Popular digital currencies also known as cryptocurrencies have gained acceptance and value in the last ten years. However, this tremendous growth has brought about a number of complicated issues especially on the question of regulation.
The US being one of the most important financial markets in the world, has its own set of regulatory problems that it has to address while it tries to provide space for innovation to flourish and at the same time maintaining the investor’s protection and financial stability of the market. This article looks at some of the main issues of regulation concerning cryptocurrencies in the United States.
Defining Cryptocurrencies: Commodity, Security, or Currency?
There is no doubt that perhaps the most pressing problem that regulators face is classification of the cryptocurrencies. Different agencies view cryptocurrencies through different lenses:Different agencies view cryptocurrencies through different lenses:
- For his part, the Securities and Exchange Commission classifies some cryptocurrencies as securities.
- Other things CFTC regards as commodities are The Commodity Futures Trading Commission.
- The Internal Revenue Service (IRS) basically categorizes it as property in as far as taxation is concerned.
Therein lies a challenge of lack of a coherent definition to refer to across the divisions making it difficult for both regulators and participants in the market to understand this concept. It also causes inequitable standards of the regulations, which can slow down change and also cause the emergence of ways around them.
Preventing Fraud and Protecting Investors
As the numbers of ICOs and other cryptocurrencies related investments have grown, fraud has also started to develop. The SEC has increased its scrutiny of questionable products to ban them, but coins’ distributed and frequently pseudonymous structure creates difficulties for authorities. Investor protection is one of the key principles, although industries have to find ways to prevent fraud without hampering proper business ideas.
Anti-Money Laundering (AML) and Know Your Customer (KYC) Regulations
Since most cryptos represent a decentralized digital currency system, they provide the anonymity that is not available in regular finance to those wanting to wash money or use it for other unlawful purposes.
The USA has very rigid measures on AML and KYC and that any financial institution must adhere to. In particular, applying these regulations to the crypto space is complicated because many of them are Decentralised and use Pseudonyms.
Taxation and Reporting Requirements
Cryptocurrencies were deemed by the IRS to be property that has to be declared for taxes on transactions involving it. What this implies is that every purchase, starting from using bitcoin to pay for a cup of coffee right through to swapping altcoins, can be a taxable event.
The difficulty of partage and report of these operations can present challenges for both the accounting practitioners and the organisation. Furthermore, cases of the lack of proper direction and the emergence of new legal requirements ensures that the situation remains unclear.
Regulatory Coordination Among Agencies
Several agencies at the federal as well as state level are involved in the regulation of cryptocurrency and these include the SEC, CFTC, IRS and FIN CEN. It results in confusion of the roles and the responsibilities due to the increased engagement of various agencies.
The consistent intention of these agencies is to make suitable policies by implementing a homogenous measure for innovation with appropriate scrutiny of the market and safety of investor’s wealth.
State vs. Federal Regulations
Furthermore, there are state laws and regulations on the use of the available cryptocurrencies for businesses to observe and adhere to. For instance, New York state’s BitLicense demands that businesses engaging in digital currencies acquisition of a license.
It was structuring seen with resultant generation of a state-level structure, which many a time leads to regulation arbitrage and often increases complications in business across states.
Balancing Innovation with Regulation
Cryptocurrencies are actually the invention of the newest technological possibility that can revolutionize the banking system. Thus, overregulation may slow down the development of the industry and push companies to other countries that are more crypto-friendly.
This is why it has dialectically remained a herculean task for US regulators to draw the balance between both, that is,between regulation and innovation. The regulatory authorities are to safeguard consumers’ interests and promote stability in the financial markets at the same time as not hampering progress in technology.
Addressing Environmental Concerns
Hence, the environmental perspective within the context of cryptocurrency, especially Bitcoin, has attracted a lot of attention. The employees’ high energy usage and its related consequences have led to demands for regulation as a means of correcting this problem.
Although, some states are trying to enact laws that would check or at least regulate the activities of miners, the states do not have a single concerted master plan to tackle the problems.
International Regulatory Harmonization
Cryptocurrencies exist in the international territory, at times, going beyond the country’s boundaries. This international character requires collaboration and synchronization of the measures within the different nations.
Thus, the US needs to act in coordination with global bodies and other nations with the goal of maintaining high regulatory rules that will not allow regulatory dance and globally coordinate and integrate crypto markets.
Future Outlook
There are very many cryptocurrencies in the US and the regulatory environment is constantly changing. That, however, will prove necessary when some of the new technologies enter the market and when regulation becomes more of a stable phenomenon.
Due to the rapid growth of the fintech industry regulators and the market participants as well as other stakeholders must engage in continuous communication to create the desired conditions favorable for innovation while maintaining the necessary level of market and investor protection.
Conclusion
Thus, cryptocurrencies pose peculiar regulatory problems in the American legal system. Differentiating between them, evasion of fraud, AML and other compliances, taxation control and, finally, interaction with other regulatory authorities are merely some of the issues that must be solved.
To some extent, any attempt to regulate sharing economy platforms and limit adverse externalities while at the same time trying to encourage innovation will be a work in progress.
With the modern development of the crypto market, the legal actions towards it should also progress in order to provided sound and long-term financial environment.