A look at reasons why countries are looking at regulating cryptocurrency transactions
The adoption of cryptocurrency has seen a major push in the past couple of months. One key development that brought attention to cryptocurrency is El Salvador’s adoption of Bitcoin as legal tender.
Another significant moment in cryptocurrency’s recent history is the Chinese crackdown on crypto mining. This regulation was a step towards reducing the country’s carbon footprint.
However, regulation of any kind is a major challenge to the growth of cryptocurrency.
A cryptocurrency is a digital, decentralized and blockchain-based form of currency. Unlike conventional fiat currencies (issued by governments), there is no central authority that maintains the value and supply of a cryptocurrency.
By their very definition, cryptocurrencies are not meant to be regulated. Thus the introduction of regulatory mechanisms can hamper how a cryptocurrency functions.
The need for regulation
In spite of the dissonance between cryptocurrency and regulation, there is a need for some form of control over cryptocurrency. From a government perspective, cryptocurrency offers space for tax evasion.
The concern surrounding tax evasion stems from the fact that there are no strict reporting requirements for cryptocurrency transactions. Jon Feldhammer, a former senior litigator at the internal revenue service (IRS) of the United States, says, “Any time you create a path of non-reporting, you create a way to benefit from tax fraud in an untraceable or a much-harder-to-trace way.”
Another important concern that governments see as a reason for regulation is terror financing. Cryptocurrency transactions are not regulated by central authorities and also have no names attached to them. Their unregulated system and relative anonymity give them the potential to fund illegal activities.v
Within the realm of cryptocurrencies, stablecoins are seen as a bridge between cryptocurrencies and fiat currencies. They have the high transaction speed and the low transaction costs of a cryptocurrency and they also have the stable value of fiat currencies.
However, there is apprehension about whether the stablecoins actually have reverses of their fiat currency equivalents. For instance, earlier this year, there was fear that the widely used stablecoin Tether did not have enough reserves to back every coin in circulation. Such fears also motivate the push for crypto regulation.
The global regulatory landscape
United States of America
In 2020, a total of 32 bills concerning cryptocurrency were introduced in the US Parliament. The 2020 cryptocurrency regulations focused on the aforementioned concerns of terrorism and tax fraud. However, they also promote the use of blockchain technology for government functioning.
The largest number of these bills discussed the tax treatment of crypto. The two main bills within this category are the Cryptocurrency Act and the Token Taxonomy Act. The Crypto-Currency Act of 2020 talks about regulating the economic function, whereas the Token Taxonomy Act focuses on the technological approach to regulating cryptocurrency.
People’s Republic of China
As previously mentioned, China has cracked down on cryptocurrency. However, this crackdown has not been limited to crypto mining. The country has put in place restrictions that ban financial institutions from providing services related to cryptocurrency. Firms have also been urged to monitor money flows involving crypto trading.
In Australia, cryptocurrency exchanges are legal. They are regulated under the Anti-Money Laundering and Counter-Terrorism Financing Act of 2006. This act requires digital financial entities to establish a customer’s identity, monitor transactional activity and report any suspicious transactions. The country also imposes a capital gains tax on crypto transactions. Capital gains or losses from personal assets are disregarded. The category of personal asset refers to cryptocurrency used to purchase of items for personal use or consumption.
South Korea has come out with tax regulations for cryptocurrency. The country’s Ministry of Economy and Finance has stated that, as of 2022, cryptocurrency users will face a 20% tax on profits over 2.5 million South Korean won (US$2,262).
In 2021, India has also begun planning crypto regulation. The Cryptocurrency and Regulation of Official Digital Currency Bill 2021 is reportedly going to ban all cryptocurrencies. It will also act as the legislative framework for India’s own official digital currency like the digital equivalent of the Chinese Yuan. The regulation is yet to be tabled.
Future of crypto regulation
The lack of regulatory clarity on cryptocurrency stems from the complex and evolutionary nature of the currencies. This makes it difficult to classify the categories they would be taxed under. These complexities are the reason why none of the US bills on crypto regulation have come to fruition so far.
While some countries go the extra mile and ban cryptocurrencies, others are still considering where they stand on the matter. Nischal Shetty, co-founder of the Indian cryptocurrency exchange platform, WazirX believes that, “the fact that it is technology, and it is new, has kept them (governments) skeptical about crypto markets.”
While the initial idea of cryptocurrency was a decentralized system free from government regulation, today, an increasing number of countries came out with plans to create their own digital currency and to address the concerns surrounding crypto. Governments seem to see this as a step towards protecting their interests (such as those of taxes) and their citizens. As countries work on their respective regulatory framework, the process might curtail the freedom cryptocurrency previously enjoyed. However, in the long run, it may help those who own cryptocurrencies feel safer and perhaps encourage more people to invest in them as well.
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