The digital asset business is not at all unregulated, even though it is often seen as an uncharted territory. Just in the U.S., the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Treasury have all put out rules and directions for how to run the cryptocurrency market. Along with efforts from financial watchdogs around the world, state regulators and law enforcement agents are also stepping up. Cryptocurrency regulation is still hard to understand, mostly because digital assets aren’t like other money assets; they don’t fit nicely into traditional financial categories.
For people who are new to this field, knowing the rules and regulations is important for making smart choices. This guide is meant to help you understand crypto laws, why they are in place, how they have been tried in the past, and what to expect in the future.
Why Is Crypto Regulation So Complicated?
Most of the trouble with controlling cryptocurrency comes from the fact that it has many uses. Digital assets, such as Ether (ETH), the native token of Ethereum, make it hard to tell the difference between goods, currencies, and stocks. As an example, Ethereum has been called a commodity, a currency, and an investment at different times. In 2023, the SEC and CFTC couldn’t agree on whether Ether should be treated as a property or a commodity. This implies that neither of them regulate Ether. Because crypto is new to the banking world, there is a lot of uncertainty about where it can be used. With a worth of almost $1 trillion, the crypto market is very risky for both investors and government officials.
Why Do We Need Crypto Regulation?
At first, people in the cryptocurrency community believed in a “cypherpunk” philosophy, which said that people should use cryptography to protect their privacy and safety, keeping governments and corporations from controlling them. This way of thinking led to a “let it go” approach to developing the area. However, as the business grew, so did theft, scams, and bad management. This caused buyers to lose a lot of money, as shown by the failure of FTX and other companies that went bankrupt. Regulators say it’s very important to protect customers and keep the market honest, especially since more and more people’s money is tied to the volatile world of digital assets.
Here are some reasons why crypto needs to be regulated:
- Protection against fraud: There are a lot of scams in the crypto world, like Ponzi schemes, Initial Coin Offering (ICO) scams, and false advertising of coins that can cost investors billions of dollars.
- Consumer safety: Notable failures like FTX show how important it is to keep consumers safe from risky businesses.
- Market stability: Cryptocurrencies are notoriously volatile, and if they aren’t regulated, this can make things less stable for both people and businesses.
Previous Attempts at Regulating Crypto
The U.S. government has tried to control cryptocurrency more than once, but the results have been mixed because it’s hard to figure out how to classify digital assets. Bitcoin, the first and best-known cryptocurrency, is a great example of this problem.
Bitcoin has been labeled as:
- By the U.S. Treasury in 2013, it was a virtual currency and payment method.
- The CFTC declared it a commodity in 2014 under the Commodities Exchange Act.
- the Internal Revenue Service (IRS) for income tax reasons in the same year.
Also, in 2021, Congress passed an infrastructure bill that treated Bitcoin like cash and required trades over $10,000 to be reported. This large number of names makes things hard for people who own Bitcoin. For example, if you sell Bitcoin for a profit, you will have to pay capital gains taxes because Bitcoin is considered property. But the rules about reporting make me wonder if someone should tell the IRS when they use the Lightning Network to tip $1 in Bitcoin. Yes, technically, but that goes against Bitcoin’s definition as money.
Legislative Actions and Proposed Bills
Congress has proposed more than 50 bills to deal with digital asset taxation, classification, stablecoins, and central bank digital currencies (CBDCs). This is because they know how complicated digital assets are. Some important examples are:
- The 21st Century Dollar Act (H.R. 3506) aims to bring financial systems up to date by adding digital assets.
- The Keep Innovation in America Act (H.R. 6006) was made to encourage new ideas in the blockchain and bitcoin industries and make rules clearer.
- The Blockchain Regulatory Certainty Act (H.R. 5045) wants to give companies and projects that use blockchain clear rules.
The Responsible Financial Innovation Act of 2022 (RFIA), which was introduced by Senators Cynthia Lummis and Kirsten Gillibrand, was one of the most important pieces of legislation. This bill aims to solve several important problems, such as making it easier to understand what the difference is between security tokens and digital goods and how crypto assets are taxed.
In addition, Congress has been having hearings on how to regulate cryptocurrencies. At least 15 meetings were held in 2022 alone. The Senate Banking Committee and the House Financial Services Committee were in charge of most of them. These meetings are very important if we want to fully understand the effects of crypto regulation and create a system that helps consumers and the economy as a whole.
The Role of the White House in Crypto Regulation
In March 2022, President Joe Biden signed an Executive Order on Ensuring Responsible Development of Digital Assets. This was a big step toward creating a unified set of rules for digital assets. The order tells several cabinet-level offices to look into the pros and cons of cryptocurrencies and how they affect the areas they are responsible for.
This attempt by the whole government shows how important it is to regulate the crypto space in a way that keeps investors safe and encourages new ideas. Congress and the White House want to work together to find a fair way to regulate crypto. But when things go bad, like when the FTX crashed, politicians can start pointing the finger. Mick Mulvaney, a former congressman and acting chief of staff at the White House, said, “Washington loves to find a scapegoat.”
What to Expect in 2023 and Beyond?
In the near future, it looks like both Congress and the White House will work to make crypto rules more clear. Even though the political environment is divided, both parties are interested in creating rules for digital assets. Official laws will not be passed until then, though, so companies and people who run outside the rules will continue to face enforcement actions.
One example is how the SEC has been aggressive in sending Wells Notices to companies that are being investigated. Settlements have been reached recently with:
- What the SEC says is a security is Kraken’s ether staking scheme.
- Paxos is being blamed for putting out a Binance-branded stablecoin that the SEC also considers a security.
- Terraform Labs is the company that made the unstable coin TerraUSD and the governance token Luna, both of which failed.
Besides the CFTC, other groups like the FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency have also become more aware of the crypto business. Banks are being warned not to put too much money into crypto because it is volatile and huge amounts of money could come in and out at once.
Final Thoughts
As time goes on, one thing becomes clear: regulating cryptocurrencies is no longer a question of if, but of when and how. Lawmakers, officials, and even the White House are becoming more interested in digital assets, which shows that they understand how important they will be to the future economy. Investors and business owners in the crypto space need to know about changes in regulations at all times. As the rules of the road become more clear, the crypto business will likely grow up. This will allow for more innovation while protecting consumers from the biggest risks.
In a world that is always changing, knowing how crypto law works will help both new and experienced crypto users feel confident in their decisions. The future of crypto regulation will determine the way forward for digital assets around the world, no matter if you are just starting out or have a lot of money involved.
