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Cryptocurrency: Regulating The Unregulated

Is regulation good for the overall health of the cryptocurrency market?

Decentralized cryptocurrencies existed long enough to prove itself competitive against the mighty centralized fiat. Its unregulated nature frees it from any manipulation and control from any central authority and enjoys a rather independent navigation of the market it has created for itself. But too much freedom can also cause some downsides that, if left unchecked, could derail cryptocurrency’s aim for mass adoption, which, up to this day, remains elusive.

Regulators have already attempted to define the asset category of cryptocurrencies and continue to observe and study its movement and impact. But interpretations of observations differ in each country of adoption. Some regulations started off with declaring coin ownership for tax purposes, while others categorize initial coin offerings, or ICOs, as securities subject to the same regulations. Regulatory intentions for these purposes may be lauded to identify and uproot fraud, which is highly possible to exist within the walls of ICOs, exchanges, and trading itself. Moves to regulate can initially hamper any potential value cryptocurrencies are holding, but deemed so, in the long run, beneficial to finally arrest the volatility issue these cryptocurrencies are notoriously known for.

The focus of regulation is resting on taxation report and initial coin offerings, or ICOs. The unregulated area of capital gains made traders a lot of money as cryptocurrencies were, for the longest time, a lucrative asset source without any government demand for declaration. Now the US IRS has noticed and has begun acquiring lists of activity logs of exchange accounts and scrutinizing users’ trading trails and crypto earnings. Tax forms already contain blanks to declare one’s crypto acquisitions, depositions, and dispositions. Federal purposes treat cryptocurrencies as property, not currency that could generate foreign currency loss or gain. Due to this principle, general tax principles applied to property transactions will also apply to transactions regarding the sale or trade of cryptos. As crypto is then held as property, it will be considered as a capital asset subject to capital gains tax.

The Securities and Exchange Commission (SEC), for their part, are looking into ICOs and are seriously considering placing them under the regulation of securities, and cryptocurrencies treated as securities. To define, ICOs is the raising of funds with the promise of a digital token in the future. Developers who raised the funds will use it to create an application for the relevant use of the token. The promise makes the token distinct from the promise itself. Therefore, the token, fundraising aside, cannot be defined as a security but a commodity. To even be considered a security, cryptocurrencies must be entered into a contract involving the investment of money with the expectation of profits from the efforts of others. the cryptocurrency network involves a variety of enterprise in which investors accrue profits from the cryptocurrencies by holding it and not from the efforts of others.

The International Monetary Fund (IMF) cites digital assets and currencies as attractive investment instruments that can sway capital inflows way from fiat currencies of countries with high inflation and weak financial policies. Crypto exchanges will also be hard-pressed to apply anti-money laundering and combatting the financing of terrorism procedures due to the blockchain’s decentralized core and investors spread across borders. IMF suggests that central banks could be empowered to grant licenses under supervision for exchanges to conduct AML, CFT, and KYC monitoring, and sensitive client information, including wallets, must pass regulatory standards on a global scale. The G-20 has recently declared that it will follow the Financial Action Task Force regulation on travel rule, requiring exchanges to collect and transfer customer data in the processing of transactions. Domestic rules are also crystallizing in many different countries who are seeing a rise in cryptocurrency adoption. While others are welcoming, other countries chose to ban the entry and use of cryptocurrencies until legislative measures regulate its entry.

It is understandable that regulatory bodies are out to protect consumers from being duped by cybercriminals and the plain ignorance from risks that can wipe out any venture capital from wild market swings. But betting on cryptocurrencies is still based on speculation. But even then, exchanges are one in the fact that fit regulation can bring an air of favourable conditions to attract a serious inflow of capital into the industry. The regulation then is not to tighten the lid but to loosen the bonds for the consumption of everyone. It is better to allow our children to play in a field surrounded by fences rather than in an open wild surrounded by wolves.

In the meantime, what is needed now, is for the crypto asset class to self-regulate.

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