Regulation of cryptocurrencies: opportunities and prospects Skip to content

The real possibility of cryptocurrency regulation

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It is virtually impossible to regulate blockchain technology. But governments continue to look for new technical and legal opportunities to do so. Let’s find out why countries interfere in the crypto industry and what problems arise along the way. 

Why would one want to regulate cryptocurrencies?

Blockchain technology allowed the first cryptocurrency to be launched in 2009. Its main feature is distributed storage of information between all users. None of them can intentionally or accidentally make a change, since only the option that is fixed by the majority is recognized as correct.

Such authentication not only provides reliability but also virtually eliminates the possibility of any outside interference. For example, government agencies will not be able to confiscate bitcoins obtained fraudulently or block a criminal’s account of a criminal.

In addition to countering crime, the need to regulate cryptocurrencies is caused by the role of the state in the modern economy. The state is responsible for such functions as protecting property rights and collecting taxes.

The problem arises when it is necessary to determine the legal status of cryptocurrencies — to treat them as currencies, goods, securities or property. The system of taxation, supervision, and reporting will depend on the classification. Thus, commodity markets operate under relatively weak regulation. Securities, by contrast, are usually subject to more onerous rules regarding price transparency, trade reporting, and market abuse.

Thus, the regulation of cryptocurrencies themselves is almost impossible. Instead, regulators are targeting cryptocurrency infrastructure.

Cryptocurrency infrastructure

The cryptocurrency industry includes different infrastructure objects, each of which requires a different approach to regulation. 

Exchanges. Possible changes in legislation create a potential risk for the crypto exchanges founders. Companies prefer to set up their servers and offices in countries where their work will be strictly regulated. Digital legislation is most developed, for example, in Switzerland, Canada, Japan, and Australia.

These governments are looking for technical opportunities to introduce the cryptocurrency industry into the legal field. Major exchanges such as Binance and Bittrex have already committed to implementing Chainalysis tools for blockchain monitoring. This enables tracking suspicious transactions in real time.

Exchangers. Regulation of the exchangers activities is most often reduced to checking who  purchases digital coins initially. Exchangers require their users to confirm their personal data.

Law enforcement agencies identify both criminals who accumulate bitcoins from drug sales, and those who use the currency to hide wealth. For example, the US internal revenue service tracks the actions of Bitcoin holders and monitors the payment of taxes.

Companies that produce stablecoins. Digital coins pegged to the dollar exchange rate are issued for users who need integration with traditional financial instruments. This determines the need for clear compliance with the law and obtaining approval from regulators. To do this, Tether has implemented the «Know Your Transaction» tool from Chainalysis in the USDT network.

«Know Your Transaction (KYT) for Token Issuers is a unique real-time anti-money laundering (AML) compliance solution for monitoring a token’s full lifecycle, from issuance to redemption» — Chainalysis commented.

Legal status of cryptocurrencies in 2020

Here are examples of countries with different levels of regulation of the cryptocurrency industry.

The map of Bitcoin Legality
Countries by the level of cryptocurrency legalization. Source: coin.dance

Full legalization. In Switzerland, cryptocurrencies and exchanges are legal. The tax administration is considering crypto-currencies as assets: they are subject to Swiss wealth tax and must be listed on annual tax returns. To start operating, crypto exchanges must obtain a license from the financial market supervisory authority. Similar rules apply for ICOs.

The Canadian tax agency also defines cryptocurrencies as commodities. Trade in them is regulated as barter transactions, and the income received is considered as business income. Therefore, taxation is applied to profit. 

Legal status is not defined. In France, there is still no direct legislative regulation of cryptocurrencies. Cryptocurrencies are not prohibited, but they are not protected either, so citizens assume all the risks of owning them. 

In Russia, courts consider cryptocurrencies to be «other property». For the first time, such a decision was made by the arbitration court of appeal in May 2018. The court ordered the debtor to transfer access to the crypto wallet to the bankruptcy trustee. The latest version of the law «On digital financial assets» defines cryptocurrency as property and prohibits using it as a means of payment. The law is due to come into force on January 1, 2021.

Completely forbidden. There are countries where the turnover of cryptocurrencies and the operation of crypto exchanges are legally prohibited. These include Afghanistan, Algeria, Bangladesh, Bolivia, Pakistan, Qatar and Saudi Arabia. 

Summary

The decentralized principle of the blockchain and the complex legal nature of cryptocurrencies complicate the task of state regulation. However, countries come up with solutions to fight crime and regulate economic relations.

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