Cryptocurrency and Regulation: A Global Tug-of-War
Cryptocurrency and Regulation: A Global Tug-of-War
The Regulatory Tightrope
Governments are caught in a precarious position. Unregulated cryptocurrencies pose several risks:
- Money Laundering Haven: The anonymity associated with crypto transactions makes them attractive for criminals seeking to launder money.
- Financial Meltdown: The extreme volatility of some cryptocurrencies could trigger financial instability if they become widely adopted. Imagine a scenario where a sudden crash wipes out billions of dollars in investor wealth, causing a ripple effect through the financial system.
- Investor Vulnerability: Without proper regulations, investors are left exposed to scams, hacks, and market manipulation.
Balancing Innovation and Stability
Governments must tread carefully. Overly restrictive regulations could stifle innovation and drive crypto businesses offshore, hindering the potential benefits of the technology. On the other hand, under-regulation could lead to financial chaos and widespread consumer harm.
A World of Different Approaches
The approach to cryptocurrency regulation varies dramatically across the globe:
- The Ban Hammer: Some countries, like China, have taken a hardline stance, banning cryptocurrency transactions altogether. This approach eliminates the risks associated with crypto, but also stifles innovation and eliminates potential benefits.
- Cautious Embrace: Many developed economies, like the United States and the European Union, are taking a more measured approach. They are developing frameworks to regulate crypto exchanges, offerings, and activities. This approach aims to strike a balance between mitigating risks and fostering responsible development.
- Crypto Havens: A few countries, like Singapore, see the potential of crypto and are aiming to become hubs for the responsible development of the industry. They are attracting crypto businesses with regulations that are clear, predictable, and supportive of innovation.
The Path Forward: Collaboration is Key
The future of cryptocurrency regulation is likely to be a collaborative effort. Here are some key trends on the horizon:
- Focus on AML/KYC: Expect regulations to tighten around Anti-Money Laundering (AML) and Know Your Customer (KYC) measures. Crypto exchanges will likely be required to implement stricter procedures to identify users and prevent illicit activity. This will make it harder for criminals to use crypto for nefarious purposes.
- Stablecoin Scrutiny: Stablecoins, cryptocurrencies pegged to a stable asset like the US dollar, are likely to receive increased scrutiny. Governments are concerned about the potential impact of stablecoins on financial stability, especially if they become widely used as a medium of exchange. Regulations might focus on ensuring stablecoin reserves are adequately backed and that issuers are subject to oversight.
Increasing regulation
China
In September 2017, China banned ICOs to cause abnormal return from cryptocurrency decreasing during announcement window. The liquidity changes by banning ICOs in China was temporarily negative while the liquidity effect became positive after news.[131]
On 18 May 2021, China banned financial institutions and payment companies from being able to provide cryptocurrency transaction related services.[132] This led to a sharp fall in the price of the biggest proof of work cryptocurrencies. For instance, Bitcoin fell 31%, Ethereum fell 44%, Binance Coin fell 32% and Dogecoin fell 30%.[133] Proof of work mining was the next focus, with regulators in popular mining regions citing the use of electricity generated from highly polluting sources such as coal to create Bitcoin and Ethereum.[134]
In September 2021, the Chinese government declared all cryptocurrency transactions of any kind illegal, completing its crackdown on cryptocurrency.[30]
El Salvador
On 9 June 2021, El Salvador announced that it will adopt Bitcoin as legal tender, becoming the first country to do so.[135]
United Kingdom
In the United Kingdom, as of 10 January 2021, all cryptocurrency firms, such as exchanges, advisors and professionals that have either a presence, market product or provide services within the UK market must register with the Financial Conduct Authority. Additionally, on 27 June 2021, the financial watchdog demanded that Binance, the world's largest cryptocurrency exchange,[147] cease all regulated activities in the UK.[148]
United States
In 2021, 17 states passed laws and resolutions concerning cryptocurrency regulation.[149] The U.S. Securities and Exchange Commission (SEC) is considering what steps to take. On 8 July 2021, Senator Elizabeth Warren, part of the Senate Banking Committee, wrote to the chairman of the SEC and demanded answers on cryptocurrency regulation due to the increase in cryptocurrency exchange use and the danger this posed to consumers. On 5 August 2021, SEC Chairman Gary Gensler responded to Senator Elizabeth Warren's letter regarding cryptocurrency regulation and called for legislation focused on "crypto trading, lending and DeFi platforms," because of how vulnerable the investors could be when they traded on crypto trading platforms without a broker. He also argued that many tokens in the crypto market may be unregistered securities without required disclosures or market oversight. Additionally, Gensler did not hold back in his criticism of stablecoins. These tokens, which are pegged to the value of fiat currencies, may allow individuals to bypass important public policy goals related to traditional banking and financial systems, such as anti-money laundering, tax compliance, and sanctions.[150]
Legality
Main article: Legality of cryptocurrency by country or territory
The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. At least one study has shown that broad generalizations about the use of Bitcoin in illicit finance are significantly overstated and that blockchain analysis is an effective crime fighting and intelligence gathering tool.[159] While some countries have explicitly allowed their use and trade,[160] others have banned or restricted it. According to the Library of Congress in 2021, an "absolute ban" on trading or using cryptocurrencies applies in 9 countries: Algeria, Bangladesh, Bolivia, China, Egypt, Iraq, Morocco, Nepal, and the United Arab Emirates. An "implicit ban" applies in another 39 countries or regions, which include: Bahrain, Benin, Burkina Faso, Burundi, Cameroon, Chad, Cote d’Ivoire, the Dominican Republic, Ecuador, Gabon, Georgia, Guyana, Indonesia, Iran, Jordan, Kazakhstan, Kuwait, Lebanon, Lesotho, Macau, Maldives, Mali, Moldova, Namibia, Niger, Nigeria, Oman, Pakistan, Palau, Republic of Congo, Saudi Arabia, Sengeal, Tajikistan, Tanzania, Togo, Turkey, Turkmenistan, Qatar and Vietnam.[161] In the United States and Canada, state and provincial securities regulators, coordinated through the North American Securities Administrators Association, are investigating "Bitcoin scams" and ICOs in 40 jurisdictions.[162]
Various government agencies, departments, and courts have classified Bitcoin differently. China Central Bank banned the handling of Bitcoins by financial institutions in China in early 2014.
In Russia, though owning cryptocurrency is legal, its residents are only allowed to purchase goods from other residents using the Russian ruble while nonresidents are allowed to use foreign currency.[163] Regulations and bans that apply to Bitcoin probably extend to similar cryptocurrency systems.[164]
In August 2018, the Bank of Thailand announced its plans to create its own cryptocurrency, the Central Bank Digital Currency (CBDC).[165]
Advertising bans
Cryptocurrency advertisements have been banned on the following platforms:
- Google[166] - Ended August 2021[167]
- Twitter[166]
- Facebook[166] - Ended December 2021[168]
- Bing[169] - Ended June 2022[170]
- Snapchat
- LinkedIn[171]
- MailChimp[172]
- Baidu
- Tencent
- Line
- Yandex[171]
The Bottom Line
While the specific form of future regulations is uncertain, one thing is clear: governments won't let crypto operate in a complete regulatory vacuum. The key lies in striking a balance – fostering innovation and economic growth, while protecting consumers and maintaining financial stability. As the crypto industry evolves and regulations take shape, the future of money and financial systems could be fundamentally reshaped. This global tug-of-war will determine how crypto integrates into the larger financial landscape.
