After the capitalization of the cryptocurrency market began to rapidly approach the $ 1 trillion mark, government institutions began to make serious efforts to develop laws and regulations that govern it. The response was a protest against such attempts and the desire of protesters to justify their position on the nature of cryptocurrencies, created in order to avoid state and banking control. Government regulation is incompatible with the libertarian beliefs of investors attracted by promises to end the tyranny of inflation and the monopoly of state banks. However, with each new blockchain problem, hacking of wallets and exchange services, or speculative price fluctuations, the number of those who want to reduce risks increases.
Cryptocurrency emerged as an alternative means of payment to traditional fiat currencies. Over time, it has developed into a highly risky speculative investment asset. Later, a mechanism for collecting the initial ICO capital using the same technology arose, which became an additional source of instability. The current situation in the field of cryptocurrency regulation is characterized by two conflicting trends. On the one hand, there is a growing need for clear rules by which transactions are performed. Their development and widespread adoption would attract more institutional investors to this area, which would serve as an additional impetus for development. On the other hand, there are concerns that strict restrictive regulation, which does not take into account the specifics of cryptocurrencies, may, on the contrary, slow down or even stop the development of cryptocurrency technologies.
The main vulnerabilities of cryptocurrencies
Many hopes related to cryptocurrencies and blockchain have not materialized. Thus, the promised security and reliability of payments turned out to be significantly lower than expected.
Potential Monopoly Pressure
Collusion between miners can jeopardize the security and timeliness of cryptocurrency units. The formation of large mining pools gives them a speed advantage and the ability to extract monopoly profits from mining.
Since cryptocurrencies are not a universal means of payment, communication between the buyer and the seller is required to exchange them for goods, services, or fiat currency. It is provided by exchange services acting as intermediaries. Making it easier to find counterparties, they, at the same time, increase the risks of cryptocurrency owners, as they become objects of hacking and theft.
Money laundering and financial crimes
The absence of common international rules allows jurisdictions to maneuver in search of the safest conditions for criminal activity.
The main directions of regulation of cryptocurrencies
- Consolidation of international efforts
The decentralized nature of cryptocurrencies reduces the effectiveness of local regulatory efforts. The attitude towards cryptocurrencies ranges from a complete ban (Algeria) to encouragement (Japan, Estonia). In these conditions, users always have the opportunity to manipulate jurisdictions. The development of common international rules should help to solve the problem.
- Development of a unified legal definition of cryptocurrencies
For the entire existence of cryptocurrencies, their legal definition has not been given, which is valid in all countries. The same can be said for ICOs. They do not have a single nature and can be considered as a currency, commodity, share of ownership, security, credit, deposit, financial derivative or forex contract. Establishing an internationally agreed taxonomy is an important challenge for regulators.
- Development of clear rules of taxation
The circulation of cryptocurrencies (exchange for fiat and mutual exchange) can generate profits that should be subject to taxation. This year, the United States passed a law clearly clarifying in which cases capital gains tax is paid on these profits. In other Western countries, the same clarity does not yet exist, especially when it comes to crypto dividends.
- Development of uniform rules for the operation of exchange services
Users of exchange services must have a bank account. This makes it easier to identify and collect taxes. However, for the services themselves, this rule does not always work. Only a few of them have bank accounts. For example, a Bitstamp account is opened in Slovenia, while Coinbase is in Estonia. The banks’ position is clear. They fear the illegal use of the money they hold. If the activities of exchange services are subject to certain rules, then these fears will ease, and large banks will be able to open accounts for such companies.
- Creation of legal infrastructure for ICO
In the regulatory documents, first of all, the boundaries of what is acceptable for ICO should be indicated and a legal definition of this type of activity should be given. The existing regulatory documents do not provide for responsibility for fundraising, a mechanism for reimbursing damages in the event of a project failure, government actions to track illegal transactions and fraud.
Government agencies do not yet have effective tools to control ICOs. Therefore, it would be logical to give this function to exchange services that host tokens issued within the ICO. On the other hand, investors could undergo mandatory verification under the KYC and AML schemes. Comprehensive control will obviously reduce the number of fraudsters on both sides.
Regulation is essential to social survival
Despite the growing interest in cryptocurrencies, this area of economic relations is still relatively narrow. But it is expanding at a rate that suggests that it will soon accumulate large financial resources. Therefore, operations with cryptocurrencies should become safe, understandable and convenient for users. Regulation does not mean prohibition or total control. Back in the 17th century, John Locke said that “where there is no law, there is no freedom.” In order to be free, a society must live according to the rules that protect this freedom. If we talk about cryptocurrency, then the main goals of its regulation should be:
- Transformation of the cryptocurrency sphere into a full-fledged part of the financial space
The crypto economy should not function separately from the traditional one and be independent from it. Fiat and crypto money will coexist for a long time and therefore must work together in order to provide people with a convenient choice. This is impossible without regulation.
- Building trust
Many investors refuse to participate in cryptocurrency transactions precisely because this area is not regulated by the state and is illegitimate from their point of view.
- Protection against fraud
The lack of rules allows us to consider the cryptocurrency sphere as a place for illegal transactions and tax evasion.
- Protection against market manipulation
The presence of large mining pools and owners of large packages of major cryptocurrencies provides ample opportunities for market manipulation. Regulation will help protect small users from sudden changes in business conditions.
Whether you like it or not, anything that is not regulated in today’s world seems suspicious and untrustworthy. This idea has been formed over the centuries and has good reasons. Chaos does not contribute to development, it stops it. Therefore, if we want cryptocurrencies to develop, we must accept the fact that regulation is an important condition for this development.