How Do Governments Regulate Cryptocurrencies?

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Governments regulates cryptocurrencies

During the early stages of blockchain technology, cryptocurrencies functioned in a murky area of the economy. However, when more financial institutions joined the area and worldwide use increased, authorities’ risk calculus shifted. Governments regulate cryptocurrencies have subsequently made significant efforts to fight cybercrime and safeguard people, but many say the task is far from complete.

As a result, investors, businesses, and institutions need to understand how governments regulate cryptocurrencies and how industry leaders advance the discourse.

What is Cryptocurrency?

A cryptocurrency is a digital currency that is represented by an encrypted data string. A peer-to-peer network is known as Blockchain monitors and organizes. It serves as a secure ledger of transactions such as buying, selling, and transferring. Bitcoin is the first decentralized cryptocurrency. Others are known as “altcoins” or “tokens,” depending on who created them and what they were created for. Read the blog to know more about how governments regulate cryptocurrencies.

Since its whitepaper publication in 2008, Bitcoin has attracted a lot of attention. Governments regulate cryptocurrencies has the potential to upend a new monetary system. 

Features of cryptocurrencies

As we all know, we are in an era where the digital ecosystem is at its peak. It is accurate to say that governments regulate cryptocurrencies is another dimension of the financial market. Digitized assets can grow more than one can think of. Here are some of the reasons why cryptocurrency has become a hit:

Highly secure network: 

Virtual wallets store cryptocurrency, and a private key keeps it secure. That means only the alleged owner can have access to the accumulated funds. Another form of security is that owners can incorporate encryption technology into their storage devices. 

Decentralized: 

Cryptocurrency is decentralized, which means there isn’t a single location where you can trade virtual currency. This keeps trading from being disrupted in the event of a hacking attempt. As the transaction data is stored directly by cryptocurrency holders, it is dispersed throughout the network.

Virtual currency transfers: 

Governments regulate cryptocurrencies is not like traditional currency transmission. The user’s location is irrelevant when transferring virtual currency, and the process is nearly instantaneous. To know more about cryptocurrency as a viable option for payments, check out this blog.

Fast development: 

Cryptocurrency holders can use their assets through a variety of tools and services that are rapidly evolving. It is easy to convert and exchange Bitcoin and other cryptocurrencies for dollars and euros. Conversion and exchange services fund these currencies directly from a cryptocurrency wallet.

Have you noticed how the definition of value in a currency has evolved? It is moving away from physical attributes and toward the velocity with which it is used in an economy. Governments regulate cryptocurrencies are valuable because they are both a store of value and also a medium of exchange. Consensus-based transactions are approved by a decentralized network of independent nodes. 

According to John P. Kelleher, a blockchain software architect and founder of Level K., there are six key characteristics of a useful currency. They are scarcity, divisibility, acceptability, portability, durability, and counterfeit resistance (uniformity). These characteristics make it possible for a currency to be widely used in a market. They also keep monetary inflation in check and make sure that the currencies are safe to use. Governments regulate cryptocurrencies has most of the six characteristics of a useful currency.

Blockchain’s Most Prominent Application: Cryptocurrency

Blockchains may store almost any type of data, however, the earliest use cases facilitated the development of cryptocurrencies. Bitcoin, the first cryptocurrency, went live in 2009. Since then, cryptocurrencies have enabled individuals to undertake safe financial transactions. Cryptocurrency transactions take place without the intervention of a national body, such as a central bank.

Critics warned early on that such a system would simply help criminals. Governments regulate cryptocurrencies can support extremist groups while also facilitating money laundering and dark web activities. While hazards persist, cryptocurrency offers several advantages. This includes:

  • Increasing engagement in the global economy, especially among citizens from underdeveloped nations.
  • Reducing the risks of conducting business in new markets.
  • Making transactions more effective at a lesser cost.
  • Protecting private persons against unscrupulous government confiscation of their assets.
  • lowering security hazards of identity theft
  • Maintaining personal privacy and individual autonomy 

Here are Five Reasons why Cryptocurrencies Require Regulation

Avoid manipulation of the markets and safeguard investors:

Market manipulation and price volatility are typical with cryptocurrency. Take, for example, Bitcoin, the world’s oldest and most popular cryptocurrency, which reached all-time highs in early 2021 before falling and losing a large portion of its value. As a result of the absence of authorized information on these digital assets, as well as the technological complexity involved with them, rules aimed at protecting investors are necessary.

Allow some cryptocurrencies:

Thousands of cryptocurrencies exist worldwide. Most investors, however, are only familiar with a few of them, like Bitcoin, Ether, Ripple, and Dogecoin, among others. They scarcely know anything about the thousands of other virtual assets. To safeguard clients, a regulatory authority clearing cryptocurrencies is necessary, with the ability to publish all information about the performance of digital assets, as well as their threats and possibilities.

Understanding potential risks linked with technology:

Technology is evolving at incredible speed. This poses a huge risk since such developments have the potential to make technology, including blockchain, obsolete in the future. Given the quick pace of technological development, information infrastructure and experienced financial advisers who specialize in cryptocurrency are essential. This allows investors to better grasp the technological risks associated with cryptocurrencies and make more educated decisions.

Fraudulent activity on and cyber security threats:

Investing in cryptocurrency involves another risk: internet fraud. Hacking is a huge global issue, and cyber-attacks have grown commonplace. One cyber-attack might result in losses for investors who have put their money into cryptocurrency. The government can use rules to assist cryptocurrency investors secure their money. Investors can also raise concerns or retrieve their assets if they lose them.

Money Laundering:

Any uncontrolled system has the potential to fuel illegal activities. As a result, a customer due diligence procedure similar to that of a bank is necessary. This can assist in maintaining track of investors’ true identities and verify their whereabouts when they acquire or sell cryptocurrency. Any violation of such principles should result in serious consequences. 

Governments regulate cryptocurrencies: Various Aspects of Financial Destiny

The chances for legislative action on digital currency remain uncertain. This is due in part to the large number of important concerns that must be dealt with. The issues vary from preserving the stability of financial markets to establishing the legal consequences of smart contracts.

Currently, four federal regulatory agencies are active in controlling bitcoin concerns. This group comprises the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Department of Justice (DoJ), and the Department of the Treasury. Each business would have a unique approach to a complete regulatory framework. 

SEC: Protecting Investors and Closing Loopholes

All SEC regulation is based on reporting obligations. These regulations aim to assist investors in making smart judgments. The SEC requires companies that sell shares, or “securities,” to submit a registered public offering statement before distributing them to investors. Furthermore, companies that enable the purchase and sale of securities, such as stock exchanges and some types of investment businesses, are required to register as national securities exchanges.

According to the SEC, many cryptocurrency offerings are virtually the same as securities transactions. This implies that bitcoin firms must meet the same investor protection criteria as publicly listed corporations. This involves frequent disclosures on business governance and vulnerability to market threats.

The SEC also wants to designate some cryptocurrency firms as securities exchanges. This is because they allow consumers to exchange their digital assets for traditional currency. For example, in its continuing case against Coinbase, a cryptocurrency exchange, the SEC alleges that the company has been functioning as an unregistered national securities exchange since 2019.

CFTC: Preventing Market Manipulation and Scams

The CFTC is concerned with preventing fraud and fraudulent activity in derivatives markets. Derivatives are financial investment contracts. Their value is based on the market price of an underlying item, such as a currency or commodity. Wheat, gold, and oil have all been considered commodities in the past, and Bitcoin has been one since 2015.

For almost a decade, the CFTC has attempted to regulate Bitcoin and other digital currencies. During that period, the agency largely focused on pursuing prosecutions against market manipulators. Mitigating the abuses caused by market manipulators is especially crucial in bitcoin regulation.

When a person is the victim of fraud, the transactions function as digital contracts will never revoked by them. Criminals can quickly and anonymously withdraw their ill-gotten profits as currency using blockchains to conceal their true identities.

DoJ: Investigating Fraud and Combating Illicit Finance

The DoJ’s approach to crypto includes prosecuting criminals who utilize cryptocurrency for evil purposes such as supporting terrorist groups and conducting cybercrime. The Criminal Division of the Department of Justice announced the formation of the National Cryptocurrency Enforcement Team (NCET) in 2021. The NCET, as a branch of the Fraud Section, sought to counteract the use of cryptocurrency as an unlawful weapon. It concentrates on cases of extortion, fraud, and money laundering.

The Department of Justice goes beyond combating illicit cryptocurrency activities. The Department also pursues cryptocurrency exchanges that do not report such offenses. The trial of former Binance CEO Changpeng Zhao is one example of such efforts. Zhoa’s prosecution was based on his inability to create an adequate anti-money laundering program.

Department of the Treasury: Interprets and Enforces Tax Law

The Internal Revenue Service (IRS) reports to the Department of the Treasury. In its authority to oversee cryptocurrencies, the IRS assesses crypto assets in light of the tax code. Typically, an individual’s broker reports to the IRS how much money they make or lose from securities and commodities transactions over a year. This common reporting technique helps to prevent tax avoidance.

The decentralized and private nature of cryptocurrencies poses issues for the IRS. Decentralization makes it difficult for governments to determine who qualifies as a broker for cryptocurrencies, as they regulate the market. Blockchain’s privacy-preserving feature further complicates compliance logistics for digital asset surveillance.

Countries Accepting Cryptocurrency

As of now, El Salvador has adopted Bitcoin as a legal currency. Other countries, including the US, UK, Europe, Canada, Australia, Denmark, France, Germany, Iceland, Japan, Mexico, and Spain, also accept crypto transactions. It may not take long before other countries follow them, as there is a vast opportunity that lies ahead. 

Conclusion

2021 has been the year of cryptocurrency. Probably because during the global pandemic strike, P2E games are the ones most gamers cling to as a source of income. Gamers were all over it.  The pandemic was also an eye-opener that there’s a digitalized world lying out there. It was a breakthrough for Web3 as a whole. Many Governments regulate cryptocurrencies have now started to try their hands on digital assets.  

Though P2E, DeFi, and NFTs have been around for a while, 2021 was the year they gained the most popularity. Many industries like banking have now started to create their currencies in this space. Cryptocurrency brings with it many potential opportunities. Blockchain and crypto will rule the future industries very soon.

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