Is cryptocurrency regulated?
Good question. Unfortunately, it’s not an easy one to answer.
The regulatory status of cryptocurrency varies between countries and it’s important to distinguish between the areas of legal status and official recognition. While the majority of countries don’t currently outlaw the use of cryptocurrency, its official recognition as either ‘money’ or a ‘commodity’ depends on the jurisdiction.
As you read this, many countries and territories, such as the European Union, are in the process of reviewing their positions on cryptocurrency.
Some cryptocurrencies, such as Bitcoin, are still associated with illegal activities - mainly due to historic high-profile cases, such as the famous ‘Silk Road’ trial. Much has changed since then, however, and many countries are trying to take a more balanced and rational approach that recognises both the vulnerabilities and potential of cryptocurrency.
Why is cryptocurrency proving difficult to regulate?
A core feature of cryptocurrencies is that they operate on a decentralised platform, while traditional financial institutions and services are centralised and adhere to a defined set of rules and regulations. Regulatory bodies in the UK, such as the Financial Conduct Authority (FCA), enforce these clearly defined policies that all banks, financial services firms and advisers must follow.
Given cryptocurrency’s relatively recent surge in popularity, the FCA hasn’t quite caught up and is yet to consolidate their position on how to regulate them.
Cryptocurrency regulations in action
Of course, other parts of the world are approaching regulations differently – with varying degrees of success. Here are a few examples of recent and ongoing attempts to regulate cryptocurrency.
The European Union
The EU is concerned about criminal use and wants to prevent cryptocurrency from being used by money launderers, terrorists and drug traffickers. European governments have therefore called for increased regulation of cryptocurrency.
The proposed regulations will likely require increased transparency when it comes to cryptocurrency transactions. This may compromise the current level of privacy that users enjoy, forcing them to fully reveal their identities. The EU’s push for greater governance and compliance will probably apply to both digital currency exchanges and wallet providers.
The United States
At the time of writing, there are no federal regulators in the United States that are solely responsible for overseeing cryptocurrency, but some precedents have already been set.
The Internal Revenue Service (IRS) has published some guidance on the taxation of cryptocurrency, while the Securities and Exchange Commission (SEC) has revealed that it is dedicating a significant portion of its resources to identifying cryptocurrency ‘scams’ - especially in relation to ICOs.
The ownership and trading of virtual currencies is currently legal in the United States, but they are subject to taxation and they could face new regulations in the not-too-distant future. In fact, many countries enforce taxes on cryptocurrency, but we’ll cover this in more detail in another lesson.
A number of top financial regulators in the US will soon be meeting to discuss cryptocurrency regulations. This will lead to further legal developments that will no doubt alter the current playing field.
China and South Korea
China and South Korea have experienced the largest and most widespread cryptocurrency craze compared to other parts of the world. As a result, their respective governments have become so concerned by the explosion of speculative trading - financial transactions that risk losing everything in the hope of making a really big gain - that they feel compelled to impose regulations and enforce greater control.
China is currently home to the world’s largest community of Bitcoin miners. Despite this, the country is clamping down on all elements involving cryptocurrencies, including mining. Other elements, such as initial coin offerings (ICOs) and exchanges, were banned by local authorities in 2017. Cryptocurrencies can still be traded in China, but only through over-the-counter (OTC) services, which is a much slower process.
Some commentators have indicated that this may be part of a wider strategy on the part of the Chinese government to cleanse financial markets of risk and reassert authority over non-traditional means of moving money. Looking ahead, there is little chance cryptocurrency will disappear altogether from China, but it may become more centralised and therefore less representative of the basic principles behind cryptocurrency and blockchain technology.
So, should cryptocurrency be regulated?
Taking a balanced view, let’s examine the pros and cons of regulating cryptocurrency…