The U.S. is likely to introduce more cryptocurrency regulation. But what form will it take?
Jesse Powell, CEO of crypto exchange Kraken, warned the government might tighten its cryptocurrency rules. In an interview with CNBC this week, he said, "I think there could be some crackdown." Powell is concerned that increased regulation might hurt cryptocurrencies.
Powell is not the only one who thinks more regulation might be on the horizon. Treasury Secretary Janet Yellen told a February roundtable on financial innovation that she sees the potential and the problems of new digital currencies. "Cryptocurrencies have been used to launder the profits of online drug traffickers; they've been a tool to finance terrorism," she said.
And Federal Reserve Chairman Jerome Powell has said cryptocurrencies are speculative and highly volatile. He stressed they're "not really useful as a store of value, and they're not backed by anything."
Regulators worldwide are concerned about the dangers of cryptocurrency, but also aware that overregulation could bring its own risks.
Why regulate crypto?
Bitcoin, the first cryptocurrency, was launched in 2009 as a decentralized digital currency that didn't rely on banks. That gives it a lot of advantages, such as lower banking fees, easier international transactions, and access for those who can't obtain traditional financial services. However, it also comes with increased risks of fraud, volatility, and theft.
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As it grows in popularity, these are some of the reasons authorities want to regulate it:
To stop people losing their money. The fear is that as Bitcoin booms, new crypto investors speculate on crypto without fully understanding the fundamentals. People draw comparisons with the dot-com bubble of the early 2000s. When it burst, the Nasdaq fell almost 80%, costing investors an estimated $5 trillion.
To protect against scams. Regulators are also concerned about cryptocurrency and Bitcoin fraud. Regulation could help prevent so-called pump-and-dump schemes, in which scammers spread rumors on social networks to mislead investors and push up the price of a currency. The SEC has warned of Ponzi schemes that use money from new investors to pay returns to old ones.
To prevent funding illegal activities. The anonymity of cryptocurrency opens the way for money laundering and the funding of terrorism, drugs, and other illicit activities.
It's worth noting that a recent report from Chainalysis showed the percentage of illicit crypto activity was falling. In 2019, about $21.4 billion worth of transfers were known to be connected to criminal activity, which represented 2.1% of cryptocurrency transactions. Last year, that figure fell to $10 billion. And due to the surge in crypto, that came to 0.34% of overall activity.
What crypto regulations does the U.S. already have?
Cryptocurrency comes under the remit of several U.S. government departments, including the SEC, the Commodities and Futures Trading Commission (CFTC), and the Financial Crimes Enforcement Network (FinCEN).
The CFTC is the main body overseeing crypto markets. It has taken action against unlicensed cryptocurrency exchanges, prosecuted fraudulent coin offerings, and worked to control margin trading.
You also have to pay tax on your cryptocurrencies. Crypto is taxed as property, not currency -- so you must carefully document all purchases, sales, and profits.
At a state level, the situation varies. Some states make it easy to buy digital currencies. Wyoming, for example, is keen to capitalize on the crypto boom. Its rules exempt crypto companies from certain state money laws. And in Ohio, you can even pay your state taxes with crypto.
In contrast, New York has strict regulations. Its "BitLicense" means crypto exchanges must register and comply with rules such as verifying users' identities and only trading in certain coins. That's why some U.S. exchanges do not serve New York residents.
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As cryptocurrencies become more mainstream, every day seems to bring a new headline about the Bitcoin boom. And every big story brings us one step closer to increased regulation -- it's almost unavoidable.
Many in the industry are concerned about the impact of regulation. But others argue that if it's carefully thought out, regulation could actually encourage even more people to invest in cryptocurrencies.
How strict would new regulation be?
The big question is how stringent regulation would be. SEC Commissioner and crypto fan Hester Peirce told a recent Bitcoin conference, "While regulators need to understand and scrutinize new asset classes and technologies, excessive conservatism can impede competition, distort the market, and harm investors."
"We can do better," she said. "I hope that this year will mark a turning point for the United States, which in turn may spur other countries similarly to take a more sensible approach to crypto regulation."
It's unlikely the U.S will ban cryptocurrencies altogether, not least because it's become so widespread. But it might put the brakes on the rollercoaster. Or perhaps it will introduce lighter regulation that ensures investors strap on their seatbelts before they ride.