Crypto: Sooner or Later Will Come Regulator

Crypto is here, crypto is there, crypto soon will be everywhere. The only problem is that the larger the industry, the greater attention from regulators.

Over the last few years, almost every central bank had something to say about crypto. In most cases, they referred to the risks of investing in digital assets, warning that no legal recourse would be available to crypto investors in the event of a loss.

Many AML/CFT authorities developed or adapted regulation to apply to certain types of crypto assets, with the Financial Action Task Force (FATF) updating its standards to cover virtual assets and virtual asset service providers in 2018.

The Swiss FINMA, MAS, and UK FCA have issued high-level guidance on the treatment of crypto assets in order to help identify whether existing legislation and regulations apply to them.

Others didn´t want to collaborate with the emerging industry, imposing restrictions on investments in cryptocurrencies. Their reasoning was that cryptocurrencies are mainly issued for illegal activities, such as money laundering and terrorism.

Additionally, they required banks and other financial institutions that facilitate such markets to conduct all the due diligence requirements imposed under such laws.

Algeria, Bolivia, Morocco, Nepal, Pakistan, and Vietnam, for example, banned all activities involving cryptocurrencies. China, Macau, and Pakistan, on the other hand, banned ICOs.

It is also true that some jurisdictions saw an opportunity in the crypto industry. While not recognizing cryptocurrencies as legal tender, they saw a potential in the technology behind it and began developing a cryptocurrency-friendly regulatory regime as a means to attract investment.

Why so much attention to a considerably small crypto industry?

Officially, the government wants to regulate digital currencies to:

1. Stop Money Laundering and Fraud
2. Prevent Illegal Activities
3. Stop Terrorism
4. Provide a Trustworthy Infrastructure to the Citizens
5. Gain Authority Over the Cryptocurrencies

In reality, most of the points do not stand up to closer examination. Not to waste the reader´s time, it´s enough with mentioning that the blockchain is a system built on foundations of mutual mistrust.

And that´s exactly what makes it trustworthy, the absence of centralization. Cryptographic hash links and distributed consensus mechanisms ensure that the data stored on an immutable blockchain can not be altered or deleted.

If we try to understand the real reason behind this "witch hunt" is that governments want to expand the reach of their financial surveillance and get rid of privacy protections. The DOJ even said that DECENTRALIZED EXCHANGES have to register with FinCEN and have to “collect and maintain customer and transactional data” or else be subject to civil and criminal penalties. How decentralized they will be then...

2020 - The year of mass crypto-adoption?

Whilst most of the world has been dealing with the negative consequences of the Covid-19 pandemic, 2020 was a great year for Bitcoin as well as the industry itself. Numerous investment sharks even started calling Bitcoin an inflation hedge instrument, especially in the context of trillion stimulus packages.

Wall Street veterans from Paul Tudor Jones to Stanley Druckenmiller blessed it as an alternative asset. And companies like MicroStrategy Inc. and Square Inc. moved cash reserves into crypto in search of better returns than near-zero interest rates deliver.

Sounds promising, doesn't it? Maybe, but there is one serious problem. People forget about Bitcoin origins. It was supposed to be an alternative to fiat currencies, to fight against “the Big Brother”.

Instead, everyone is talking about institutional investors’ money and that Bitcoin is the new gold. Could you imagine Satoshi Nakamoto expecting his creature to be legalized one day and serving for the good of the government? That sounds insane, but the reality is disappointing. 

Better it goes, closer attention from regulators

At the same time as Bitcoin is gaining momentum, it is also capturing greater attention from regulators. Clearly, Central Banks see a threat in the Crypto industry and they don’t want to lose control over money flows. The only thing is that it isn’t that easy to ban something decentralized, something that has no central control.

The question now is if there will be a tighter regulation with Biden in the White House. Janet Yellen, new Treasury Secretary, already called cryptocurrencies “a particular concern”.

The UK’s Financial Conduct Authority and the president of the European Central Bank also called for more stringent regulatory scrutiny for cryptocurrencies, alleging to the extreme volatility and criminal activity often associated with the market.

Europol said that DarkMarket operated on the hidden part of the internet known as the dark web and had been used by 2,400 vendors to sell drugs worth more than €140m using cryptocurrencies including bitcoin and monero.

Will regulations kill Bitcoin?

According to the study “The Impact of Cryptocurrency Regulation on Trading Markets”, for dozens of regulatory actions concerning a wide variety of subjects in six major jurisdictions, no evidence was found that these regulations either attract or repeal traders to the jurisdiction. Neither it has been discovered that national-level regulation affects global trading volume.

Thus, authors believe that imposing new regulations on cryptocurrencies will not lead to capital flight. Cryptocurrencies are bought and sold on exchanges across the globe, so traders can simply change exchanges.

In this context, some argue that governments should allow emerging technologies to develop unimpeded – and that attempts to regulate cryptocurrencies would simply push their exchanges, investment managers, and surrounding firms in their rich ecosystem offshore to more laissez-faire jurisdictions. 

If u Lose, U Can Guide! 

Governments don’t like losing money and the lack of regulation doesn’t allow them to charge capital gains from crypto profits. What is the solution? Introduce new taxes.

Earlier this month, South Korea announced it will begin taxing crypto benefits 20 percent, from both buying and selling, beginning in 2023. The U.S. Internal Revenue Service (IRS) treats Bitcoin as property rather than a currency for federal tax purposes. People who engage in Bitcoin mining are also subject to U.S. taxation.

In the case of the EU, in 2015, the European Court of Justice (ECJ) declared that Bitcoin transactions “are exempt from VAT (value-added tax) under the provision concerning transactions relating to currency, banknotes, and coins used as legal tender.” Thus, according to the ECJ, Bitcoin is a currency and not property.

In Japan, Bitcoin is officially considered a payment method. The sale of Bitcoin is exempted from consumption tax as of 1st of July 2017.

A brief history of capital gains tax

Back in 1921, the United States was struggling to pay off World War I debts; inflation was high, as was unemployment. In other words, the country was in the midst of a depression. Post-war income taxpayers, wearied of war sacrifices, blamed the income tax system, which caused capital to flow into tax-exempt securities instead of industry. To be more precise, to meet the increased need for revenue, Congress enacted a variety of taxes, including numerous excise taxes, an excess profits tax, a capital stock tax, and, most importantly, an ever-expanding income tax. 

1. On August 14, 1914, the Treasury issued a private letter stating that gain from the sale of securities by a beneficiary of a will was taxable. 
2. In December of that year, an official Treasury decision required taxation of profits from the sale of real estate. 
3. In the Revenue Act of 1916, Congress had intended to tax stock dividends as income, but failed because “such taxation was unconstitutional under the sixteenth amendment.” Additionally, politics provided strong reasons to uphold the taxability of capital gains. Since the Pollock decision in 1895 the Court and Congress had been at odds over the extent of congressional power in the taxing area. 
4. In 1919, the Treasury finally promulgated a regulation providing that income included "gains derived from the sale or other disposition of capital assets."
5. By 1920, the Bureau of Internal Revenue had already been treating capital gains as income for several years.

In summary, the Supreme Court made its capital gains decision in the context of a post-war country in the midst of a depression.

Conclusion

There is almost no doubt that sooner or later the mast majority of regulators will turn their eye on the cryptocurrency industry. Clearly, central banks don´t want any competitors in their space, which is why they began announcing so-called CBDCs. They want to get rid of privacy and anonymity, thus we will continue to see attempts to expand the reach of their financial surveillance and get rid of privacy protections.