Top Regulatory Threats to Crypto in 2022

Top Regulatory Threats to Crypto in 2022

2 years ago

How have countries all over the world decided to deal with crypto regulation?

Top Regulatory Threats to Crypto in 2022


Regulation is frequently seen as a threat to the crypto space within the community. But is all regulation actually bad for crypto? And how are the biggest economies like America, China, and the EU regulating digital assets? Today we are taking a deep dive into what crypto regulation is, how it works and what it means for all crypto HODLers.

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How Crypto Drew the World’s Attention

Cryptocurrencies have gone from being speculative investments to a fundamental part of a balanced investment portfolio. Today, 16% of Americans invest in, trade, or use crypto, according to Pew Research.

It is hardly surprising that governments around the world are pondering how to regulate the growing crypto space in the best way possible. Individual countries have taken varying approaches to crypto laws with unpredictable consequences.

The UK’s regulators, for instance, allow British citizens to buy and hold as much crypto as they want but have cracked down on adverts for cryptocurrencies and platforms. China, on the other hand, has criminalized cryptocurrency transactions and mining crypto across the country.

In this article we will try to figure out what we mean by crypto regulation, which methods officials are using to regulate crypto, and whether regulation is necessarily all bad for crypto.

What Do We Mean by Regulation?

The term “regulation” is used a lot in the press, but what exactly does it mean? In short, regulation is an official rule applied and enforced by a department of government called a regulator.

Regulators enforce all kinds of regulations for every type of business, including environmental pollution rules, rules against using children for labor, and of course, rules on how we can use cryptocurrencies. For the most part, regulators exist to protect us from shady, illegal, or harmful business practices.

And while some arms of the media love to denounce regulators for “unnecessarily” interfering in the free market, for the most part, they are creating and carrying out useful and necessary rules. They prevent monopolies from taking over the small companies and charging sky-high prices for basic necessities or stop unscrupulous companies from pouring toxic waste into our rivers.

But the relevant question for us, the crypto diehards, is whether the regulation is actually bad for crypto.

Is Regulation Bad For Crypto?

Regulation definitely can be bad news for crypto. For instance, regulations banning exchanges or limiting the energy that miners can use will limit the number of people who can access and benefit from digital currencies.

Fortunately, politicians on both sides of the aisle remain skeptical of crypto regulation. The senior Democrat Ron Wyden warned the US government against harshly regulating crypto, arguing it would stifle innovation.

Still, not all regulations will spell disaster for crypto. As a matter of fact, you would be surprised how much regulation can actually help crypto. Some regulations will give crypto more legitimacy, which could lead to institutional investors being more willing to finance crypto ventures. That, in its turn, would help the crypto industry grow.

In fact, a number of crypto figureheads are asking for a federal regulatory framework for cryptocurrencies, including Coinbase’s CEO Brian Armstrong.

So now that we know what regulations are, and that not all regulation means Bitcoin is to zero, let’s take a look at the options regulators have in respect to cryptocurrencies.

What Options Do the Regulators Have?

As we said earlier, regulating cryptocurrencies is problematic for a number of reasons. Cryptocurrencies and platforms are built on new technology that regulators need to get their heads around before they can create a regulatory framework.

But thanks to ever-increasing investment and innovation in crypto, there are tonnes of new technologies and tools coming out every week, further complicating an already difficult job for the regulators.

We must also account for the fact that Westerners have invested considerable sums of money into crypto, and so any regulation that would damage digital assets would also harm their own citizens. If the EU and the US regulators decided to ban all cryptocurrency overnight, they would be pulling the rug out from under 300 million people or more, many of which live in their own backyards.

And after all, democratically elected governments are accountable to their voters. And if those voters happen to be crypto HODLers who do not want crypto strongly regulated, the government has little choice but to approach crypto regulation with a light touch or risk facing a furious backlash.

Still, regulators have dozens of ways to slow crypto’s progress at their disposal.

How Exactly Can Crypto Be Regulated?

Regulators have a myriad of tools to regulate crypto, but most have so far chosen one or two of the following strategies:

#1 Introduce or Increase Taxes on Crypto

Today, most tax departments charge from ten to twenty percent capital gains tax on any profits made from trading crypto. However, not all regulators choose to do so.

However, we have to take into account that regulators that have not announced crypto taxes could do so, and those that do charge taxes could increase the rates.

Then again, regulators might also reclassify crypto as a new type of asset, which would also change how much tax we pay on profits from selling Bitcoin or Ethereum.

#2 Regulate Crypto Advertising

Regulators could also moderate how crypto firms can advertise their products and services to the general public.

For instance, both the UK Financial Conduct Authority and the Spanish government have implemented rules to stop exchanges and platforms from making certain kinds of claims about their services, and from advertising in certain areas.

Another way to regulate crypto is to ban the sale of all crypto derivatives, like options and futures contracts, which the UK’s Financial Conduct Authority did in January 2021.

According to the Financial Times, the FCA’s derivatives ban is both overly cautious and hurting Britain’s position as a global financial center. The newspaper also claims the ban has not achieved much because Brits can simply buy derivatives abroad to get around the regulation.

#4 Deter the Public From Buying Crypto

Another approach, which a surprising number of regulators are taking, is to make the public aware of the risks of crypto. Which, at first glance, seems like an appropriate and reasonable first step toward regulation.

However, research published by the Financial Conduct Authority shows such warnings are neither useful nor effective. The FCA’s research shows that the majority of crypto HODLers are knowledgeable about what crypto is and how it works, and are, for the most part, aware of the lack of regulation and the risks involved in trading crypto.

#5 Total Ban on Crypto

Finally, regulators could always ban crypto outright. This is an approach taken by China, Egypt, Iraq, Qatar, and a number of other countries already.

However, it is unlikely that any Western countries will ban crypto completely, just because so many of their citizens own crypto, and a ferocious uproar would likely follow a full-blown crypto ban.

Central Bank Digital Currencies, or CBDCs

The regulations we have talked about so far control crypto directly, but governments and regulators have another, indirect way to regulate crypto: by creating a government-controlled digital currency with all of the crypto’s technological prowess but under centralized oversight.

Central bank digital currencies, or CBDCs, are digital currencies that are somewhat similar to cryptocurrencies, except they are not transparent and they are controlled by a centralized regulator or government. CBDCs are being trialled and tested all over the world today, and a few major economies could replace cash with CBDCs within the next decade.

In practice, spending a digital dollar would work just like spending money on your credit card. The difference is that the digital dollars would be programmable. So every purchase you make is trackable. So if your central bank actually did get rid of all cash and implemented a CBDC overnight, it could keep tabs on your spending habits or stop you from buying products it does not approve.

CBDCs have long been a major concern for privacy advocates. If citizens are being compelled to provide ID to the government for every transaction they make, the politicians could build a massive, lifelong file on their spending habits, which raises serious privacy questions.

In fact, a worrying Federal Reserve report on CBDCs came out in January which failed to explain how a digital dollar could maintain cash-like privacy, and also claimed that a CBDC that lets citizens keep their anonymity simply “isn’t viable.”
Should a Western country go ahead and release a CBDC, the government could then claim that its citizens are no longer in need of decentralized cryptocurrencies. With the right PR and media campaigns, people could be brought around to the idea that Bitcoin and other cryptocurrencies are “unsafe” compared to the government’s CBDC, and that the public should thus sell their digital assets. And if that happened, regulators would have free reign to crack down more forcefully on crypto without as much kickback from the public.

In the end, CBDCs could give regulators a perfect opportunity to crack down on decentralized cryptocurrencies outside of their control.

How Are Different Countries and Regions Regulating Crypto?

So far, Western countries have had a generally positive response to crypto, and North Macedonia is the only European country to have banned spending, trading, or investing in crypto.

Eastern countries, on the other hand, maintain a hot and cold relationship with digital assets. India, China, and Russia have all flip flopped more than once on whether to ban crypto entirely.

So without further ado, let’s take a more in depth look at what is going on in the US, China, and the EU.

#1 USA

Owning, selling, buying, and mining crypto is legal across the United States, and an estimated 27 million Americans own cryptocurrency today. However, the United States has, until incredibly recently, taken a scattershot approach to crypto regulation.

Virtually every finance-related regulator from time to time issues press releases and makes announcements about how crypto should be regulated. This, in its turn, has led to confusion and uncertainty for American traders and HODLers.

The Securities and Exchange commission (SEC) views crypto as a security, while the Commodity Futures Trading commission (CFTC) claims Bitcoin is a commodity. The IRS even classes cryptocurrencies as property for federal income tax purposes. So as of yet, the United States has no clear regulatory framework for crypto.

Despite all the confusion, America saw some regulatory progress in 2021, most notably President Biden’s reappointment of Jerome Powell as the chair of the Federal Reserve. Powell is thought to be in crypto’s corner, as he has said on record that he does not see cryptocurrencies as a “financial stability concern,” and that he has “no intention” of banning crypto.

However, he has on other occasions said that stablecoins need some form of regulation soon. Even so, Powell’s reappointment was hailed as a sign of incoming crypto-positive regulation.

And while plenty of HODLers considered Powell’s reappointment to be crypto’s salvation, we saw little in the way of regulation until recent announcement, when those praying for a coordinated approach to crypto regulation finally had their wish granted by President Biden.

The US President issued an Executive Order aligning the US government’s strategy for crypto regulation, which should ensure that digital assets are responsibly developed across the United States. The order also gives American financial regulators the power to carry out studies and surveys to better understand and comprehensively regulate the crypto space.
In response to the order, Brett Harrison, the president of the crypto derivatives platform FTX, said that some amount of regulation is important to allow institutions to come in and feel confident in being able to put their money into this emerging space like cryptocurrency.

So while we cannot say for sure what kind of regulation the US will have in place in ten years, for now at least American HODLers can sleep a little easier knowing that positive regulation is on the way.

#2 China

China might have the most complicated relationship with crypto of any country on this list. In the past nine years or so, China has frequently lashed out against crypto, but each time, the markets bounced back, and the rules eventually softened.

In the very early days – up until the middle of 2013 – the Chinese government didn’t have all that much to say about Bitcoin, and Chinese people were free to use it – although few did.

But in late 2013, the People’s Bank of China (PBoC) abruptly took a hostile stance against crypto. The PBoC issued a notice prohibiting banks from handling transactions related to Bitcoin immediately, explaining that as the coin was not backed by any country or authority, it was not safe neither trustworthy.

Later the PBoC set up a research group to study how it could set up its own CBDC, a digital currency we discussed above. Moreover, while banks were prohibited from handling Bitcoin at the time, Chinese citizens we allowed to mine Bitcoin, which they certainly did. In fact, Cambridge University estimated that at their peak, Chinese Bitcoin miners was carrying out about 75% of all Bitcoin mining.
A few years down the line, in 2017, the Chinese government banned initial coin offerings, or ICOs, much to the dismay of crypto HODLers, as those were bringing tonnes of cash into crypto at the time.

Finally, in June 2019, the Chinese government announced that trading cryptocurrency was officially banned in China, and the government would block access to all crypto exchanges and coin offering websites.

In a further step toward an outright crypto ban, China’s National Development and Reform Commission labelled Bitcoin mining an “undesirable” industry due to the energy required later on in 2019.

And in early 2020, the Chinese government clamped down on crypto even further by blocking access to over 100 websites that were either crypto exchanges or offered crypto-related services.

Later on in 2020, the Bank of China announced that it had finished the early-stage development of its CBDC called the digital yuan, and that the first public pilot would launch in Shenzhen.

While China’s CBDC has so far proved successful, its ban on running exchanges and trading crypto had little effect, as many Chinese citizens carried on mining and trading Bitcoin anyway.

Which is why in May of 2021, the Chinese Central Bank decided to kill crypto in China once and for all, announcing that all transactions of cryptocurrencies would be henceforth illegal within the country. The ruling also disallowed Chinese nationals from working for foreign exchanges.

Unfortunately for Chinese Bitcoin miners, the Central Banks ruling really was the final nail in their mining rigs’ coffin, and most of them closed their doors for good or moved to other countries to continue their mining operations.

Given its advancements toward implementing an own CBDC, we feel that China is unlikely to allow its citizens to freely trade cryptocurrencies again anytime soon. And barring some kind of radical regime change, the Chinese government will probably maintain its hostility toward decentralised and democratically controlled cryptocurrencies for the foreseeable future.

#3 EU

Individual member states of the European Union are free to choose how they want to regulate crypto. So far, most European countries have approached crypto with an open mind. Digital assets are legal in most countries in the European Union today, same as crypto mining.

While some European countries have gone ahead and regulated crypto, quite a few members are waiting for a common, European approach towards crypto regulation.

The members who have regulated crypto have focused on taxing it, and taxation on profits made from trading crypto differs significantly from country to country, varying between 0 and 50 percent.

Slovenia, for example, has no tax profits from trading cryptocurrencies, but does require citizens to declare and pay tax on salary payments in crypto.

Germany, on the other hand, asks for between 14 and 45 percent tax on crypto profits above €600, although profits from sales of cryptocurrency held for over a year are exempt from tax.

The EU itself has made significant progress toward regulating crypto, and recently proposed a Europe-wide regulatory framework for crypto called the Markets in Crypto Assets, or MiCA. In its current form, the framework dramatically simplifies operations for Europe-based crypto firms to expand their operations.

Under the new legislation, once a crypto firm is permitted to operate in one European state, it can also work in all others. Obviously, the framework is widely considered to be great news for crypto.

However, some European parliamentarians added a last-minute provision to the MiCA which would force proof-of-work cryptocurrencies to shift to more energy-friendly consensus mechanisms, like proof-of-stake.

Obviously, should this addition make it into law, Bitcoin mining in Europe could be effectively outlawed unless the majority of the Bitcoin network were willing and able to migrate the network to a proof-of-stake consensus mechanism.

However, Stefan Berger, an EU parliamentarian working on the framework, has said he doesn’t feel that the framework is the right place for setting out energy conditions for crypto, as its goal is to regulate crypto as a financial asset.

So while the last-minute change is certainly worrying, it is not yet clear whether it will survive the next vote, so there’s still hope for European crypto regulation.

Wrap Up

Crypto represents a big challenge to regulators, central banks, and governments.

Some, like China, have rushed to ban crypto and replace it with a centralised CBDC. Others, like most Western countries, have adopted an inquisitive and open approach to crypto regulation that should bring legitimacy and institutional investment to the space.

Whether or not crypto will survive the threats from regulation and CBDCs remains to be seen, but for now, the digital assets are marching steadily onward into the mainstream.

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