The regulatory status of cryptocurrencies is an exceedingly complicated topic. Hundreds of countries all around the world have grappled with the prospect of regulation, applying varying levels of classification and attributing the rights to regulate to various institutions and regulatory authorities. Matters are further complicated when one considers how some countries, such as the United States, have differing tax-related laws based on different states.
Consequently, it would not be possible nor time efficient to provide a rundown of every law in every constituency regarding the regulatory status of the evolving financial sector of cryptocurrencies. Because of this, it is important to understand that this guide does not purport to do so. Instead, this piece will provide an introduction to the regulatory status of cryptocurrencies in key economic sectors of the world.
More importantly, this guide will place a heavy emphasis on the legal realities and considerations surrounding the very backbone of cryptocurrency technology, the blockchain. As governments around the world consider the prospect and possibilities of regulation, the technical makeup of the blockchain and the technologies which constitute this growing financial center are of extreme importance.
Speculators have significant reason to pay close attention to the regulatory progress of many countries regarding the cryptocurrency and ICO market. Regulation could mean several things for both buyers and sellers of cryptocurrencies. Namely, most considerations have to do with the tax burdens and reporting requirements placed on those who possess or market different kinds of currencies.
Investors and entrepreneurs interested in distributed ledger technology should take any definitive statements regarding the regulatory future of cryptocurrencies with a grain of salt. Truthfully, very few speculators in the world of cryptocurrency know exactly how major world governments will react to developments within the community.
Blockchain Technology Introduction
The core of the blockchain is distributed ledger technology. This public technology works by storing financial transaction data publicly on units known as blocks. These blocks, as well as the information within them, are unchangeable and are permanent. The first major application of the technology came with the introduction of Bitcoin to the world stage. Bitcoin used the technology to facilitate decentralized currency creation and trade.
There are several notable benefits to the nature of the blockchain.
First, it is clear that the immutable nature of information stored within its nodes is an incredibly important aspect of its technology. Immutability means that the data cannot be revised or edited by any party. This means two major things. In addition to ensuring that outside parties cannot change the transaction data once it has been verified, the immutability of information provides a stable foundation for future trusted transactions—there can be no disputes if the data cannot be edited.
Next, the decentralization of information native to the blockchain is integral to the long-term philosophical and actualized goals of the technology. Many users of the original Bitcoin had grown distasteful with the traditional economic system. From a theoretical perspective, the creators of the currency took issue with the currency manipulation and the centralization of power within the financial sector. With Bitcoin, however, the currency remains out of the hands of any centralized power. It is up to the people to determine the direction in which the currency moves, and the success or failure of any particular type of transaction.
Some sources outline that the technology is one way that the community can deal with the innate chaos of other financial systems. The distributed ledger continues to store information, regardless of happenings in the political world or socioeconomic changes that occur in any particular institution or country.
But cryptocurrencies are full of their own form of chaos as well. Scamming, forks in the road, and major qualms among traders are all chaotic aspects of the cryptocurrency market. Because of this, it has become necessary for many governments of the world to consider the prospect of regulation for the chaotic enterprise.
But regulation has come, in many ways, too late. Governments just now deciding to work to regulate cryptocurrencies have a long road ahead of them—not to mention an extensive and complex legal battle. Coherent regulation of this sophisticated technology will require regulatory authorities to cultivate a deeper understanding of the tech which they seek to legislate.
A Need for Regulation
The need for regulation of cryptocurrencies is a deeply historical topic which requires regulators to evaluate not only the current state of cryptocurrencies and Initial Coin Offerings, but the timeline of events which led to the problems the sector now seeks to grapple with.
Bitcoin’s initial introduction to the world came, in many ways, as an act of direct rebellion to the traditional economic system. Its creators and purchasers were fed up with the establishment of the economic sector, with its centralized nature and propensity for manipulation by socioeconomic elites. The anti-capitalist and libertarian philosophical backings necessary for the creation and popularity of the project continue to characterize a disdain for the old financial system.
But this laissez-faire economic ideology has always been a source for critiques on Bitcoin and cryptocurrencies. The beginning days of Bitcoin saw its primary use in the criminal underground of the internet known as the dark web. The decentralized currency is entirely anonymous, and consequently was useful for criminals buying drugs, guns, and even hired hitmen.
Following the revelation that the public ledger-based currency was being used for such nefarious ends, government everywhere worked overtime, even crossing national boundaries and collaborating, to try to stop the massive criminal underground lurking beneath the clear web. But eventually, it came clear that the very nature of the currency lent itself to misuse in the black market.
Because of this, many governments refocused their sights on not only the dark web marketplaces that peddled drugs and criminality, but also on the currency which had allowed it all to happen—Bitcoin.
When criminals noticed the deep governmental disdain for the anonymous currency, and as pressure was ramped up to track down the users of the so-called anonymous form of payment, developers responded by creating even more ways to pay on the dark web. Though not entirely attributable to the criminal underground, what followed was the creation of hundreds of “altcoins,” or alternatives to Bitcoin, many of which continue to come forward in 2018.
But the regulatory woes for Bitcoin and its clones don’t stop at concerns of dark web criminality. In 2016, the popularity of a new crowdfunding method on the blockchain known as an Initial Coin Offering abruptly exploded. Its application even began to dwarf traditional online methods of finance such as venture capitalist investment. Thousands of companies have used the unique form of funding, and it has created several massive problems for governments like the United States, where the trade of securities is a serious legal concern.
ICOs function somewhat like an Initial Public Offering would in the traditional fiat financial system. A company offers a new idea or product, but needs the public’s help to make it into a reality. They then create some sort of new currency, or coin, and offer to sell it to investors. In return, investors are either given some sort of value within the company, or they are given access to the product which will eventually be created.
ICOs created a new way that many investors began to generate wealth. The price of the coins could rise spectacularly in some cases, because the price would almost invariably start-out very close to zero. Even a minute rise to the price per unit could mean serious gains for investors that got in early. Still, though, investment on the ICO market was never closely-regulated, and scams were prevalent.
To start, the creation of ICOs led to the proliferation of incredibly popular “pump and dump” schemes. In these massive scams, executives behind a website create new currency, artificially inflating its value by promoting, or pump, a product/project that either never existed or is greatly exaggerated. Then, once the price has risen to a suitable cap, the leaders of the scam immediately sell, or dump, all of their shares, causing the price to plummet.
While these scams are good for those that get in early on the product and sell before the inevitable price crash, they are a clear violation of hundreds of securities-based laws in countries all over the world, and have caused the financial ruin of untold thousands of investors.
And it isn’t just Bitcoin and its occasional spinoff anymore, either. Blockchain currencies like Monero, Dash, and Zcash have inspired fears in some governments that criminal acts like tax evasion may be even easier than ever.
For governments interested in raising more public funding, regulating cryptocurrencies is an incredibly important process. Initial Coin Offerings are often multi-million dollar ventures, and grabbing onto this growing business is the key to a cognizant regulatory evolution in many parts of the world.
Options For Regulations
Luckily for governments unsure of the proper strategy for effectively regulating cryptocurrencies or Initial Coin Offerings, several potential routes for regulation exist. In particular, four different categories characterize how some governments are planning to integrate cryptocurrencies into their existing regulatory framework.
As a brief note: these categories are not the end-all for the options exercised by major governments. Instead, these categories represent just some of the possibilities which could help consumers to understand the directions which their own government could travel down when it comes to evaluating and classifying decentralized currencies within their own laws.
“Wait And See”
The first potential option is known as the “wait and see” approach. As the name might suggest, this dominating strategy is the most popular among leaders of the world, and simply implies that the government will wait until the technology further develops before integrating it into existing frameworks of regulatory authority and action.
The major benefit to this strategy is that it prevents lawmakers from jumping the gun, or making legislation before completely understanding the realities of the technology which they seek to regulate, tax, or classify.
The quick evolution of the blockchain is one reason why this strategy may make sense for an interested nation. Analytics suggest that over 40 different forks have resulted in the past year alone on the Bitcoin blockchain, meaning that over 40 new coins have sprung up from the original technology. Additionally, the innovative efforts of new businesses such as Ripple and the Ethereum platform continue to complicate matters for governmental researchers.
Thousands of new cryptocurrencies have been created since the dawn of Bitcoin, and thousands of more are likely to come. These new blockchain solutions seek to innovate and change the way consumers view the nature of transaction, and could promise thousands of potential applications within financial and public sectors all over the world.
The “Sandbox” Approach
This method of regulation continues to gain steam among governments. It entails the creation of a free market in which experimentation is facilitated and its progress can be monitored. It promises a lack of disruption, but also allows governments the opportunity to discuss and negotiate regulatory options with companies which it concerns.
Both the United Kingdom and Ukraine have drafted laws creating sandbox-like conditions for blockchain technological innovations. Additionally, Kazakhstan’s Innovation Pact led to a lowering of taxes on relevant companies and “friendly regulations” that seem to appeal to the interests of both parties involved.
Sandboxing is generally the best approach for dealing with unique and novel technologies. The regulators and the regulated are able to have a continuing discussion regarding the nature of regulatory efforts inside of a free and existing framework.
New Affirmative Legislation Approach
This strategy characterizes the acting government’s interest in capitalizing on public interest in the industry, with a secondary concern of positive legislation conducive to the continuation of innovative efforts on the blockchain.
One major example of this approach was exercised by Japan, when the company made Bitcoin a legal tender last year. When this happened, the government embraced the currency and thus incentivized the creation of more innovations. When companies become less afraid that they will be over-regulated by an overzealous government, they are more likely to come forward with the kinds of innovations that continue the industry.
There are drawbacks, though. The unpredictability of the cryptocurrency market means that this approach would likely require constant changes and amendments to existing laws, making a comprehensive framework nearly impossible.
An All-Out Ban Approach
Some governments, including Morocco, Bangladesh, Bolivia, and Nepal, have banned all cryptocurrencies from being used and traded within the country. The justification for this approach is similar to the previous, in that it seeks to simplify regulation.
But this approach is unlikely to be successful. Cryptocurrencies are, by nature, global and anonymous entities. As a result, banning them on paper often just causes the users of the currencies to take their projects and interactions underground.
The Future of Cryptocurrency Regulation
Cryptocurrencies are difficult to regulate. Governments in the world continue attempt to either prohibit, assist, or explore the functionality of cryptocurrencies as the industry becomes more volatile and innovations continue to become commonplace.
Some notable obstacles to overcome for regulators include, in a large part, the very ideological backbones of the blockchain. Cryptocurrencies are naturally anonymous and function on a decentralized set of servers. Additionally, the continued changes to the blockchain, the forks in the road, and the innovations put forward by entrepreneurs in the market, make it nearly impossible to regulate.
But moving forward, several major considerations will motivate governments to attempt to regulate. In particular, governments like the United States seek to integrate cryptocurrencies into the existing framework of taxes and securities regulation.
In any case, the coming battle for the soul of the blockchain is of considerable importance to the industry. For a sector ideologically rooted in a lack of centralization, the concept of regulatory authorities sticking their nose in innovation is troubling, to say the least.