Cryptocurrencies
like Bitcoin and Ethereum have become popular around the world, offering new
ways to send, store, and invest money. But as this market grows, governments
are paying closer attention. Regulations rules made by governments can have a
big impact on how cryptocurrencies work, who can use them, and how safe they
are. In this article, we’ll explore how government regulations affect the
cryptocurrency market, and what that means for investors, companies, and
everyday users.
1. Reasons for Regulating
Cryptocurrency
Cryptocurrency operates in a decentralized and anonymous manner, which
has raised concerns among governments worldwide. One major concern is that the
rise of cryptocurrencies could undermine the traditional central banking
system. Central banks play a critical role in managing a country’s economy, and
digital currencies like Bitcoin, which are unique and resistant to duplication
or counterfeiting, could weaken their influence.
Moreover, cryptocurrency transactions do not require intermediaries such
as banks, bypassing the traditional financial infrastructure entirely. This
peer-to-peer system removes the need for bank networks licensed by central
authorities.
Another pressing issue is the increasing use of cryptocurrencies in
illegal activities. The anonymity associated with Bitcoin makes it attractive
to criminals. According to a 2019 study, approximately $76 billion worth of
illegal transactions were linked to Bitcoin annually. Cryptocurrencies have
been used as ransom payments in kidnapping cases and as a means to bypass
economic sanctions. They are also commonly used for money laundering, as the
lack of regulation allows criminals to convert illicit funds into digital
assets and trade them freely.
2. The Impact of Cryptocurrency Legislation
On one side, introducing laws that support advanced financial
technologies can enhance a country’s economic competitiveness. However,
permitting the growth of digital currencies might also threaten the stability
and independence of the national currency. As a result, many governments have
begun implementing new regulations specifically targeting cryptocurrencies.
2.1 Relevant Legislation in the United States
In the United States, both federal and state governments have maintained
a strong interest in regulating cryptocurrencies. At the federal level, the
focus has largely been on oversight and administrative regulation by various
agencies. These include the Financial Crimes Enforcement Network (FinCEN), the
Office of the Comptroller of the Currency (OCC), the Internal Revenue Service
(IRS), the Federal Trade Commission (FTC), the Department of the Treasury, the
Commodity Futures Trading Commission (CFTC), and the Securities and Exchange
Commission (SEC). However, only a few of these agencies have enacted formal
legislation.
Most federal policymakers recognize the growing importance of
cryptocurrencies to the nation's financial infrastructure and emphasize the
need for the U.S. to lead globally in this field. Meanwhile, at the state
level, numerous state governments have already introduced or passed their own
laws related to cryptocurrency.
2.2 Relevant Legislation in Europe
On September 24, 2020, the European Commission introduced new
regulations for digital assets through the Markets in Crypto-assets (MiCA)
framework. This legislation primarily addresses the issuance of crypto assets.
Under MiCA, any entity issuing a crypto asset must be legally registered and is
required to publish a whitepaper that includes specific mandatory information
prior to launching any tokens. Additionally, the issuance of crypto tokens must
receive approval from a regulatory authority.
MiCA also sets rules for cryptocurrency exchanges and stablecoins particularly
those that are pegged to traditional fiat currencies. The accompanying graph
illustrates the price fluctuations over a six-year period for the US
dollar-backed stablecoin, USDT.
2.3 Relevant Legislation in China
While countries like the U.S. and those in Europe were preparing to
embrace cryptocurrency, China took a different approach by imposing strict
restrictions. On May 18, 2021, the Chinese government banned financial
institutions from offering services related to cryptocurrency. As a result,
several crypto exchange platforms announced they would cease operations within
China. This move triggered a significant drop in Bitcoin’s value, marking one
of its largest price declines in 2021. The chart below illustrates Bitcoin’s
price on the day of the ban.
In recent years, Chinese regulatory bodies have shown openness to
innovations such as online payments. However, the government's stance on
cryptocurrency has been notably stricter. One key reason is that China enforces
strict foreign exchange controls, whereas Bitcoin’s anonymous online
transactions can bypass these regulations. Additionally, Bitcoin is often used
in money laundering activities, which poses a serious threat to the authority
and control of China’s central bank.
Conclusion
To sum up, cryptocurrency is a form of digital money built on blockchain
technology and operates through a decentralized system. With the exception of
El Salvador, most governments remain cautious about its rapid growth China
being the most restrictive, having banned both crypto-related financial
services and mining activities. In contrast, the United States and European
countries have shown a more open attitude, though each has developed its own
regulatory approach to manage this emerging technology. The U.S. and Europe
have introduced various laws to oversee crypto markets, while China has taken a
different route by creating its own state-backed digital currency to rival
Bitcoin. The evolution of cryptocurrency mirrors the broader transformation of
our era its future remains uncertain, and no one can predict the ultimate
outcome for Bitcoin.
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