In the latter half of the 20th century, we began to experience the digital age with life-changing innovations, and as such, it was inevitable that regulation would come into play. With the growing popularity of Cryptocurrency that has established itself as a profound component of the current financial landscape, there has been an increased focus on regulation and enforcement at the federal level. With the United States being the largest holder of crypto investors, firms, exchanges and trading platforms, while still having a rather muddled regulatory framework, there are many concerns over whether future regulation will have a negative impact on cryptocurrency innovation. Thus far, the United States has decided to openly not ban cryptocurrencies, and while this is certainly a more beneficial stance towards the technology compared to other countries, a stringent course of regulation can prove to be just as harmful. Nevertheless, if done correctly, adequate regulations on cryptocurrency in the United States can be advantageous to resolve the main issues of currently fragile investor protection, tax evasion, and money laundering while still addressing concerns over regulation’s negative impact on crypto’s financial value and innovation.
The lack of regulation in the crypto industry can be attributed to its confusion of classification in which financial agency should primarily authorize this technology. Given the short history of crypto and many of its structures still unknown, it can be challenging for governments to decide what exactly is the preferred regulation method, as seen with many countries taking vastly different approaches. While countries like China have cracked down on crypto, banning transactions and punishing miners, El Salvador became the first country to establish Bitcoin as a legal tender and even exempt profits from taxes. Recently, there has been no shortage of regulation talk, with the US treasury ready to start stablecoin enforcement, Securities and Exchange Commission (SEC) chairman Gary Gensler clearly highlighting further need of regulation and rules on crypto exchanges, and the Commodity Futures Trading Commission’s (CFTC) increased enforcement against businesses. (Schmidt and Bain 4) As cryptocurrencies near an impressive 10% of the world’s wealth, it can certainly be alarming that it is still loosely regulated. (Reiff 7) This relatively fast growth also draws attention to its future and its vast potential, with regulation being at the forefront of impacting factors. Due to the crucial impact that future regulation will have on the industry and our economy in general, two conflicting sides have emerged. Many experts believe that this growing industry in the United States will benefit from increased regulation and will eliminate crypto’s current dangers while other enthusiasts claim that these regulations will suffocate the industry.
Most notable is lawmakers helping to delay the proposed massive bipartisan infrastructure bill due to one provision that affected the cryptocurrency industry. The vague definition on taxing brokers –, which if extended towards wallet developers, miners, and software developers –, would significantly hinder innovation and drive the industry out of the country. This increased pressure has many concerned that current actions suggest tighter regulation in the future which in turn may hurt trading volumes, suppress innovation and even encourage many participants to flee towards less strict jurisdictions. The need for regulation is certainly there in the United States as drawbacks range from potential theft, lack of guidance in tax resulting in money laundering and evasion, and being used for illegal transactions as seen through the Silk Road online blackmarket.
Cryptocurrencies like Bitcoin have been used in ransomware attacks and have been extremely successful as cyber attackers have started to demand larger sums of money due to Bitcoin exchange not only being extremely fast but also almost impossible to track. A larger concern about cryptocurrency is theft and scams in regards to fraudulent apps, websites and startups all which will have no legal protection once someone has been scammed. Many users blindly trusting their savings in interest-earning cryptocurrency exchange platforms may not be aware if their cash is unprotected. A main issue recently was of fake exchanges, with over $80 Million lost by Americans in cryptocurrency scams between October 2020 and April 2021. People may be drawn into certain exchanges because the concept of cryptocurrency is so new, and often lose their money as they put their money into the exchange and later discover they are not able to take any out again.
Furthermore, the IRS currently classifies crypto as an asset and not money meaning that capital gains and losses have to be reported. Since it isn’t classified as money, companies can use cryptocurrency to avoid paying their taxes as current reporting requirements are generally lax and the government can be blind to many transactions. Regulations should be implemented for these reasons as they are similar to the reasons for regulations in other existing financial sectors. Exchanges, businesses and third parties can choose to not file these currency transaction reports which then would be exempt from tax. With the current thin regulations in place, there are many regulatory gaps in which all concerns are not met, while continuations in this thin regulation could potentially overregulate cryptos by including a general rule that would encapsulate every detail rather than nuanced points that address specific concerns. A study done by Nicholas Burnell highlights that there is no association between the most popular currency, Bitcoin and the main liquid assets which calls for a framework separate to that assigned to those assets, because the risks involved with the investment of Bitcoin are “statistically different” as well (Burnell 5).
When crucial problems are addressed through regulations, many practices can not only remove any uncertainties, but also promote greater usage. A popular belief from finance experts is that innovations would rather be increased and cryptocurrency’s value in our economics will skyrocket after regulation. According to a study done by Gemini, there is roughly about 14% of Americans that own crypto. Other than regulation, a larger conflict in this industry is over its value and longevity in general, as there are still many who believe it is a sham which will only last in the short-term. Now, if regulation would be implemented, there would be a greater number of the population who would want to invest and become a part of this booming industry. This would in turn, create more trust in this system which would allow for further innovation and a serious objective of positively changing the financial landscape. There is a large portion of Americans still distrustful towards cryptocurrency, and if regulated efficiently, would increase trust in its use financially as an investment and as its created method of payment.
A large concern is of “pump and dump” actions in which cryptocurrencies are unfairly boosted in price from recommendations or social media. The main point being that cryptocurrency is extremely volatile due its lack of regulation right now, there can be significant upward and downward movements in the market over very short time periods, which are behaviors that are not seen in other markets. With regulation, these actions will be harder to get away with and provide accurate evaluation of a currency’s worth and its future predictability. With clearer guidelines, it can be argued that cryptocurrency will drive towards even further innovation as more people would be interested if it is deemed safer for investors. Nevertheless, regulatory uncertainty in the United States can be harmful to investors and entrepreneurs if they are not sure about the certainty over how they can utilize cryptocurrency and if it is safe in doing so.
While the United States has focused on developing clear and fair guidelines regarding crypto, many argue that it should just be left alone or that the United States is pushing for an unreasonable amount of regulation. There are several enthusiasts who claim that continued regulation will drive crypto prices down, make it unattractive as a currency, and evacuate the technology out of the US and towards other countries in which the laws are more favorable for innovators and developers. However, these claims may be unreasonable as found in a study done by Feinstein and Werbach. They discovered that price declines almost never followed cryptocurrency in a country. Although it may cause some short-term effects, like seen with Bitcoin price drops, in the long-run the crypto market has continued to grow (Feinstein and Werbach 22). Many crypto enthusiasts also claim that if unfavourable regulations exist trading will move offshore, however, the study did not find crypto traders fleeing that jurisdiction into more lenient countries. The study further claims that tighter regulation, as it weeds out the bad actors, can actually provide safer environments for genuine investors and only those that abuse the current system would look down upon them. With bad actors gone, day traders and major investment firms are more likely to invest into cryptocurrency as well, thus growing its market. As a country develops further crypto activity, Feinstein and Werbach state that regulation to protect investors will follow as a result of that and not the other way around. As long as lawmakers aren’t too extreme as already exhibited by other countries, the United States will be able to implement a system that greatly strengthens the value of all cryptocurrencies and even establish an exemplary model as to how successful regulation can be reached.
While many other countries strive for a concrete standing on cryptocurrency, the United States will try to aim for a regulatory framework that maximizes the potential of our modern-day technology. This debate is far from over any time soon as regulation talks have just recently started to pick up for the United States and cryptocurrencies like Bitcoin and Ethereum have reached new heights in value and utility. Most notably however, is the idea of web 3.0, in which many are saying that we are now approaching the third generation of the internet, with blockchain technology — the technology used in cryptocurrencies — being at the cornerstone of this massive change. It is inevitable that the internet and new technologies will fundamentally change the way in which we live and that regulation will have a large impact on their development and usage. It is important for lawmakers to become familiar with this new technology without blatantly writing them off, as cryptocurrency and blockchain technology is technology that people have never experienced before, which is why regulation has become a problem worldwide. Understanding the usage of cryptocurrency and while accepting a potential massive change to our economic environment will ensure that this technology has the ability to become advantageous to our society.
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