Cryptocurrencies Regulations by Governments

Cryptocurrencies such as bitcoins have received mixed reactions from the public. Central Banks have been giving the red light over investing in cryptocurrencies. Most governments across the world are anti-bitcoins, however, some have been lenient over this revolution.

In this article, we are going to focus on some of the reasons behind most governments cracking down on cryptocurrencies, some of the measures the governments have been putting in place and the response from the crypto community.

Bitcoin

Bitcoin is a digital currency underpinned by blockchain technology. Bitcoin operates on a peer-to-peer decentralized network, it’s neither issued nor guaranteed by any jurisdiction if performs its functions based on an agreement reached between peer-to-peer network users. Bitcoin is not regulated and there are no frameworks set up to regulate it in most jurisdictions.

The rapid rise in the price of bitcoin in 2017 to almost above $ 20000 by the end of the year may have attracted the attention of governments, already the cryptocurrency had been termed by some as a Bubble about to burst. Bitcoin is not limited to a single nation and its scope goes beyond the nation’s boundaries, regulation of the coin, therefore, is going to be in a global arena to be effective.

Regulation of Bitcoin at a Global Stage

The global community especially governments are concerned about regulations that are dire in regulating the use of cryptocurrencies. Global readers from the western nation, successful businessmen, and other global opinion makers have also joined in the clarion call for putting up-regulation measures overuse of cryptocurrencies.

The International Monetary Fund (IMF) aims to foster global financial stability, its chief head Christine Lagerde has already pointed out that regulation on cryptocurrencies is inevitable.

The key question in putting the regulations revolve around “who is doing what, and whether they are properly licensed and supervised.” The Financial Action Task Force, an international intergovernmental body that aims at tackling financial crime is gearing up efforts on monitoring the use of cryptocurrencies in money laundering.

The task force is usually composed of ministers from member countries, it determines standards and executes legal, regulatory and operational measures to fight money laundering, terrorist financing, and other cross-border financial crimes.  The European Union and the G20 are also gearing up for ensuring cryptocurrencies are regulated especially the Initial Coin Offerings.

Why are governments concerned about the unregulated nature of cryptocurrencies?

Already there are cases of hacks, crimes, and scams related to the use of cryptocurrencies.  These are ills that are out there and without proper legal frameworks, it would be hard to tame them. The biggest concern is the anonymity bitcoin has, accounts are identified by the anonymous string of random numbers which makes it hard to trace the owner. The anonymity present is a good avenue for use in money laundering.

Money laundering is the process of making illegally obtained money “dirty” look “clean”. The money may be linked to terrorism or drug trafficking.

Money laundering is the process of making money obtained from illegal activities look like it came from the right sources. Other concerns by the governments in regard to the use of cryptocurrencies are Ponzi schemes, fraudulent trading activities, and tax evasion.

Taxation of Cryptocurrencies

The tax authorities in every country are also concerned. People may use cryptocurrencies to evade taxation, in the USA already Coinbase has sent out some of their member’s data to Internal Revenue Service for assessment of tax exemption in an attempt to catch up with those cheating on taxes.

Different countries have recognized cryptocurrencies differently in relation to taxation, the headache to most has been on differentiating whether cryptocurrencies such as bitcoins are either a foreign currency, a currency, a financial supply for goods and services, a commodity or whether they are property.

Where cryptocurrencies are recognized as property held for appreciation in value they are subjected to Capital Gains Tax, where one is taxed a certain rate of the price difference between the buying and selling prices.

However, this would have setbacks with the nature of volatility in the prices. Transacting in digital currencies that qualify for securities has consequences of security transfer tax duties. Tokens used in the distribution of profits on equity tore or payment of debt is subject to withholding tax.

Even as some nations put tax measures on cryptocurrencies trading and mining others are giving waivers and exempting them from taxation, this is in the bid to promote innovation and to attract crypto companies to their countries. In Germany, the Federal Ministry of Finance considers Bitcoin tax exempt as long as it is used as a means of payment.

In several countries governments have banned crypto operations, n China the government banned Initial Coin Offerings and Bitcoin exchanges, elsewhere some have gone the extra mile by arresting those engaging in bitcoin trading and mining of the companies, and some have had their offices ransacked by authorities and their websites shut down by the authorities.

BitLicense

In the USA the federal state of New York has already established a regulatory framework, the state-specific license was introduced and any company that wants to work with the residents of New York must get the license. The license pupillary known as BitLicense was introduced by the New York State of Department of Financial Service in 2015.

The license requires obligations like hiring a compliance officer, consumer protection, anti-money laundering, cybersecurity, and business recovery and capital requirements. These have been criticized by the majority since it’s an expensive process to meet. Already since the introduction companies that existed before it came in place have been exiting New York due to the consequences of not meeting the obligations, these include companies such as Paxful, Localbitcoins, Kraken and Genesis Mining.

The South Korean government has also been at the forefront of setting up regulations over cryptocurrencies, any news that came out with negative rumour’s such as the perceived ban on cryptocurrencies resulted to price drops in the bitcoin prices. However, the South Korean government did not ban cryptocurrencies but now requires crypto investors to change their anonymous virtual accounts to one attached to their identities or face penalties.

Crypto Association Regulations

In recent times crypto companies are now teaming up to establish self-regulatory trade associations to promote and set standards. This comes in Japan after one of the exchange sites CoinCheck was hacked and NEM worth around $543 was stolen on Jan 26 2018.

In setting up regulations the areas that governments should put focus on a number of areas including:

• wallet providers,
• cryptocurrency exchanges
• and intermediaries between the traditional financial system and the crypto ecosphere.

The regulatory framework must be put in place if the governments recognize and allow the use of cryptocurrencies so as to protect the consumers, where there is no regulation and things such as scams occur the investors lose since no agency will come to their rescue.