer protection and innovation while sorting out its approach towards crypto regulations. The European Union has introduced Markets in Crypto-Assets regulations (MiCA) as a complete regulatory framework to provide a legal certainty to crypto industry. MiCA applies to crypto asset service providers, stablecoin issuers and cryptocurrency issuers to ensure accountability, transparency and investor protection.
Another regulation known as General Data Protection Regulation is applied to all the blockchain and cryptocurrency companies that operate within the European Union to mandate user protection and data privacy. European Union also makes sure that anti money laundering directive is being compliant, that requires all crypto exchanges and crypto wallet providers to provide customers notifications about suspicious transactions.
China
China has a particularly strict approach towards crypto regulations and it has taken multiple measures to regulate cryptocurrency use within its borders. China banned all the cryptocurrency exchanges and ICOs in 2017. Which restricted the users to trade cryptocurrencies only on local platforms. As a result of this, many Chinese exchanges moved their operations to other countries.
In 2021 China took measures and crackdown on the Bitcoin mining. They insinuated that it is impacting the environment on an alarming level and also causing financial instability. This led to a drop in hash rates as multiple mining operations moved from China to other countries like Kazakhstan and United States.
But with all these crackdowns on decentralized cryptos, China has also developed its own digital currency called “The Digital Yuan”. It is a Central Bank Digital Currency (CBDC) introduced to increase financial inclusion and reduce the influence of other private cryptocurrencies.
Japan
Japan has a completely different and progressive approach towards crypto regulations. They focus on innovation while protecting their consumers. Japan has recognized cryptocurrencies like Bitcoin as a legal property under their Payment Services Act. It was one of the first countries to do this. They require the crypto exchanges to register with their Financial Services Agency and adhere to KYC and AML measures.
Japan is also one of the first countries to implement strict security measures where they require exchanges to undergo regular audits and segregate customer funds. It was after multiple Japanese exchanges like Mt. Gox got hacked leaving the exchange on the verge of bankruptcy.
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Conclusion
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The crypto regulatory field is rapidly evolving and different countries are adopting to different approaches according to their political, financial and social context. Some nations are using clear regulatory frameworks while others have imposed strict restrictions based on the concerns like fraud, illegal activities and financial stability.
Crypto industry is maturing everyday which highlights the need of regulations to balance customer protection with innovation, financial integrity and security concerns. But as cryptocurrencies are of global nature, we need the international corporations to come up with effective, adaptable and fair regulations.
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