Cryptocurrencies have entered the mainstream. No longer the preserve of a few cryptographers, terrorists and criminals, their popularity has exploded over the last few years – with bitcoin peaking at close to $20,000 in December 2017. But, with governments only just beginning to react to this nascent industry, several key issues have emerged. Firstly, how to protect consumers who may have little understanding of these volatile financial instruments and the risks associated with investing in them. Secondly, how governments can stop – or rather, minimise – the use of cryptocurrencies for funding illegal activities. And, thirdly, how such assets should be taxed.
Regulatory changes are very important to cryptocurrency traders, as they can have a pronounced effect on coin valuations. Bitcoin and ether, for example, both dropped significantly after Chinese regulators announced they were outlawing initial coin offerings (ICOs) in September 2017. This created an opportunity to go short for those in the know – with further dips in February 2018 when the country began to clamp down on mining.
Here we take a look at the key regulatory issues that traders need to be aware of, along with some of the countries with regulations that are likely to affect cryptocurrency valuations.
Cryptocurrency regulations
Governments have taken a wide range of approaches to regulating cryptocurrencies, even going so far as to define the assets in different ways. To date, digital currency regulation has mainly focused on:
Consumer protection
Protecting consumers has been the number one challenge for governments for two main reasons. Firstly, because cryptocurrencies have proven to be extremely volatile and, secondly, because they are designed to exist outside any form of centralised control, meaning regulation can easily be ignored by anyone with an internet connection.
To date, the uneasy solution for most governments has been to simply warn consumers about the risks of cryptocurrencies, exchanges and ICOs, rather than attempting to impose a difficult-to-enforce ban. However, a few countries – including Bangladesh, Qatar and Bahrain – have legislated to make it illegal to use cryptocurrencies within their borders, though practically this may be unenforceable.
Prevention of crime
The second major challenge for governments has been how to minimise the use of cryptocurrencies for illegal activities. This is a thorny issue, given that payments can often be made anonymously via cryptocurrency networks, making it difficult to identify people buying or selling goods or services over the web.
While many governments have yet to tackle this problem head-on, a number have expanded money laundering and anti-terrorism laws to ensure that banks and other financial institutions carry out enhanced checks on those trying to access cryptocurrencies via established exchanges, or cash out any takings.
Taxation
A final challenge has been taxation, with governments keen to ensure that they are able to collect additional revenues from the income they are generating for individuals and businesses. This has led to a divergence in the way cryptocurrencies are categorised for the purposes of taxation, with some governments defining them as foreign currencies, and others as financial assets, to give just two examples.
This means that, depending on the jurisdiction and entity benefitting from any gain in value, cryptocurrencies can be subject to VAT, income tax, corporation tax, with a minority of jurisdictions even allowing the deduction of losses.