Regulation
Bitcoin has a regulation problem
Regulation is one of the key factors influencing the price of Bitcoin. Cryptocurrency’s rise in popularity has stalled every time a government has wielded the political whip, and countries have taken different approaches to dealing with it. Bitcoin Regulation.
For example, in November 2019, Bitcoin collapsed as China accelerated its crackdown on cryptocurrency-related activities. Conversely, whenever a regulatory “victory” emerges, prices temporarily increase. For example, in January 2024, after years of denials from regulators, approvals of the Bitcoin Spot ETF caused its price to rise in the following months to over $73,000.
By their very nature, cryptocurrencies are freewheeling, not bound by national borders or specific agencies within a government. However, this nature presents a problem for policymakers who are used to dealing with clear definitions of assets. Here are two unanswered questions related to Bitcoin regulation.
Key points
- Bitcoin regulation can vary on both a national and local level, depending on the country or region.
- In the United States, the IRS treats cryptocurrency as property, while the CFTC treats it as a commodity.
- Many cryptocurrency companies have tried 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 the confusion over cryptocurrencies than their classification by US regulatory agencies and updates with 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 moved with alacrity and formulated rules for Initial Coin Offerings (ICOS) AND smart contracts, federal responses are generally fueled by interpretations of existing laws regarding 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 had 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 issue for regulators.
For example, there are basically four different types of tokens traded on exchanges: transactional, utility, security, and governance tokens. As the name indicates, utility tokens have 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.
Such tokens are not subject to SEC rules unless used as securities. On the other hand, security tokens represent shares or shares of a company and automatically fall under the purview of the SEC. Governance tokens allow holders specific rights to a blockchain, and transactional tokens are designed to be used only in financial transactions.
Not surprisingly, several tokens have circumvented existing regulations by declaring themselves utility tokens. Such startups have been publicly reprimanded, but that hasn’t 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) they called for international discussion and cooperation among regulators regarding cryptocurrencies. The EU, which has welcomed the cryptocurrency revolution, may have an advantage over other territories because it controls a 28-member bloc. In June 2023, the EU Cryptocurrency Markets (MiCA) the regulation came into force. MiCA defines cryptocurrency assets and how they should be regulated in the block. This legislation addresses how cryptocurrency 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.
Creating regulations for cryptocurrencies
On his Twitter page, former head of the blockchain practice at law firm Cooley, Marco Santori, called bitcoin a “legal platypus” that doesn’t fit neatly into established asset categories. However, the platypus may not pose much of a problem for taxation or purposes within the United States.
Bitcoin and cryptocurrencies are really no different than cash, stocks, bonds or other financial instruments: they can represent the same things. There are already regulations in the United States that can apply to how an investor, company or consumer treats them. Creating definitions and applying them to these virtual assets for regulatory purposes, as is already being worked on, may be all that is needed.
Regulators may look to Asia for guidance
Some countries, particularly in Asia, are pointers on how to handle 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 Act and developed a regulatory framework in 2017.
Startups planning an ICO are also required to obtain a license that establishes a minimum set of requirements and information for the offering. Finally, exchanges are also subject to capital requirements, strict IT compliance checks and KYC (Know Your Customer) regulations. To achieve these changes, Japan had to amend its payment services law. To be sure, the task is much simpler in Japan as the country has only one agency, the Financial Services Agency, to implement 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 assets that it deems to be securities. It does not yet regulate Bitcoin, but is regulating 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 actions taken to avoid regulation. If this continues, Bitcoin will likely survive as long as it has the support of users communicating 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, meaning it is not backed or supported by the United States government.
The bottom line
Bitcoin regulations vary around the world, if they exist at all. But one thing remains certain: developed countries with financial services regulators will likely develop regulations on cryptocurrency-related 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 ours warranty and exclusion of liability for more information. As of the date this article was written, the author owns BTC and LTC.