Why Crypto Regulations are a Necessary Evil

There has been mammoth development in the crypto space since the invention of Bitcoin by Satoshi Nakamoto. ICOs have been flourishing at a rapid rate and various new tokens have made their presence felt in the world of cryptocurrencies. However, with the increased number of ICOs, there was an increase in the number of scams that started surfacing. That’s exactly where regulations come into the picture.

Regulations can be the possible solution to combat crypto scams but the way the regulations are implemented is possibly wrong. Laws should not restrict innovation.

Imagine yourself in a restricted environment, do you think you would be able to utilize the complete creative potential of yours? Likewise, cryptocurrency is an innovation of blockchain technology which requires an open and free environment to flourish. However, hackers have misused the open nature of the industry. There have

been so many cases reported till date which are associated with money laundering, hacks, data thefts, financial terrorism, etc.

Therefore, there is always a safety concern associated with the cryptocurrency industry and every newbie in this industry experiences emotional turbulence while investing in digital assets which is quite obvious.

Why regulations are inevitable?

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Cryptocurrency trading and monetization emphasize the need for legal and regulatory frameworks. The current level of uncertainty and volatility involved in the crypto markets are expected to diminish with legal concurrence.

ICO regulation, crypto-exchange oversight, taxation guidelines and legal scaffolding for the onboarding crypto investors are some of the ways through which regulation can strengthen the crypto industry and leave the junks at bay. Regulations aim to make the cryptocurrency industry a safe investment arena and more fertile for innovation.

ICO regulation

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The problems that we come across in crypto industry today are due to moral hazards and the only possible solution to these is law. Although many people think that Governments are afraid of losing power, therefore, they are stepping into the field of crypto regulations yet it is not solely true. Regulations are necessary for the crypto space to thrive in the long run and ICO regulation is the best example.

There are several ICOs that made huge money from the investors but absconded in the mid-way giving out a false impression about every ICO. Don’t you think this happened due to the lack of regulatory framework? ICO regulation is a mandate and it is a mandate for good. Regulations are not meant to slow down the process or discourage the evolution of it. They should be here to support the genuine projects evolve smoothly.

The president of BaFin, which is an independent institution whose governance is looked after by Germany’s Federal Ministry of Finance has recently expressed his enthusiasm to create a global regulatory framework for ICOs so that they can become safer for investors to make use of. Likewise, there are several countries where ICOs are not banned, instead, they are allowed with heavy regulations. Among the other standards, KYC (Know Your Client) is increasingly being used to differentiate the current ICO scenario from the market manipulations and scams that had happened in the past.

Taxation

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Cryptocurrency investors could evade taxation since long due to unclear crypto tax guidelines. According to the current tax guidelines, every bitcoin or altcoin transaction such as mining, airdrops, spending, trading, exchanging, etc will be a taxable event under the US taxation.

2018 is expected to be a landmark year for Internal Revenue Service enforcement of cryptocurrency gains. Everything that is discussed regarding Bitcoin taxation applies to all the altcoins. Therefore, one cannot escape the taxes earned from digital assets. Although it’s a comparatively new domain which would still require quite a bit of work yet the governments of different nations are more or less on the same page in defining the norms.

Exchanges and Custodianship

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The security of the customers’ coins and their private keys has always been a concern. Barring the decentralized exchanges, most crypto exchanges hold the private keys of their customers for a handful of benefits both on the client as well as the exchange’s front. Regardless of the benefits, crypto exchanges holding private keys can pose serious threats.

Regulations in the domain of exchanges could help prevent the vulnerability of private keys held by the exchanges. For instance, baseline security measurements and third-party auditing could be utilized to create safety standards. Besides preventive measures, for the hacks and breaches that mess with the holdings of clients on these exchanges, the exchanges should have greater accountability. Although exchanges are trying to compensate the losses of clients these days yet the need for more institutionalized solutions is not going to fade anytime soon.

In the case of cryptocurrency custodianship, the scenario is different unlike regulations in the case of exchanges. The market is not waiting for regulatory help rather the regulation is waiting for the market. The significant hurdle to sizeable investors in the field of cryptocurrency is the lack of accredited custodians. The only viable solution to this is a better accountability and custodianship, if that may come from regulations, good enough!

Let’s have a look at the approach towards crypto regulations by different countries:

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• Russia: A consensus was formed to take the final decision on crypto regulations. Although it was decided that the Central Bank will allow crypto trading paving the path for new laws to be implemented gradually yet crypto to crypto trading remained unregulated because of the involvement of anonymous transactions.
• Japan: Japan recognized cryptocurrency as a mode of payment since 2017. After several criminal activities were reported, it tightened its framework and has been planning to regulate ICOs with rules to prevent unfair trades and money laundering.
• China: Trading bitcoin is illegal and the China government has shut down all the crypto exchanges in the country and banned the ICOs. The only crypto activity that is going on is mining.
• South Korea: The government has legalized the use of cryptocurrencies in 2017 and issued a bill which would regulate the Korean Financial Intelligence Unit to authorize the crypto exchanges in a similar fashion as it does with banks. Thus, the exchanges will have to obey strict money laundering rules.
• United States: It is not illegal to hold cryptocurrencies in the nation but one has to pay capital gain tax. ICOs exclude the US citizens from purchasing tokens in order to escape the US securities regulation.
• Australia: After legalizing Bitcoin in 2017, the Australian Taxation Office is trying to incorporate the treatment of cryptocurrencies in its own jurisdictions and trying its best to identify any concerns related to tax. The Australian Transaction and Analysis Centre, upon realizing that the scams are increasing, tried to fix them by implementing improvised money laundering laws.

After having a close look at the crypto regulations across the countries, it’s imperative to know what the crypto masterminds think about the regulations and legal guidelines in the crypto space.

Nischal Shetty, Founder & CEO at WazirX & Crowdfire Inc

“Regulations will help prevent scams and bring in the necessary confidence for individuals and institutional investors. If we want to see crypto shape up in legitimate ways such that there is mass adoption then regulations will play a pivotal role.

However, governments around the world need to ensure they come up with regulations from the ground up and not blindly use existing frameworks. Existing frameworks that are meant for stock markets and banks are regressive for crypto and will not foster growth of this segment. We need a new set of regulations keeping in mind that crypto is a completely new asset class.”

Sumit Gupta, Co-Founder & CEO at CoinDCX

“For the major part, cryptocurrency regulations are necessary for wider adoption of cryptocurrencies in trade and monetization.

In the present scenario, due to legal uncertainty, most institutional investors steer clear of cryptocurrency in India. When the industry is regulated, institutional investments would flood in and crypto businesses would grow exponentially.

Taxation framework, legal guidelines, and regulatory sandboxes would pave way for innovation, sustenance, and overall growth. In the current situation, only day traders and short-term investors are booking profits in crypto. Regulations would make this possible for long-term investors, institutions, and farsighted financial magnates.

While two years ago ICOs were looked at as Get Rich Quick schemes, currently ICOs are under scrutiny in most countries. Bringing in regulations and developing a legal and regulatory framework for ICOs would shift the emphasis from quick money making to long-term investor protection and legal compliance. Promising ICO projects with real scope for growth would find it easier to raise funds and deliver their promises and products.

From a cryptocurrency exchange’s point of view, regulations would set the path for both prevention and remedial measures in the event of a hack and loss of users’ digital assets.”

Vishal Gupta, Founder & CEO at BINEX.TRADE

“Regulations are necessary for a structured growth of the crypto industry without any illicit activities in place. However, they are evil at the same time because too much of regulations restrict innovation. Due to stringent regulations, businesses decide to move to countries with friendly regulations. This does not affect the crypto exchanges much but the end-users. The middle-class investors get stuck without finding an exit route.”

Let’s hope that the regulations aid in making the crypto space a quintessential environment to flourish and the evil aspect is doomed forever.