Regulation is among the key factors that affect the bitcoin price. The cryptocurrency’s rise has been arrested every time a government has cracked the policy whip, with countries taking varying approaches to bitcoin regulation.
For example, in November 2019, bitcoin sank to an all-time low when China accelerated a crackdown on cryptocurrency businesses, mirroring what happened when South Korea also made a move to regulate cryptocurrency trading back in 2017.
Conversely, whenever a regulatory “victory” emerges, prices surge temporarily. For instance, in October 2023, after years of Bitcoin Spot ETF denials from regulators, rumors of a Bitcoin Spot ETF approval caused a nearly $2,000 price spike and drop within a few hours.
By their very nature, cryptocurrencies are freewheeling, not beholden to country borders or specific agencies within a government. But this nature presents a problem to policymakers used to dealing with clear-cut definitions for assets. Here are two unresolved questions relating to Bitcoin regulation.
Key Takeaways
- Bitcoin regulation can vary on both the national and local levels, depending on the country or geographical area.
- In the U.S., the IRS treats cryptocurrency as property, while the CFTC considers it a commodity.
- Many cryptocurrency companies have avoided securities laws or requirements by offering utility or transactional tokens instead of security tokens.
Who Should Regulate Cryptocurrencies?
Nothing is more symptomatic of confusion about cryptocurrencies than their classification by U.S. regulatory agencies and updates with former President Donald Trump’s tax reform law. The Commodity Futures Trading Commission (CFTC) treats bitcoin as a commodity, while the Internal Revenue Service (IRS) treats it as property.
There is also a disparity in state and federal responses to cryptocurrency. While states have moved with alacrity and formulated rules for initial coin offerings (ICOSs) and smart contracts, federal responses are generally fueled by interpreting existing laws compared to how the cryptocurrencies are being used. For example, cryptocurrency startups in New York are required to obtain a BitLicense, which has stringent requirements regarding disclosures, before an ICO. Similarly, Arizona recognizes smart contracts. But as of November 2023, Congress hadn’t enacted any legislation to guide regulators, although there have been several attempts.
How Should Cryptocurrencies Be Regulated?
The unique characteristics and global portability of cryptocurrencies present another problem for regulators.
For example, there are broadly four different types of tokens being traded on exchanges—transactional, utility, security, and governance tokens. As their name indicates, utility tokens serve an underlying purpose on a platform. For example, Augur, which is a betting platform that uses the Ethereum blockchain—its token, REP, is used on the blockchain as a stake (the bet). Such tokens are not subject to the SEC’s rules unless they are used as a security. On the other hand, security tokens represent equity or a share in a company and automatically fall under SEC purview. Governance tokens allow holders specific rights on a blockchain, and transactional tokens are designed to only be used in financial transactions.
Not surprisingly, several tokens have circumvented existing regulations by declaring themselves utility tokens. Such startups have been publicly rebuked, but that has not stopped tokens with questionable business models from being listed on exchanges outside their native countries.
In response, international agencies such as the International Monetary Fund (IMF) have called for an international discussion and cooperation among regulators as far as cryptocurrencies are concerned. The EU, which has been welcoming of the cryptocurrency revolution, may possess an advantage over other territories because it controls a 28-member bloc. In June 2023, the EU Markets in Crypto Assets (MiCA) regulation entered into force. MiCA defines cryptocurrency assets and which types are enforceable by regulators. This legislation answers how cryptocurrency should be regulated in the EU, but the U.S. and other countries are still working on solutions. Some countries have placed outright or partial bans on cryptocurrencies.
Creating Regulations for Cryptocurrencies
On his Twitter page, the former head of blockchain practice at law firm Cooley, Marco Santori, called bitcoin a “legal platypus,” one that doesn’t fit neatly into established asset categories. However, the platypus may not be such a big problem for taxation or purposes within the United States.
Bitcoin and cryptocurrencies are actually no different than cash, stocks, bonds, or other financial instruments—they can represent the same things. In the U.S., regulations already exist that can apply to how an investor, business, or consumer treats them. Creating definitions and applying them to these virtual assets for regulatory purposes, as is already being worked on, might be all that is needed.
Regulators Could Look to Asia for Guidance
Some countries, notably in Asia, are pointers in ways to deal with cryptocurrencies. The clearest indication of future policy for the region regarding regulation may come from Japan, which officially recognized cryptocurrencies as property in its Payments and Services Act and developed a framework in 2017.
Note that El Salvador became the first country (in June 2021) in the world to accept bitcoin as legal tender.
Startups planning an ICO are also required to obtain a license that establishes a minimum set of requirements and disclosures for the offering. Finally, exchanges are also subject to capital requirements, strict IT compliance checks, and regulations about KYC (Know Your Customer). To achieve these changes, Japan amended its Payment Service Act. To be sure, the task is much easier in Japan since the country has only one agency, the Financial Services Agency, to operationalize the changes.
South Korea has plans to tax any cryptocurrency profits of more than 2.5 million South Korean won at 20%, a measure which is scheduled to be placed into effect in 2025.
Who Regulates Bitcoin Futures?
In the U.S., bitcoin futures are regulated by the Commodity Futures Trading Commission (CFTC).
Why Are Wealthy Investors for Regulation for Bitcoin?
Sophisticated investors generally support regulation because they want the protection provided by regulatory bodies and transparency.
What Is U.S. Regulation on Bitcoin?
Despite engagement by many federal and state regulators in the U.S., there has been little formal rule-making on cryptocurrency.
The Bottom Line
Bitcoin regulations vary around the globe if they exist at all. But one thing remains certain—developed countries with financial services regulators are likely to develop regulations on cryptocurrency activities to protect the interests of both consumers and governments and to combat illegal activity.
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