Cryptocurrency and blockchain technology are making their way into full integration with our daily life and activities. It has introduced a novel way of owning assets and managing finances, but one major problem still plagues regulators of cryptocurrencies. Governments, agencies, and several authorities worldwide don’t have a clear-cut method of regulating the digital currency network. With countries like China, India, Algeria, and several others placing a total ban on cryptocurrency transactions, the fear of being unable to regulate or control the currencies is clear.
The United States of America, Canada, and most European countries embrace bitcoin and other digital currencies as a form of exchange and see them as taxable property. Meanwhile, some countries are undecided about regulations or the ban of cryptocurrency but have expressed their concerns to their citizens.
How Blockchain Works
Blockchain is a specific type of database created by Satoshi Nakamoto in 2008. It’s not clear what Satoshi Nakamoto means as no one can be identified with that name. It could be a group of people or someone who wants to keep his identity anonymous. Only that blockchain differs from a typical database in the way that data is stored and managed. Blockchain uses blocks that are linked using cryptography to store data like timestamps and transaction details. This data is then shared across a network of computers and is decentralized across nodes.
If new data is updated on the network, it’s updated and replicated across the other servers. This allows for openness for the network. Hence everyone has an equal chance at utilizing the network. Privacy protection seems better, and the fear of regulatory bodies is the ease at which blockchain networks can aid criminal activities.
The concept of distributed ledger is so intriguing, and it promises to be a major technological breakout. It only just started, and with prospects of being integrated into multiple areas, businesses are subtly implementing the structure into their models. However, blockchain has its setbacks like every novel technology but has seen breakthrough solutions and easter eggs that suggest how big a project blockchain could land the world.
Concerns About Cryptocurrency
There are about 2,000 cryptocurrencies in the world today. While you can only know a minute number of them, most of them lead a shadowy existence. The number keeps increasing, but the things they all have in common are:
They are virtual currencies (no coin or banknotes)
They are not issued by a central bank or single state
They appear to be transparent and traceable.
However, most governments’ concern with cryptocurrency is the feasibility for exchange and payment purposes, considering its volatility. Cryptocurrencies are much more volatile than conventional currencies. For example, bitcoin has fluctuated between $30,000 and $60,000 and currently stands at the $50,000 range as of this writing time. The decentralized nature of the technology poses a threat to the current monetary systems all over the world. It’s a system that allows everybody to take part in the mining of currency—a process of gaining cryptocurrency by validating data blocks and transactions to the distributed ledger system on blockchain.
Unlike the usual monetary systems where central banks are responsible for printing, regulating, and circulating currency notes, there’s no central body for cryptocurrencies. For example, bitcoin’s current global supply is 21 million, and only 18.5 million bitcoins are in circulation or maybe not. While some people have lost the key to their private wallets, and some have died, it’s not certain if the amount of bitcoin in circulation is up to 18.5 million. And there’s no regulatory body overseeing the amount of bitcoin left to be mined. It is also unclear what will happen when all 21 million bitcoins have been mined, and the supply is exhausted.
For some governments around the world, it is the uncertainty that bound the technology that’s preventing them from building trust upon it. At the same time, for some, it is the opportunity and prospects that it promises. Other concerns for cryptocurrency include its linkage with money-laundering, fraud, and other illicit activities. And for countries who occupy the grey area of legalizing cryptocurrency— they advise against investing or saving as property because of the arguable high-risk potential.
Facebook announced the launching of its blockchain cryptocurrency, Libra (now Diem), and its digital wallet Calibra in mid-2019, and heated public battles immediately followed. The management of Libra was immediately called into question by the US Senate. Letter from lawmakers following the announcement showed concerns over the risks the project posed to financial institutions and consumers. Major partners including eBay, Mastercard, Paypal, Visa, and Strip withdrew from The Libra Association before anything even launched. This mirrors how rocky the regulatory landscape for crypto is and the need for a steadier knowledge of the intricacies.
Regulation of Cryptocurrency
The regulation of cryptocurrency is not so easy, like something that can be made out of a textbook. And to date, no country has really been able to come around to effecting its regulation because of its intricacies. It’s a hotly debated topic among governments and global economies. With some having stringent policies and some indifferent, the acceptance seems near. However, I’ll share some insights that could assist in seeing the possibilities of regulating cryptocurrencies, even for countries that have banned it.
The US, recognizing its need to maintain the leading role in the technology’s development and prospects for future infrastructure were the first to embrace the technology. With few formal rules being introduced, most of the regulation to cryptocurrency in the United States has been at the agency level. The Internal Revenue Services (IRS), Department of Treasury, Securities and Exchange Commission (SEC), , Federal Trade Commission (FTC), and Financial Crimes Enforcement Network (FinCEN) have all had little engagement to do with cryptocurrency. All of these agencies have different definitions of cryptocurrency as well as their stances on how regulation should be applied.
For example, FinCEN does not consider cryptocurrency as a legal tender but considers exchanges like money transmitters as under its jurisdiction. The IRS considers cryptocurrencies as property and issues tax guidance accordingly. This acceptance further went to see a number of exchange companies take advantage of the possibilities open to them.
In Europe, the European Union had a welcoming attitude to blockchain technology until January 2020, when the Union signed its 5th Anti-Money Laundering Directive(5AMLD) into law. It was the first time cryptocurrencies and its service providers will fall under regulatory scrutiny.
The fact sheets of 5AMLD state that the law seeks to increase transparency amongst cryptocurrency owners. It proposes that central databases be created for cryptocurrencies and custodian wallet addresses for Financial Intelligence Units (FIUs). This places cryptocurrency service providers under the same regulatory conditions as banks and other financial institutions. And it’s obligatory for them to identify their users and report suspicious activities to the FIUs.
5 countries out of the 27 member country union made the deadline to pass 5AMLD, and other countries subtly transposing elements of the directive into national law, it becomes clearer that a global regulation will prove effective in regulating cryptocurrency activities.
The Chair of the Switzerland-based Financial Stability Board (FSB) stated in February 2020 that financial regulators must speed up the process of developing a regulatory framework for cryptocurrency activities around the world. The letter was addressed to finance ministers and central banks and called for the need for global regulators to evaluate the risk and benefits of stable coins to keep up with the rapid innovation in the crypto market. This enables the government to still keep control over it in case of a technology explosion.
With blockchain seeping into industries, it’s best to have a grasp on the network before it grows wilder. Financial services, healthcare, energy, and with NFTs making the rounds, cryptocurrencies have a play in intellectual property management. The technology now challenges and poses a threat to displace legacy institutions.
Countries where cryptocurrencies are currently banned can choose to look on the bright side. Banning cryptocurrency limits the possibilities of emerging tech-savvy upstarts with blockchain solutions. Blockchain is a novel technology and still has several problems to address. One of them is the scalability trilemma, in which solutions can provide ways to make blockchain networks optimally decentralized, scalable and secure.
No country has come around to fully regulate cryptocurrency. With this, if governments do not start the process now, importing templates from countries where regulations have worked out well may not be an option when blockchain becomes a necessity for thriving countries. As technology becomes more prevalent, it should be a learning process for governments to implement regulations across these various industries.
There’s a lot to come and a lot to learn in terms of blockchain technology, and now is the time for countries to figure out how to balance building an environment that nurtures innovation and entrepreneurship with one that protects its citizens from fraud, crime, and harm.