Regulation
Bitcoin has a regulatory problem
Regulation is one of the key factors affecting the price of Bitcoin. Cryptocurrency’s growing popularity has been halted every time a government has raised the political whip, and countries have taken various approaches to address it. Bitcoin Regulation.
For example, in November 2019, Bitcoin sank when China accelerated a crackdown on cryptocurrency businesses. Conversely, each time a regulatory “win” appears, prices temporarily soar. For example, in January 2024, after years of regulators’ denials of the Bitcoin Spot ETF, approvals of the Bitcoin Spot ETF caused its price to soar over the following months to over $73,000.
By their very nature, cryptocurrencies are free and not dependent on national borders or specific agencies within a government. However, this nature poses a problem for policy makers, accustomed to dealing with clear definitions of assets. Here are two unresolved questions related to Bitcoin regulation.
Key takeaways
- Bitcoin regulation may vary at the national and local levels, depending on the country or geographic area.
- In the United States, the IRS considers cryptocurrency to be property, while the CFTC considers it to be a commodity.
- Many cryptocurrency companies have attempted to avoid securities laws or requirements by claiming that their tokens are utility or transactional tokens rather than security tokens.
Who should regulate cryptocurrencies?
Nothing is more symptomatic of confusion about cryptocurrencies than their classification by US regulatory agencies and their updates with those of former President Donald Trump. tax reform law. THE Commodity Futures Trading Commission (CFTC) treats Bitcoin as a commodity, while the Internal Revenue Service (IRS) treats it like property.
There is also a disparity in state and federal responses to cryptocurrency. While states have acted with alacrity and formulated rules to Initial Coin Offerings (ICOS) And smart contracts, federal responses are generally fueled by the interpretation of existing laws in relation to how cryptocurrencies are used. For example, cryptocurrency startups in New York must obtain a BitLicense, which has strict disclosure requirements, before an ICO. Likewise, Arizona recognizes smart contracts. However, as of March 2024, Congress has not passed any legislation to guide regulators, although there have been several attempts.
How should cryptocurrencies be regulated?
The unique characteristics and global portability of cryptocurrencies pose another problem for regulators.
For example, there are broadly four different types of tokens traded on exchanges: transactional, utility, security, and governance tokens. As the name suggests, utility tokens serve an underlying purpose on a platform. For example, ether (ETH) is used on Ethereum to pay transaction fees and as collateral to participate in blockchain processes and earn rewards.
These tokens are not subject to SEC rules unless they are used as securities. On the other hand, security tokens represent equity or stock in a company and automatically fall under the jurisdiction of the SEC. Governance tokens grant holders specific rights to a blockchain, and transactional tokens are designed for use only in financial transactions.
Unsurprisingly, several tokens have circumvented existing regulations by declaring themselves utility tokens. Such startups have been publicly reprimanded, but that has not stopped tokens with questionable business models from being listed on exchanges outside their home countries.
In response, international agencies such as International Monetary Fund (IMF) have called for international discussion and cooperation among regulators regarding cryptocurrencies. The EU, which welcomes the cryptocurrency revolution, may have an advantage over other territories as it controls a 28-member bloc. In June 2023, the European Crypto Asset Markets (MiCA) regulation came into force. MiCA defines cryptocurrency assets and how they should be regulated on the block. This legislation addresses how cryptocurrencies should be regulated in the EU, but the US and other countries are still working on solutions. Some countries have completely or partially banned cryptocurrencies.
Create regulations for cryptocurrencies
On his Twitter page, the former head of Cooley law firm’s blockchain practice, Marco Santori, called bitcoin a “legal platypus” that doesn’t fit neatly into established asset classes. However, the platypus may not be such a big problem from a tax perspective or for tax purposes in the United States.
Bitcoin and cryptocurrencies are actually no different from cash, stocks, bonds or other financial instruments: they can represent the same things. In the United States, there are already regulations that can apply to how an investor, business or consumer treats them. Creating definitions and applying them to these virtual assets for regulatory purposes, as is already underway, could be sufficient.
Regulators could look to Asia for guidance
Some countries, particularly in Asia, provide guidance on how to manage cryptocurrencies. The clearest indication of the region’s future regulatory policy may come from Japan, which officially recognized cryptocurrencies as property in its Payments and Services Law and developed a framework in 2017.
Startups planning an ICO must also obtain a license that establishes a minimum set of requirements and disclosures for the offering. Finally, exchanges are also subject to capital requirements, strict IT compliance controls and regulations regarding KYC (Know Your Customer). To achieve these changes, Japan had to amend its payment services law. Certainly, the task is much easier in Japan since the country only has one agency, the Financial Services Agency, to operationalize the changes.
South Korea plans to tax all cryptocurrency profits above 2.5 million South Korean won at 20%, a measure expected to take effect in 2025.
Will the SEC regulate Bitcoin?
The Securities and Exchange Commission regulates what assets it considers to be securities. It does not yet regulate Bitcoin, but it does regulate investments or derivatives related to Bitcoin.
Will Bitcoin survive regulation?
Bitcoin has survived many regulatory changes so far, likely due to the pressure the cryptocurrency community puts on governments and regulators and the steps they take to avoid regulation. If this continues, Bitcoin will likely survive as long as it has the support of users who communicate with their legislative representatives.
Is Bitcoin legal in the United States?
Yes, Bitcoin is legal in the United States, but it is not recognized as legal tender, which means it is not supported or supported by the US government.
The essential
Bitcoin regulations vary around the world, if they exist at all. But one thing remains certain: developed countries with financial services regulators are likely to develop regulations on cryptocurrency activities to protect the interests of consumers and governments and combat illegal activities.
The comments, opinions and analyzes expressed on Investopedia are for online information purposes. Read our warranty and exclusion of liability for more information. As of the writing of this article, the author owns BTC and LTC.