As Bitcoin and other cryptocurrencies enjoy widespread adoption and booming engagement, both investors and exchanges contend with increasing regulation.
Regulation, particularly within the sphere of finance is nothing new. Perhaps maybe even something we often take for granted, save for a few precious months per year. Regulation has long been purported to exist purely in the best interest of the people. Taxes fund programs and infrastructure crucial to existence as we know it. Regulations and laws prevent untoward business practices and bad actors from taking advantage of the free market, and keep capitalism ticking along safely.
Despite the disruptive technologies of Bitcoin and other cryptocurrencies, regulation is a given– much like death and of course, taxes. While the ideal of more tightly regulating cryptocurrencies may serve to alienate some investors– most seem to believe that regulation of the space is a favorable future for the functionality of cryptocurrencies. Most exchanges and trading platforms, from the largest and most lucrative, to platforms like Bitvavo that are focused on retail and novice investors already adhere to a number of regulatory practices. As adoption soars, and more investors look to make their mark on the crypto space, governments around the world begin to seriously propose new measures to keep the digital financial environment in check.
Why Regulation? Why Now?
While many lawmakers and governing agencies have been pushing for better crypto regulation since 2017, the hustle to get them in place has been lackluster at best. While this could be because cryptos have long been considered to be a dying fad, or that policy makers never considered digital currencies as a real threat in the marketplace is unknown. What is known, on the other hand, is that Bitcoin, one of the most well-known cryptos in the world currently enjoys a market cap of $941.8 billion at time of writing. Yes, billion. With a B. As in, nearly a trillion.
It’s also become more of a concern to most governing agencies as the coin has been sitting comfortably near the $50,000 resistance band since early February. With heights scraping $60,000 near the end of last month. Because of this newfound stability and valuation, many legislators are scrambling to get tax laws and KYC protocols firmly in place before the end of the 2020 tax season– something that should have been done years ago.
Largely thanks to the infrastructure that has been brought to the table due to increasing engagement and adoption of DeFi, cryptocurrencies seem to not only be more common, but are also beginning to build analogues of traditional financial structures, allowing more and more people– particularly those of the unbanked and under banked variety– to invest. This influx of retail investors and the financially disenfranchised could reasonably see policy makers placed in a precarious situation should clear and transparent regulation not be put in place immediately.
Why Tax Crypto?
For proponents of crypto regulation, taxation of the asset represents a more centralized control of a fully decentralized paradigm. On which the crypto community seems to be starkly divided. Some would like to see better regulation as derivative investing and DeFi begin to shape cryptos into something more readily recognizable by investors of any ilk. Hoping that stronger regulation and more applicable taxation laws would bring greater stability and reliability to the market. Meaning that there will be fewer loopholes to be taken advantage of, providing a less manipulatable marketplace.
These regulations could help improve crypto’s more nefarious public image– one related to money laundering and terrorism funding. Further maturing the asset as a fungible and respected currency. Something that could indeed more seamlessly dovetail into the business and public sector. Engendering higher trust among retail investors and moving more popular cryptos towards the transactional structure of an actual currency, rather than just a speculative asset class.
However, not all crypto enthusiasts share this sentiment. As there still exist crypto-purists, who believe that bringing centralized control and KYC protocols to the crypto space belie the base purpose of cryptocurrencies themselves. Encouraging administrative fees and penalties, as well as market manipulation and valuation control. All things that most cryptocurrencies were purpose-built to defend against. Instead, preferring to adhere to the trustless, decentralized system that cryptos were built to secure and support.
Crypto Trading Platforms Feel the Squeeze
Beyond just the effects that legislation would exert upon crypto users, points of entry such as crypto trading platforms would also need to comply with strict rules and regulatory practices. Something that many already do, but some– like peer-to-peer networks– still exist in a legal grey area. If regulation continues to tighten its grip on crypto investments, all platforms would be forced to comply, lest they face legal action or loss of client engagement.
Many crypto trading platforms have already felt the pressure to comply with a number of soft regulations that have been implemented in crypto hubs around the world. Which is arguably well-seated in their own interests as businesses. For most financial institutions, regulations are what keep their businesses chugging along peacefully, allowing for protections not only afforded to their customers, but also for their firms. Regulations ensure that exchanges and trading platforms are performing their duties in the best interest of their clients. While legislation for exchanges varies greatly– dependent upon which country they operate from, and which they extend their services to, most international exchanges must comply with laws that any exchange is subject to: crypto or otherwise.
Which, as exchanges are already an example of bringing in centralized powers and mediators into the cryptocurrency landscape, it doesn’t seem irregular that they would have restrictions and regulations they would need to comply with. It should also come as no surprise that many of them gladly comply with existing legislation, if not lobby for future regulation. Taking the onus off of the investor, and placing it instead on the companies that function as conduits to the market.