Ronald Regan once said: “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
Does this “One size fits all” approach work for crypto?
In recent months there has been a flood of cryptocurrency news, due to market volatility and piecemeal regulatory developments. The crypto crash — which has seen markets plunge and investors madly selling assets — is reigniting calls to regulate the market.
The cryptocurrency market, a $1.2 trillion business that has grown significantly in the last decade, is still very volatile. Regulatory control of the market has been severely ignored, cryptocurrencies fall into various regulatory gaps.
In a recent article, Thomas Wade describes the situation for financial regulation of cryptocurrencies. The article contains a fun fact: Bitcoin futures are controlled by the Commodity Futures Trading Commission (CFTC), but Bitcoin itself is unregulated by any financial authority, other than those tasked with the task of preventing financial crimes. An important takeaway as Wade puts it: “Except in limited circumstances, taxation, or, the activity of most cryptocurrencies and the treatment of digital assets is currently largely unregulated in the United States…. The lack of a primary regulator is only part (and possibly a cause) of the regulatory patchwork of inconsistent agency regulations and guidance on various isolated aspects of crypto.”
Who regulates bitcoin? Everyone and no one.
In the US. it is unclear who is fully responsible for bitcoin and cryptocurrency regulation. While various agencies have claimed and prosecuted cryptocurrencies under their jurisdiction, the future of crypto regulation is undetermined.
Some countries, notably in Asia, are pointers on ways to deal with cryptocurrencies. The Japanese government passed a Virtual Currency Act, which defines and describes cryptocurrencies. Recently, after the collapse of TerraUSD, they passed a law clarifying the legal status of stablecoins. Last year, South Korea announced that any cryptocurrency profits over 2.5 million South Korean won will be taxed at 20%.
The unique characteristics and global portability of cryptocurrencies present a problem for regulators. International agencies such as the IMF have called for a global discussion and cooperation among regulators as far as cryptocurrencies are concerned.
The problem with the current state of regulation is that crypto is poorly understood.
Regulators need to be asking themselves: Do cryptocurrencies need to be regulated at all? Is crypto a commodity or security? Do cryptocurrencies fit into the existing framework?
When regulators look at cryptocurrencies, they assume that they can be categorized, filed, and regulated with their respective agencies.
Cryptocurrencies do not take any one form. Some cryptocurrencies have emerged as an alternative to the dollar, while others go far beyond just being a currency and offer so much more.
Let’s take for example the definition of electronic money. This seems like an obvious category for Bitcoin to fall into. Electronic money is electronically stored monetary value, as represented by a claim on the electronic money issuer, issued on receipt of funds to make payment transactions; and accepted as a means of payment by a person other than the electronic money issuer. Bitcoin does not easily fit into this definition. To start, Bitcoin is not issued in the traditional sense. It is instead mined — a system that rewards new Bitcoins to those who provide computational power to verify and record Bitcoin transactions on the blockchain. The issuer is therefore an algorithm and an extended group of people who maintain the Bitcoin network, not a central bank or other financial institution. Nor does owning it give its owner an automatic right to a claim on the said issuer.
How do you categorize Ethereum which was designed to be a currency but also a platform for other applications, like loans and crowdfunding?
If regulators do what they’re conditioned to do, we will end up with something that resembles traditional banks, stock markets, and investments.
There comes a point when one must recognize that a square peg does not fit into a round hole. For things to improve with the current state of crypto regulation, lawmakers need to get a better understanding of crypto.
Rather than trying to label cryptocurrencies and fit them into an existing system, regulators should try to build a framework that permits the participants in the evolving crypto world to make their own decisions. A good example is “A Simple Proposal for Regulating Stablecoins” which instead of categorizing stablecoins, proposes clear disclosures and basic collateral requirements.
If there is going to be regulation, it should allow consumers to make informed decisions about their risks, and only to the extent, there is some market failure.
by Ilias Louis Hatzis is the founder and CEO of Kryptonio wallet.
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