Based on a suggestion by @BitcoinDood
US Crypto Regulation – An Examination
As cryptocurrencies continue to spread and thrive, more banking and financial institutions are turning a sharp gaze at regulating the new asset class. Currently, different governmental bodies around the world view cryptos as an asset, commodity, security, or money. Inquiring minds are looking at how regulation may affect the future price. In this article, we will focus broadly on how future regulations may affect the price.
What is Regulation?
In short, regulations are the set of rules and standards that govern specific sectors of the financial market. For example, the Commodity Futures Trading Commission (CFTC) has oversight on Futures and Options to facilitate a streamlined and efficient market. The US Securities and Exchange Commission (SEC) is responsible for regulating the sale of securities (stocks and bonds) on the open market.
Traditionally these regulatory bodies enforce the laws which help the markets operate. To operate efficiently, traders need the confidence to know that there is a foundational rule set to which everyone adheres. A healthy market requires regulation.
It is curious to see, then, to see those staunchly opposing the idea of regulating cryptocurrencies.
Are Cryptos Regulated?
Cryptocurrencies are still new and being regulated slowly as the governing bodies classify them. Currently, both Bitcoin and Ethereum are not securities in the eyes of the law. In 2019 the SEC chairman, Jay Clayton, said the following in an interview with CNBC “Cryptocurrencies are replacements for sovereign currencies … replace the yen, the dollar, the euro with bitcoin. That type of currency is not a security.” This statement clarifies that the SEC has no direct control over regulating BTC or ETH or how they trade on exchanges.
However, though BTC and ETH do not fall under the SEC’s purview does not mean other cryptos are safe from government eyes. The last two years have seen a sharp increase in the amount of attention the SEC has dedicated to other, more centralized cryptos. The best-known example is EOS, which settled with the SEC and paid $24 million in fines to the SEC over the $4.1 billion it raised in selling its token. While this example seems like a slap on the wrist for EOS, it does set a very publicized precedent. Other projects are willing to draw out the legal proceedings. The messaging app Kik, which raised over $100 million in 2017, has been in legal action for over a year. The process has been long and deliberate thus far, with over 11 depositions taking place. Kik is asking for a trial date for sometime in 2020.
Regulation and Price
Perhaps the most contested subject is regulations affect on price. Since the first Bitcoin ETF proposal in 2015, crypto enthusiasts have been clamoring for ways to allow institutional and retail investors to buy Bitcoin on the same market in which stocks trade. The reasoning is allowing investors to invest in Bitcoin like their 401k fund should decrease the friction involved in signing up for a crypto-specific exchange. The company Bitwise Asset Management surveyed financial advisors last December and found that 56% had not invested due to “regulatory concerns.” As financial advisors and wealth managers must follow strict rules in regards to their investments, more clear regulation could allow new money to enter the market. Encouragingly, of the respondents to the survey, 6% already invest their clients’ funds in Bitcoin. This number is a sharp increase compared to 2016 when Bitcoin was hardly ever mentioned in the mainstream press.
Others hold the opposite view and believe an increase in regulation decreases the price of Bitcoin. A report from this month by ScienceDirect.com cites restrictions from anti-money laundering, state-backed cryptocurrencies, and increased securities regulations as negatively impacting the price. Rather than over-regulate this new asset class, governments should take a “hands-off” approach to this new money. The report states, “As such, government commitments not to overregulate cryptocurrencies and to let the industry develop in a freer environment can contribute to lower market volatility and more stable coin and token prices.”
In another example of regulation pushing down the Bitcoin price, the introduction of Bitcoin futures in January of 2018 saw the price plummet over a year from nearly $20,000 to $3,100. On the regulated market, it is possible to make money on securities when the price goes both up and down, using leverage and short selling. By introducing Bitcoin to a widely-traded regulated market, the CFTC allowed day-traders and legacy finance to enter the Bitcoin ecosystem.
Chris Giancarlo, the former chairman of the CFTC, told Coindesk, “We saw a bubble building and we thought the best way to address it was to allow the market to interact with it.” As the first big bubble since 2008, various members of the Trump cabinet took steps to curtail Bitcoin’s exponential growth “. . . we believed that, should bitcoin futures go forward, it would allow institutional money to bring discipline to the value of the cash market.”
While this step may have introduced “discipline” to Bitcoin’s price, it also destroyed the lives of many investors who aired their grievances over social media. At one point, the suicide prevention hotline was the top post on the popular social media site, Reddit.com.
US 2020 Crypto Regulations
2020 should be an exciting year in terms of regulations. Several new bills have been introduced. One from the past week would see no capital gains on small day-to-day Bitcoin purchases. All personal purchases under $200 would be exempt from capital gain taxes. As it stands now, any capital gains from crypto transactions are supposed to be reported to the IRS at the end of the year. From the bill
“Gross income of an individual shall not include gain, by reason of changes in exchange rates, from the disposition of virtual currency in a personal transaction (as such term is defined in section 11 988(e)). The preceding sentence shall not apply if the gain which would otherwise be recognized on the transaction exceeds $200.”
Will these changes be enough to help push Bitcoin adoption to the everyday consumer? Possibly. Whatever the impact on the price, we are rapidly moving towards an ecosystem that relies on oversight and regulation. Financial advisor and Bitcoin advocate, Bruce Fenton, nicely sums up this view.
I suggest you prepare accordingly. While the pre-regulation days of crypto brought massive price increases and visibility, the future will be shaped significantly by lawmakers.