By Natalie Lord
There has been ongoing chatter about how and whether to regulate the crypto industry for years now, and many countries have started implementing some form of rule around it. But many ask how cryptocurrencies can be regulated. This week, we look at some of the options.
There are essentially two types of regulation possible in the cryptocurrency market. One is legislative regulation and the other is executive regulation.
Legislative regulation includes the possibility of digital money not being recognised as a financial instrument because of the fact that existing legislation doesn’t have the required regulatory mechanisms in place. In this situation, new draft legislation would be required to be drawn up which would influence the formation of the crypto industry within the parameters of the law.
An alternative to legislative regulation could see cryptocurrencies being recognised as an analogue of fiat money or another type of currency already in existence. In this scenario, existing draft legislation would require amendment and addition.
Meanwhile, executive regulation would be used to control cryptocurrencies within the legislative framework, but also to integrate digital currencies into various activities and then manage them using tools that impact these areas.
The downside of executive regulation is that it is limited technically. It’s can’t verify the identity of the person executing the transactions or influence, monitor or restrict transactions as may or may not be necessary.
Many countries note the importance of regulation in the cryptocurrency field and are implementing some form of structure around it. As we explored in a previous article, some have banned cryptocurrencies entirely, whilst others are more open to integrating it into the existing financial system.
There are various regulatory tools that could be employed to exercise some level of control of the crypto industry:
- Crypto exchanges could be required to be registered. This would ensure the legal opening of the cryptocurrency exchange in the jurisdiction of the country or state, with a commitment to fulfilling certain criteria like the disclosure of user data or the prohibition or restriction of transactions for various reasons.
- Cryptocurrencies could be recognised as an investment asset and regulated by the financial services authorities or be bound by financial structures to entice investment and protect investors.
- Some cryptocurrencies could be banned whilst others could be approved.
- There could be Know Your Customer verification during registration on exchanges, online exchanges and also with e-wallets. This would entail personal data being provided by a user.
- ICOs could require legalization. This would mean that the people behind the ICO would have to disclose their identities in order to manage ICOs and collect taxes.
- A licence could be required to engage in any activity related to digital money.
- Taxes could be imposed on mining and ICOs and possibly also on cryptocurrency transactions.
- In addition to paying taxes, miners could be required to be registered also.
- Cryptocurrencies could be recognised as a method of payment. The implications of this are that the turnover of money would be controlled by financial institutions, meaning that the country would receive information on private individuals or legal entities that have digital currencies in their accounts.
In reality and in practical terms, control over cryptocurrencies within a country or state is only possible if the government recognises, introduces and permits the use of cryptocurrencies in the first place. If this happens its use would necessitate some form of regulatory structure.
An alternative option would be that draft legislation incorporating cryptocurrency controls is drawn up and that this is utilised uniformly and simultaneously by all the countries around the world. Although perhaps the greater ideal of the two options, the practicalities of this would be challenging to say the least, so the first proposition would seem to be the more realistic.
The cryptocurrency industry is still growing and developing, and there is a vast difference in attitude towards it from one country to the next. Some see it as a threat and some believe it to be the way forward. We can identify how regulation might be implanted, but when and whether it happens will only transpire with time.