Why regulate cryptocurrencies

After the capitalization of the cryptocurrency market began to rapidly approach the $ 1 trillion dollar mark, state institutions began to make serious efforts to develop laws and regulations that regulate it. The response was a protest against such attempts and the desire of the protesters to substantiate their position with the nature of cryptocurrencies, created in order to avoid state and banking control. Government regulation is incompatible with the libertarian beliefs of investors, attracted by promises to end the tyranny of inflation and the monopoly of state banks. However, with each new blockchain problem, hacking wallets and exchange services, or speculative price fluctuations, the number of people wishing to reduce risks increases.

Current situation

Cryptocurrency arose as an alternative to traditional fiat currencies means of payment. Over time, it has become a highly risky speculative investment asset. Later, an ICO mechanism for collecting initial capital was created using the same technology, which became an additional source of instability. The current situation in the field of cryptocurrency regulation is characterized by two conflicting trends. On the one hand, there is a growing need for understandable rules by which operations are performed. Development and their widespread adoption would attract a larger number of institutional investors in this area, which would serve as an additional impetus to development. On the other hand, there are fears that strict restrictive regulation that does not take into account the specifics of cryptocurrencies may, on the contrary.

The main vulnerabilities of cryptocurrencies

Many hopes associated with cryptocurrencies and blockchain did not materialize. Thus, the promised security and reliability of payments were significantly lower than expected.

Potential Monopoly Pressure

Collusion between miners can jeopardize the security and timeliness of the arrival of cryptocurrency units. The formation of large mining pools gives them an advantage in speed and the ability to derive monopoly profits from mining.

Hacking Vulnerability

Since cryptocurrencies are not a universal means of payment, communication between the buyer and the seller is required to exchange them for goods, services or fiat currency. It is provided by exchange services acting as intermediaries. Facilitating the task of finding counterparties, they, at the same time, increase the risks of cryptocurrency owners, as they become objects of hacking and theft.

Money Laundering and Financial Crimes

The absence of general international rules allows maneuvering jurisdictions in search of the safest conditions for criminal activity.

The main directions of cryptocurrency regulation

  1. Combining international efforts

The decentralized nature of cryptocurrencies reduces the effectiveness of local regulatory attempts. Attitudes towards cryptocurrencies range from a complete ban (Algeria) to promotion (Japan, Estonia). In these circumstances, users always have the ability to manipulate jurisdictions. The development of uniform international rules should contribute to solving the problem.

  1. Development of a unified legal definition of cryptocurrencies

Over the entire life of cryptocurrencies, their legal definition has not been given, which is valid in all countries. The same can be said about ICO. They are not of a single nature and can be considered as currency, goods, ownership shares, securities, loans, deposits, financial derivatives or forex contracts. Creating an internationally harmonized taxonomy is an important challenge facing regulators.

  1. Development of clear tax rules

The circulation of cryptocurrencies (exchange for fiat and mutual exchange) can generate profits, which should be subject to taxation. This year, a law was passed in the United States that clearly clarifies when capital gains tax is paid on this profit. In other Western countries, the same clarity does not exist yet, especially when it comes to crypto dividends.

  1. Development of uniform rules for the operation of exchange services

Users of exchange services must have a bank account. This makes identification and tax collection easier. However, for the services themselves, this rule does not always work. A few of their units have bank accounts. For example, a Bitstamp account is opened in Slovenia, and Coinbase – in Estonia. The position of banks is clear. They fear the illegal use of the money they hold. If the activities of exchange services are subject to certain rules, then those fears will subside, and large banks will be able to open accounts with such companies.

  1. Creation of legal infrastructure for ICO

In the regulatory documents, first of all, the boundaries of what is permissible for the ICO should be indicated and a legal definition of this type of activity should be given. Existing regulations do not provide liability for fundraising, a mechanism for compensation for damage in the event of a project failure, government actions to track illegal transactions and fraud.

Government agencies do not yet have effective tools for monitoring ICOs. Therefore, it would be logical to endow this function with exchange services that host tokens issued as part of the ICO. On the other hand, investors could pass a mandatory audit according to the KYC and AML schemes. Comprehensive control will obviously reduce the number of fraudsters on both sides.

Regulation is an essential condition for social survival

Despite the growing interest in cryptocurrencies, this area of ‚Äč‚Äčeconomic relations is still relatively narrow. But it is expanding at a speed that suggests that soon it will accumulate large financial resources. Therefore, operations with cryptocurrencies should become safe, understandable and convenient for users. The regulation does not mean the prohibition or total control. Back in the 17th century, John Locke said that “where there is no law, there is no freedom.” In order to be free, society must live by the rules that protect this freedom. If we talk about cryptocurrency, then the main objectives of its regulation should be:

  1. The transformation of the cryptocurrency sphere into a full part of the financial space

The crypto economy should not function separately from the traditional and be independent of it. Fiat and crypto money will coexist for a long time and therefore must cooperate in order to provide people with a convenient choice. Without regulation, this is impossible.

  1. Building trust

Many investors refuse to participate in cryptocurrency transactions precisely because this area is not regulated by the state and is illegitimate from their point of view.

  1. Fraud protection

The lack of rules allows us to consider the cryptocurrency sphere as the place of illegal operations and tax evasion.

  1. Protection from market manipulation

The presence of large mining pools and owners of large packages of major cryptocurrencies provides ample opportunities for market manipulation. The regulation will help protect small users from sudden changes in market conditions.

Whether you like it or not, everything that is not regulated in the modern world seems suspicious and not trustworthy. This view has been formed over the centuries and has a good reason. Chaos does not contribute to development; it stops it. Therefore, if we want cryptocurrencies to develop, we must accept the fact that regulation is an important condition for this development.

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