Cryptocurrency is an exchange medium which applies cryptographical functions to help in conducting all the financial transactions. It uses the blockchain technology to help in gaining transparency, immutability and even a decentralized system. The most vital characteristic of a cryptocurrency is that it is not under the control of any central authority such as the government or a central bank.
In recent times, the use of cryptocurrency has increased so much and due to that, this medium of exchange has gained much popularity. However, several challenges have cropped up alongside the popularity of cryptocurrencies hence creating the need for regulation of this exchange medium. The following are some of the reasons why cryptocurrencies need to be regulated:
1.To stabilize its values
Cryptocurrencies have experienced a very abnormal increase in value followed by a sudden drop. Those who buy or trade-in it at the times of value increase have therefore experienced heavy losses when the values later drop. Through the regulation of cryptocurrencies, both the extreme changes and values can be stabilized.
2. Elimination of fears
Since cases of theft of digital money have been reported, there have been fears allayed on the use of this currency. It is, therefore, necessary that further regulation through stabilizing the values be done to remove the fears. Some people also lack a deeper understanding of the general concept of cryptocurrency. Through regulation, there can be increased use and wider acceptance of this medium of exchange.
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3.Easing of tax issues
Since IRS doesn’t classify cryptocurrency as money but as an asset, companies have always used it as a means of evading taxes. RS has always tried to conduct a crackdown on this kind of abuse to tax collection but it has been difficult to catch all the criminals involved in it. In addition to tax evasion, those who need to use cryptocurrency as cash instead of investment have found it very difficult to tack.
Reasons for Regulation of cryptocurrencies by various countries in the world
For the last four years, cryptocurrencies have become so ubiquitous hence making very many national governments and regional authorities to seek for their regulation. So many counties across the world have come up with various strategies of regulating cryptocurrencies. Considering the studies of cryptocurrency regulations done across the world, a lot of information has been found concerning it as given below:
Most governments have warned their citizens of the dangers of investing in the cryptocurrency industry. Most central banks of various countries have given warnings to their citizens educating them on how to differentiate actual currencies issued by the state from cryptocurrencies which are not given by the state. Citizens are also notified on the risk arising from the high volatility of cryptocurrencies and the truth that many organizations dealing in it are not regulated. Moreover, citizens who deal in it are told to be doing so at their own risk and that no legal action will be taken in case they undergo any loss.
Countries have further warned their citizens of the illegal activities propagated by this industry including terrorism and money laundering. Some of the countries have also gone beyond warning their citizens and have come up with various measures to regulate cryptocurrency trade. Such measures include expansion of laws on money laundering, counterterrorism, cryptocurrency markets being branded among organized crimes and requirement of all banks and financial institutions dealing in the market to comply with all the appropriate conditions.
Considering the Japanese government, for example, it became the very first nation to do a recognition of the Bitcoin and other cryptocurrencies as money. However, an infamous case which happened through M.T. Gox company made the Japanese government be practically involved in the regulation of cryptocurrencies. M.T. Gox company took part in an exchange that was the origin of platforms to enhance the buying and selling of Bitcoins using the flat currency. The purchasing process became too inefficient, accompanied by delays in funding of accounts. In the end, a large number of the Bitcoin holdings were hacked leaving the cryptocurrency traders in great awe.
The Japanese government didn’t consider banning cryptocurrency from the country despite the above act. Instead, it came up with a strict anti-money laundering policy which ensures that anyone who wants to get into the cryptocurrency industry must identify himself through a process known as “Know Your Customer “.This involved a participant in the market giving his full details including full name, address, country of residence and government-issued documentation of all information provided.
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Some countries regulate initial coin offerings (ICOs) which utilize cryptocurrencies for raising funds to companies. The companies issue a new digital token and receive a cryptocurrency e.g. ether or bitcoin. The process has always been very controversial due to a lot of frauds where fake company owners have escaped with the money. The government of countries such as China, Pakistan and Macau have completely banned ICOs.In New Zealand, certain obligations are applicable depending on the classification of the token offered as either debt security, a derivative, an equity security or a managed investment product.
How trading is done with cryptocurrencies is similar to the regulation of mining, exchanges and trading. Great confusion lies on whether cryptocurrencies are considered as commodities or securities and how they would be classified according to the present operating law. Most countries have therefore introduced new laws governing this market.
Certain governments have imposed restrictions on investing in cryptocurrencies. Countries like Algeria, Bolivia, Morocco, Pakistan and Vietnam have banned all activities associated with cryptocurrencies. The governments of Qatar and Bahrain have on the other hand barred their citizens from involving in this market locally but allowed them to do it outside the country. Other countries such as Bangladesh, Thailand, Iran, Lesotho and Colombia have not banned their citizens from trading in cryptocurrencies but have instead imposed indirect restrictions through barring of all financial institutions in their countries from dealing in transactions associated with cryptocurrencies.
The governments of the three countries including Canada, Australia and Isle of man have in the recent past enacted laws which bring all the cryptocurrency trade activities and institutions facilitating them under the protection of both money laundering and counterterrorism financing laws.
In Argentina, Bitcoins are not considered as legal currency or as legal tender because they do not get issued by the country’s monetary authority. They are not considered as legal currency as they are not a mandatory way of debt cancellation. However, they may get considered as money. Some experts state that Bitcoins are classified as goods under the Civil code. Transactions with bitcoins are controlled by the rules of the sales of goods as stipulated in the Civil code.
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The Canadian government also doesn’t consider cryptocurrencies as legal tender. However, tax laws and rules are applicable to cryptocurrencies. Cryptocurrencies are considered as commodities and not a government-issued currency. Cryptocurrency exchange regulations are quite inconsistent at the provincial level through the federal government authorities treat them as securities.
In the USA, cryptocurrencies are not considered as a legal tender. Regulation of cryptocurrencies varies from state. The Securities and Exchange Commission considers cryptocurrencies as securities. In March 2018, the commission confirmed that it was looking forward to a comprehensive application of security laws to digital wallets and exchanges.