Cryptocurrency advocates view cryptocurrency as an egalitarian force that challenges central banks and Wall Street; yet regulators have taken notice due to its extreme market volatility, susceptibility to fraud, and energy-intensive mining operations.
Cryptocurrency regulations have emerged at both the federal and state levels, with different agencies overseeing various aspects of the industry.
Legality
Cryptocurrencies are digital assets that operate through computer networks as a medium of exchange. Since they’re unregulated by any central bank or government body, traditional regulations do not apply; however, with their increasing popularity as investment tools and purchasing goods and services from merchants worldwide using them directly; regulatory attention on these assets has increased greatly over time and should continue into the foreseeable future.
Many countries have begun taxing cryptocurrency investments and cracking down on financial crimes. Unfortunately, however, due to its unique characteristics some regulators are grappling with the new technology’s peculiarities – fearing restricting crypto transactions could impede economic development while not wanting to compromise their ability to police illegal crypto usage.
Regulators continue to scrutinize cryptocurrency, creating an ever-evolving regulatory landscape. Attorneys specializing in blockchain and cryptocurrency law are vital in staying abreast of current developments while adhering to all regulations.
Major concerns associated with cryptocurrency include their lack of legal tender status and price volatility, leading politicians to introduce legislation designed to regulate this emerging industry. Democratic Senator Patrick Toomey introduced legislation known as the Responsible Financial Innovation Act that creates a framework for stablecoins while also integrating them into existing banking and tax laws.
The bill would provide a clear framework for the development of cryptocurrency markets and protect investors by mandating that companies that sell cryptocurrencies register as money transmission businesses. This measure would strengthen consumer protections while helping prevent marginalized communities from being exploited; additionally it would bring transparency and accountability comparable to financial services such as securities, loans or crowdfunding services.
Additionally, this bill would require cryptocurrency exchanges to abide by anti-money laundering and other applicable federal and state laws, providing increased investor protections and decreasing fraud risk.
Anonymity
Cryptocurrencies offer tremendous potential to revolutionize financial inclusion, yet also present serious risks. Their anonymity makes it hard to track who uses them – something exploited by criminals such as Silk Road. In such instances, criminals use bitcoin for selling drugs, fake documents, ransomware and other illicit goods and services – leading regulators to take various approaches in order to mitigate these risks.
Some jurisdictions, like the United States, have implemented comprehensive policies regarding digital assets. These include consumer education, market intelligence gathering and robust enforcement as well as government-wide coordination. Under Biden administration there has been an ‘attenuated approach to crypto regulation while other governments enforce more stringent regulations against using virtual currencies.
Although there are various kinds of cryptocurrencies, Bitcoin remains the most well-known. With its widespread holding and market cap dominating rivalry from Ethereum and Tether cryptocurrencies respectively, Bitcoin is easily the leader. But other cryptocurrencies still remain with smaller market capitalization; some popular examples being Cardano, Ether Tether and Polkadot.
Due to not being issued by governments or central banks, cryptocurrencies lack intrinsic value; their price is determined solely by supply and demand – making them highly volatile with wild price swings. Furthermore, as there are no assets backed up with them and redemption cannot easily take place, investors have often shied away from purchasing cryptocurrency assets due to this risk factor. This volatility has discouraged many potential buyers.
In the US, cryptocurrency investments are overseen by three regulatory authorities: Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and Treasury Department through Internal Revenue Service. SEC classifies cryptocurrency as securities for retail investors who must report realized gains to their tax forms; furthermore CFTC regulates market manipulation issues related to crypto assets while IRS applies a capital gains tax rate against profits realized from digital asset investments.
An important component of cryptocurrency regulation involves anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations. Crypto exchanges operating in the US must abide by both sets of laws; specifically the Bank Secrecy Act and related federal statutes require them to verify customer identities as part of AML/CFT programs and obtain a license from FinCEN to operate as money services businesses while reporting information back to government authorities.
Security
Cryptocurrencies are digital currencies that operate across decentralized computer networks to operate as a medium of exchange without the need for a central authority. Cryptocurrencies are created and traded using cryptography principles, with transactions recorded on public tamper-proof ledgers known as blockchains. Bitcoin was first created by Satoshi Nakamoto of unknown identity back in 2009 and currently boasts over $1 trillion market cap; however, many other cryptocurrencies have emerged since.
Cryptocurrencies like any financial asset can be used for both legal and illegal activities. For instance, Silk Road’s dark web marketplace accepted Bitcoin payments for illegal drugs, falsified documents, ransomware attacks and other goods and services sold there; its founder Ross Ulbricht was ultimately charged with money laundering and drug distribution charges. Furthermore, cybercriminals increasingly target companies and individuals through ransomware attacks which target computer systems and demand payment to restore them – often in cryptocurrency form.
While cryptocurrency‘s popularity has skyrocketed, so has regulatory scrutiny. Regulators are striving to strike a balance between protecting consumers from scams while assuring anti-money laundering (AML) laws compliance and tax regulations; consequently cryptocurrencies now fall under regulation by federal and state securities regulators, IRS and FinCEN.
Cryptocurrencies as an innovative invention present some unique regulatory challenges, which makes regulating them difficult. For example, many cryptocurrencies do not fall under Securities Exchange Commission (SEC) jurisdiction because they do not give investors an opportunity to participate in or profit from a company’s business operations or growth. If crypto assets qualify as securities they must be sold via registered exchanges or alternative trading systems (ATS) approved by SEC before being offered for sale to investors.
The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) both possess jurisdiction over cryptocurrency sales that fall within their purview, which include securities and commodities respectively. Furthermore, the CFTC can take action if any manipulation of cryptocurrency prices occurs that violates its anti-fraud and manipulation laws. Furthermore, FinCEN has established that virtual currency exchanges must register as Money Services Businesses that can verify customer identities before selling cryptocurrencies to customers.
Regulation
Cryptocurrencies have gained in popularity, yet are largely unregulated compared to more conventional investments. Due to their volatile nature and higher degree of risk, it’s wise to conduct thorough research prior to investing. Furthermore, any purchases of cryptocurrency do not come backed or guaranteed by any government entity.
Not every government knows how to approach cryptocurrency, yet some have begun regulating them. In the U.S., regulators include Securities and Exchange Commission and Commodities Futures Trading Commission while in Chile and Mexico they have passed laws specifically regarding them. Furthermore, bipartisan legislation called Responsible Financial Innovation Act (RFIA) was proposed in Congress which seeks to provide regulatory clarity by creating strong framework for stablecoins as well as integrate digital assets into existing taxation and banking laws.
Cryptocurrencies offer anonymity that makes them attractive to criminal activities, such as Silk Road’s illegal drug sales using Bitcoin as well as ransomware sales and money laundering activities. As a result, regulations to prevent money laundering have increased dramatically while some countries have even banned crypto altogether.
Canadian regulation of cryptocurrencies can vary according to province, but most cryptocurrency investment companies must register with provincial securities regulators and meet money-laundering and counterterrorist financing regulations as well as liquidity and reserve requirements. Furthermore, Canadian Securities Administrators recently provided guidance on regulating crypto-only investment funds.
FinCEN (The Financial Crimes Enforcement Network) in the US has classified digital assets as “value that substitutes for currency,” making them subject to anti-money-laundering laws such as Bank Secrecy Act and other anti-money-laundering statutes. Furthermore, FinCEN requires cryptocurrency exchanges register as money transmitters with AML/CFT regulations in accordance with AML/CFT regulations. Conversely, CFTC takes a more welcoming stance by classifying cryptocurrencies as commodities which trade on public derivatives markets which may make them less vulnerable to criminal activity.