With every crypto bull cycle, general interest in cryptocurrencies inevitably rises. The incredible profit opportunities of these digital assets bring in increased media attention. Thus, the awareness of governments about cryptocurrencies grows. This results in various steps being taken to regulate them.
Because it is still such a novel asset, there is no global regulatory framework. Different countries have adopted various approaches. Some, such as Malta and Switzerland, accept them with open arms; others, like China and Egypt, ban them altogether.
Let’s take a look at the possibilities of crypto regulation, its benefits and drawbacks. Moreover, to show the wide variety of regulative methods, we will explore the legality of crypto in different countries.
Can Governments Regulate Cryptocurrency?
Cryptocurrencies use the blockchain technology and are borderless assets. They cannot be directly controlled by a single entity like a government or a central bank. Blockchain allows anyone on the globe to freely participate in the crypto economy (as long as they have an internet connection).
Consequently, countries cannot effectively control cryptocurrencies. Instead, they can regulate their usage within their borders and tax the profits from crypto trading. Most countries have already drawn a regulative framework on crypto taxation and decided whether they can be accepted as a payment method.
We have two recent examples of harsh regulations that are on the opposite sides of the spectrum:
- In China, the government is doing its best to completely annihilate the usage of crypto. In May 2021, the government prohibited all crypto mining operations and doubled down on this crackdown just recently. It declared that all crypto transactions would be deemed illegal in the future.
- On the other side, we have El Salvador that adopted bitcoin as legal tender, allowing citizens to use it in all financial transactions.
Both of these are extreme cases, and the general consensus lies somewhere in the middle. Most countries accept cryptocurrencies but interpret their taxation and usage differently.
How Does Regulation Affect the Cryptocurrency Market?
News about regulations can be both a positive and negative catalyst for crypto prices. Let’s illustrate this with a couple of examples.
The news of China banning crypto mining in May hit the markets very hard. bitcoin fell by 30% and dragged down the rest of the coins with it. We saw a short-lived bear market, where the total crypto market cap went from over $2 trillion to a low of $1.25 trillion, in just one month. This proves that stark regulative methods, bans, or restrictions of usage can have quite a negative effect on the market.
Conversely, positive news regarding regulations often pushes crypto prices higher. Only recently, a simple comment from Jerome Powell that the FED wasn’t planning on banning cryptocurrency gave the markets some incredible momentum. Only a week following the announcement, bitcoin had registered 30% gains at the beginning of October 2021.
This is understandable, as investors are more confident to buy cryptocurrencies. It removes the uncertainty of the government restricting their investment assets. Consequently, we can conclude that regulations have both their pros and their cons.
The advantage is that it can bring more trust from institutional investors in the crypto market, allowing for a more stable asset type. The drawback is that it whittles away one of the main benefits of crypto, which is decentralization.
Countries with Positional Regulation of Cryptocurrencies
Here are some interesting cases of cryptocurrency regulations across the world:
Australia.The Australian government has declared cryptocurrencies as a legal medium of exchange since 2017. Consequently, you can use bitcoin, ethereum, and other altcoins to purchase anything, from a bottle of water to real estate. Note that they are considered as property, and fall under the CGT.
Argentina.In Argentina, owning, investing, and transacting with cryptocurrencies is completely legal. Fortunately so, because Argentina is among the countries where people actively use crypto. The Argentinian economy has been hit by hyperinflation. Many citizens chose to use cryptocurrencies to shield themselves from the declining value of the Argentine peso. In Argentina, cryptocurrencies are not considered legal money, but investing in crypto is allowed. Individuals are expected to pay some taxes as well.
Belarus. A decree in Belarus from 2017 officially recognizes the legality of cryptocurrencies. As such, all activities that involve crypto, including mining, trading, staking, and blockchain development are legal. Moreover, these assets are deemed tax-free until 2023. The prerequisite to enjoying these benefits is to register as a High-Tech Park (HTP) resident.
United Kingdom. The UK government has been showing a mixed bag of regulative measures regarding cryptocurrencies in the past years. While individuals can legally own cryptocurrencies as property, some crypto-related financial instruments have been under increased scrutiny by the government. For instance, binance as well as other crypto exchanges have been recently forbidden from offering crypto futures contract trading and other speculative financial instruments.
Hong Kong.The Hong Kong Monetary Authority (HKMA) recognizes cryptocurrencies as virtual commodities. However, only exchanges that are registered with the Securities and Futures Commission (SFC) are allowed to buy and sell cryptocurrencies to professional investors. Dealings with retail investors are forbidden even for registered exchanges.
Canada. Cryptocurrencies are not viewed as legal money in Canada. They have also been under a banking ban since 2018. This means that individuals cannot purchase or withdraw from crypto exchanges using bank accounts or other payment methods that are linked to financial institutions. The Canadian government puts crypto on the same level as commodities and taxes them according to the Income Tax Act.
Conclusion
Even after a full decade since the birth of the cryptocurrency industry, regulations remain a mixed bag on a global level. Due to a lack of understanding of these assets, some countries have decided to outright ban users from using or owning them. Others believe that adapting to this new type of asset is essential and provide clear crypto taxing and usage regulations.
In either case, regulating cryptocurrencies is a necessity. This will reduce the chance of fraudulent and scammy projects in the future. This should bring a better balance to the markets and provide users with a more stable investment environment.
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