Cryptocurrencies are new and have grown in popularity over the last years.
This increase over a short time span has also caught regulatory bodies off guard.
Most have yet to make statements about cryptocurrencies because of a lack of understanding.
Nonetheless, there is increasing pressure from regulators to introduce various degrees of regulation on cryptocurrencies – from total bans to monitoring with no restrictions.
Because of this, there’s an ongoing debate over whether or not governments can effectively regulate the cryptocurrency market.
A brief history about governmental regulations of Cryptocurrency
Cryptocurrencies are generally regulated in two ways: by individual countries and by international organizations.
China has banned ICOs and cryptocurrency exchanges. Meanwhile, India is still considering new regulations after prohibiting banks from dealing with cryptocurrencies in 2018.
In the E.U., there is no single regulatory body but a series of national regulators that are working on common guidelines.
Cryptocurrencies are legal in most European Union member states, but each country has unique exchange regulations. However, the European Commission introduced regulation on Markets in Crypto-assets (MICA) in 2020.
In July 2021, the European Commission proposed new laws that will extend transfer of funds regulations (TFR) to all virtual asset service providers (VASP) across the E.U.
The proposal also mandates the collection of information about senders and recipients of cryptocurrency transfers.
The U.S. has taken the most fragmented approach, with different guidelines issued by federal agencies like the CFTC and SEC.
It has continued to develop cryptocurrency regulations, despite the difficulties of finding a consistent legal approach at the state level.
The exchange of cryptocurrencies is legal even though regulations vary by state.
However, the Justice Department will continue to coordinate with the SEC and CFTC as future cryptocurrency regulations are considered to protect consumers and improve regulatory oversight.
The Canadian government has played an active role in shaping cryptocurrency regulations, primarily regulating the currency according to provincial securities laws.
Cryptocurrencies are not legal tender in Canada, but they can be used to buy goods and services online or in stores that accept digital forms of payment.
In 2021 it required cryptocurrency exchanges to register with the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC).
So, as some countries are embracing cryptocurrencies as innovative financial instruments, others have banned them outright due to the currency’s potential to be used by criminals.
But can they do it? Is regulation possible or even necessary for such a decentralized system that’s based on trustless technology?
Can global governments be able to regulate the cryptocurrency market effectively?
The digital asset ecosystem is complex and intertwined.
When it comes to cryptocurrency, there are crypto exchanges, digital wallets, crypto funds, and token offerings.
As such, it’s pretty easy to see why regulating cryptocurrencies in a completely transparent manner can be a complicated task for local and international regulatory bodies.
As if that weren’t enough of an obstacle, blockchain technology is constantly evolving; it’s fair to say that we’re very much still in its infancy.
Which brings us to…
The trilemma of regulating the crypto market
As in other financial markets, regulators must protect members of the public from losing their hard-earned money, either through false investment projections, misleading news reports, or personal misjudgements.
But, in a world of open borders and free movement of capital, crypto is fundamentally opposed to governmental oversight.
The trilemma that governments face when regulating the crypto market include:
1. Achieving market integrity
2. Enabling innovation
3. Establishing clear rules
Even if regulators succeed in enacting more specific guidelines on crypto exchanges, they will still be operating with an enormous handicap.
And they only get to choose two of these three options (in the best-case scenario.)
For example, regulators have already demonstrated an inability to prevent exchange hacks from occurring.
These hacks have gone unpunished in most cases as it’s nearly impossible to trace stolen funds through distributed ledgers and multiple wallet addresses.
Governments are also generally slow to react due to bureaucratic roadblocks – for example, tax authorities are still trying to figure out how best to implement cryptocurrency taxes.
To conclude
Of course, it goes without saying that the cryptocurrency market is still in its infancy.
Lawmakers are still learning the best way to regulate it, and there will undoubtedly be a few false starts along the way.
One thing is for sure.
It’s going to be very difficult for governments to successfully regulate a market that is as massive and as complex as cryptocurrency.
But that doesn’t mean they’re not going to try and overcome the trilemma challenge.
Nevertheless, I expect an increasingly amicable relationship between government regulators and cryptographers as time goes on.
Sources:
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52020PC0593
https://fortune.com/2022/03/11/biden-executive-order-crypto-regulation-usa-nathan-mccauley/
https://www.cato.org/blog/trap-trilemma-cryptocurrency-regulation-government-control-not-default
https://www.finance-monthly.com/2021/08/can-the-government-regulate-cryptocurrency/
