Given its short history and complicated technology, Bitcoin and other cryptocurrencies are novel innovations that do not fit well within financial regulatory systems.
Regrettably, Bitcoins have been used to empower illegal conduct, as per a few reports, thanks to the anonymity decentralized platforms offer their users. Bitcoin has been used as a medium of exchange for buyers and sellers on the infamous Silk Road, a global online illegal drug market.
Regulators throughout the world have been troubled by these factors. As a result, they are scrambling to introduce a few laws and regulations as traditional financial institutions enter the crypto battlefield and digital assets gain acceptance with consumers.
What are Cryptocurrencies?
People’s working habits, communication styles, shopping trends, and even how they pay for items have all altered as a result of technological advancements. Companies and customers no longer prefer cash, and contactless payments such as Apple Pay are gaining traction.
Consumers can pay for things at computerized registers with a quick wave of their smartphone. However, a new type of payment mechanism is gaining traction these days, and these digital coins are called cryptocurrencies.
A cryptocurrency is a form of digital payment that does not rely on banks to validate transactions. It’s a peer-to-peer payment system that allows anyone to send and receive money from any location on Earth.
Cryptocurrency payments are stored in an online database that specifies transaction codes rather than keeping a record as we do with tangible money. The transactions that you make with cryptocurrencies are recorded on a public ledger which is called Blockchain. A digital wallet is where you can store your cryptocurrency.
Visit erecoin.io to learn more about cryptocurrencies.
How Can Cryptocurrencies Be Regulated?
1. By Comprehending the Importance of Cryptography in Terms of Technology and the Numerous Applications it can Serve
Like the evolution of the early internet, the immense potential of Bitcoin makes it challenging to apply existing legal frameworks and standards ex-ante.
In this setting, premature regulation will almost certainly result in the selection of winners and the favoring of incumbents, whether intentionally or unintentionally. Worse, it can deteriorate the widening digital divide within and across countries.
Regulators must distinguish between the dangers of centralized and decentralized operations to support this new paradigm’s evolution properly.
Cryptocurrencies pose threats to centralized exchanges and custodial financial services that are familiar to monetary authorities, capital markets regulators, consumer protection agencies, privacy authorities, and tax authorities around the world.
Regulators have emphasized the anonymous and transnational nature of cryptocurrency systems as a possible source of money laundering and terrorism financing.
However, criminal activity accounts for only 0.34 percent of all cryptocurrency transactions compared to the traditional banking system. As a result, giving cryptocurrency the benefit of the doubt is the least authorities can do and eventually adopt the advantages it offers.
Cryptocurrency audibility can also help with real-time transaction monitoring, record-keeping, and risk reduction. Money laundering can be recognized and deterred, resulting in evidence that can be used to convict criminals.
When viewed in this light, cryptocurrencies have the potential to increase transparency and give an opportunity for authorities who are actively striving to shift more transactions from the informal to the formal economy.
2. By Collaboration Between Regulators and the Cryptocurrency Industry
Collaboration between authorities and the crypto industry will yield the best results. To map a quickly changing world and avoid unintentional damage, regulators will require private-sector knowledge.
Involvement in the regulation process and the ability to test various compliance options under a regulatory safe harbor would also help crypto enterprises gain traction, attract investors, and remain validated by the authorities.
It won’t be easy to achieve such public-private cooperation. For the most part, regulators prefer to work in secret, and many cryptocurrency investors and current supporters were attracted to the industry to avoid government regulation in the first place.
A regulated DeFi environment is an oxymoron to them, and resistance is the best strategy. But there will be regulation. The $100 billion DeFi industry, with its significant implications for consumers, market stability, and national security, will not be ignored by Western governments.
What is the Current State of Regulation in the United States?
In recent years, federal regulatory authorities in the United States have adopted a number of policies governing the treatment of cryptocurrency transactions, investment profits, payment services, and other digital asset-related activities.
The Securities and Exchange Commission (SEC) of the United States has stated that cryptocurrencies are securities and that existing regulations will extend to digital assets as well. It is significant for retail investors, as it implies they must record realized gains and losses from cryptocurrency investments on their annual tax returns.
Bitcoin and Ethereum, on the other hand, have been classed as commodities by the Commodities Futures Trading Commission (CFTC).
The CFTC regulates the trading of cryptocurrency derivatives, the most common of which being Bitcoin futures. Speculators and hedgers are among the institutions that invest in Bitcoin by purchasing and selling futures contracts.
In the United States, cryptocurrency exchanges such as Coinbase are legal. They are governed by the Bank Secrecy Act (BSA), which regulates financial institutions and payment processors.
Anti-Money Laundering and Know-Your-Customer processes are required for crypto exchanges to remain compliant. They must also report relevant information to regulators and seek payment transmitter licenses from the Financial Crimes Enforcement Network to operate in multiple states.
Open-source cryptocurrency networks like Bitcoin and Ethereum are computer protocols accessible to the general public via the internet. However, these transparent yet encrypted ledgers still present a significant regulatory issue for the authorities.
They’re decentralized interfaces for issuing tokens, self-hosted wallets, and other DeFi services without the use of a middleman.
The prohibition of cryptocurrencies will not prevent their adoption; instead, it would limit authorities’ ability to regulate market activity around these networks and address their specific hazards.
In the long run, regulations informed by actual use cases and interactions with developers will prove more robust, reinforcing essential policy objectives and supporting eco-innovation.