What's New in Crypto Regulation and What Investors Should Know

    Simar Marwaha
    Simar Marwaha
    Published on January 3, 2023 6:29 PM

    Updated on January 16, 2023 8:16 AM

    The system may be stabilised by financial regulations, and many of them are now so prevalent that it is difficult to imagine existence without them. Let's check over the most recent advances in this field.
    What's New in Crypto Regulation and What Investors Should Know
    Source: Unsplash

    The main purpose of cryptocurrency was to operate independently of institutional middlemen. "What is needed is an electronic payment system based on cryptographic evidence instead of trust, allowing any two willing parties to interact directly with each other without needing a trusted third party," the founding statement of Bitcoin explains. Therefore, it may surprise some that the government is even participating.

    However, rather than peer-to-peer, consumers engage with cryptocurrencies through institutions. Centralized institutions are cryptocurrency-specific exchanges that offer custodial services or crypto payment services.

    Bitcoin was created as a workaround, but users have flocked to this practical entry point into cryptocurrency ownership. More conventional banking institutions are entering the cryptocurrency market. Most regulatory attention is concentrated on the point where cryptocurrencies and businesses that provide financial services meet.

    Within the cryptocurrency community, there is an ongoing philosophical discussion over the proper function of government. The issue for an investor, though, is what to do because cryptocurrency is to some extent controlled.

    Also read: The top five regulatory changes for cryptocurrencies in 2022

    What has changed recently?

    The chairman of the Senate Banking, Housing, and Urban Affairs Committee is Sen. Sherrod Brown (D-Ohio). He stated, "FTX's business model combines three of the most frequent dangers in financial markets - leverage, illiquid assets, and high concentration," in an open letter to U.S. Treasury Secretary Janet Yellen. He urged lawmakers to pass laws that would increase transparency between crypto companies' operations and customers and authorities.

    The Republican representative to Sen. Brown on the Senate's banking committee is Sen. Pat Toomey (R-Pa.), who will retire in January. He blasted Congress for failing to provide "guardrails" for the cryptocurrency business in an interview with Bloomberg.

    The Commodity Trading Futures Commission, which regulates various cryptocurrency-related operations, has a commissioner named Kristin N. Johnson. She made a reference to the cryptocurrency market in a statement made public on Dec. 1, 2022, when she stated the CFTC should consider extending laws that demand consumer funds be separated in some circumstances to apply elsewhere. She continued by saying that Congress would be required to put a stop to fraud schemes that prey on regulatory loopholes.

    Cryptocurrency is subject to taxation, according to the IRS. One of the first items to answer on your tax return is "At any point during (the tax year), did you receive, sell, swap, or otherwise dispose of any financial interest in any virtual currency?" after you have filled in your name and other basic information.

    You must pay capital gains taxes if you sell bitcoin for a profit, even if you do so by exchanging it for another cryptocurrency rather than cash. You must pay income tax on any cryptocurrency you get as payment for a job or service, which may include staking.

    It may seem counterintuitive, but if you transfer cryptocurrency to a retailer to pay for something, you must pay capital gains tax on that cryptocurrency. As a result of transactions like this, one measure submitted in 2022 sought to eliminate the first $200 of any potential capital gains; another bill sought to exclude capital gains on transactions with a capital gain of less than $50. Neither measure has been passed into law, though.

    SEC Vs. Bitcoin EFTs

    Exchange-traded funds that contain Bitcoin or other cryptocurrencies have been a goal of businesses for years. The provider of the exchange-traded fund is the owner of the assets.

    Investors can trade fund shares like stocks if the provider offers them to them. Individual investors may be able to avoid opening an account with a cryptocurrency exchange in order to make the same investment thanks to Bitcoin ETFs, which are available in some jurisdictions.

    If such a choice existed, the demand for the underlying cryptocurrencies may rise as more new investors added them to their holdings. The SEC has so far turned down every application for this kind of investment.

    There are several workarounds, such as crypto ETFs that use futures contracts to try to imitate the price trend of cryptocurrencies, but none truly match the criteria of an ETF that contains cryptocurrencies.

    Retirement savings, where $33.7 trillion was stashed away as of September, according to the Investment Company Institute, a group representing regulated investment companies, are another area where crypto might grow.

    A Roth IRA may be created at one of the few companies that provide this service, and investors can add cryptocurrency to the account. Additionally, a small percentage of 401(k) owners are starting to have Bitcoin as an option. However, general access is still constrained.

    Crypto Regulatory Loopholes

    There are several organisations that govern the conventional financial system, which is nothing new. But the issue presented by bitcoin is new.

    Jimmie Lenz, director of Duke University's Master of Engineering in Fintech programme and leader of the Digital Asset Research and Engineering Collaborative, claims that they are attempting to fit a square peg into a round hole. "A really special asset class is cryptocurrency. It is exchanged in a highly distinctive manner in addition to being a unique asset type.

    In a 2022 study, the Financial Stability Oversight Council listed its top three regulatory deficiencies relating to cryptocurrencies:

    1. Regulation arbitrage: Since there are numerous regulations for the same sort of behaviour in the bitcoin world, it is possible for anyone to manipulate the system. For instance, a cryptocurrency firm may set up subsidiaries in a number of different countries, making it impossible to fully comprehend the degree of risk it faces overall. Traditional banks that provide comparable services, however, are subject to more scrutiny.
    2. No laws for spot markets: In the conventional financial system, where payment and asset ownership are transferred instantly, spot markets are governed by rules that "encourage orderly and transparent trade" and "avoid conflicts of interest and market manipulation." Outside of that regulated by the government playing field, cryptocurrency exchanges exist.
    3. Integrated services: When a typical retail investor purchases a stock or mutual fund, a well-defined procedure starts to move forward. Each transaction, which might take a day or two to complete, involves numerous companies by design. This procedure functions like a ship's compartments, each of which is watertight: Damage that happens in one area can be limited elsewhere by the process itself. On the other hand, a crypto exchange can handle many of these dispersed tasks on its own. While it can lead to a speedier settlement, there might also be an increased danger.

    Cryptocurrency Regulation FAQs

    Is there any regulation on cryptocurrency?

    A unified framework for regulating cryptocurrency would be helpful. This legal latitude allows cryptocurrency firms to innovate and expand fast, but it also means that hazardous business practices that expose customers to danger might go unchecked. In 2021, Kurt Woock began contributing to NerdWallet.

    What happens if cryptocurrency is regulated?

    If properly targeted, more regulatory advice might aid in reducing crypto asset speculation. Increased investor confidence brought on by less speculative activity may entice additional long-term investors who have previously shunned the extremely volatile and speculative crypto sector.

    Can government seize my crypto?

    Law enforcement can obtain seizure orders for any illegal monies that ultimately end up on compliant exchanges—and many funds eventually do—after satisfying the probable cause and burden-of-proof standards.

    What is the biggest issue that regulators have with cryptocurrencies?

    Whether crypto-based instruments, such as cryptocurrency coins, tokens, and other offers backed by these coins or tokens, fulfil the definition of a "security" under securities legislation is one of the key issues at the root of the conflicts between the crypto sector and financial authorities.

    Who regulates crypto?

    Commission for Trading in Commodities Futures (CFTC): Trading in commodities and futures is governed by the CFTC. These asset class categories allow for the trading of certain cryptocurrencies, placing them under CFTC regulation.

    Why crypto cannot be regulated?

    In essence, a central body or government does not control the issuance of bitcoin tokens. Additionally, it has to do with cryptocurrencies as a form of trade. Without the involvement of a third party, transactions utilizing the blockchain may be carried out, verified, and added to the public ledger.