Why Does The Government Want To Regulate Cryptocurrency?

Governments also want to regulate cryptocurrency because it is a very practical means for tax evasion and criminal activity since cryptocurrency payments do not need the clearing authorities of the traditional financial system to operate. So far, government regulations have involved restrictions on cryptocurrency mining, cryptocurrency exchanges, and its use as a medium of payment. The goal is to discourage users from purchasing cryptocurrency in their jurisdiction. 

The Benefit Of Decentralisation

A cryptocurrency network does not belong to any physical location and it has no borders. Due to that, restrictions have not been very effective in stopping cryptocurrencies. As long as governments do not choose to shut down the internet entirely, the decentralised nature of cryptocurrencies is likely to prevail against regulations. This, in return, allows cryptos to enjoy massive gains and adoption.

The number of cryptocurrency users has exceeded 300 million individuals and 18 million businesses worldwide. These numbers suggest that cryptocurrency is now a way more legitimate asset compared to what many people believe based on what they read in the mainstream media. 

In the past, regulations caused a lot of turmoil in the cryptocurrency market in terms of their accessibility and price volatility. And they still act as a strong antagonist for the market despite the ever-rising adoption. The expectation is that regulations may have an even more decisive impact on the growth and price action of cryptocurrencies in the future.

The Reasons Behind Crypto Regulations

The spirit of cryptocurrency is anti-government but, apparently, governments cannot afford that. Let’s discuss in detail why governments really want to regulate cryptocurrency.

Lack Of Monetary Control

The current financial system is based on central banking. Almost all countries in the world operate their own central banks, which issue their sovereign currency and dictate monetary policies that apply inside the borders of the country. 

The borderless and decentralised nature of cryptocurrency makes it very difficult for the government to apply monetary policies because cryptocurrency networks operate autonomously. This makes it practically impossible for an authority to implement policies on the network on its own.

In an effort to combat that, governments are looking for ways to issue their own central-bank digital currency and ban the use of other cryptos, so that politicians can have full control over the country’s macroeconomic management. As the pioneer country in cryptocurrency bans, China is currently leading the way in issuing the first government digital currency in the world. If the currency becomes successful, it could pave the way for many other major governments to follow the same path.  

Money Outflows From The Country 

Cryptocurrency coins and tokens reside on the web, due to which there is no such thing as money moving in and out of a country with cryptocurrency. However, a government is almost always interested in retaining the wealth of its citizens inside the country, so regulators try to discourage people from converting their national (fiat) currency holdings like the US Dollar, the Euro, or the Chinese Yuan into cryptocurrency assets because in practice that act means money flowing out of the country.

Flows in and out of a country are taken more seriously in more state-controlled economies like China, Russia, or India, while it is yet less of a concern in more open economies like the European countries or the USA.

Taxation

Taxing cryptocurrency gains is a simple way for governments to generate additional income. So far, the US has been at the forefront of taxing gains from crypto investments. In the US, profits made from cryptocurrencies are subject to a capital gains tax but as of yet, it only applies to profits that you cash out, not to investments you hold on to. Plus, the highest rate you would have to pay for capital gains is 20%. Recently rumours are spreading for other countries to follow suit in taxing cryptocurrency gains. As it constitutes a very effortless revenue stream for governments, the chances look quite high for other citizens to pay crypto taxes in the future. 

Criminal Activity 

The decentralised nature of cryptocurrency allows illegal activities to bypass the legal control and compliance mechanisms throughout the world. Due to that, cryptocurrency payments can conveniently finance any illegal activity.

Governments are getting increasingly uncomfortable with being unable to trace such activity. However, it is also possible that governments use this just as an excuse to enforce crypto regulations, because the size of illegal, terrorist, or simple money laundering activities currently processed with fiat currencies is maybe 10, maybe 100 times of what is being processed with cryptocurrencies. In that sense, it could be possible that governments are only interested in preventing illegal activity that does not use their own sovereign currency.

Energy Consumption

Increasing demand in cryptocurrencies has caused cryptocurrency mining to consume a lot of computing power and thus energy. The Bitcoin network is speculated to consume more energy than many countries like Sweden or the Netherlands. Regulators are naturally unhappy with such a huge level of energy consumption that is allocated to crypto mining. A number of countries, starting with China, are currently taking precautions that decrease the level of fossil fuel consumption in crypto mining. Environmental concerns, along with the ongoing energy shortages, may push more governments to take measures against cryptocurrency mining.

Although the spirit of cryptocurrency is anti-government, it may ironically be difficult for the crypto market to grow further without additional regulations, because there are still millions of retail investors waiting on the sideline, who have been reluctant to purchase cryptocurrency due to its ongoing legal uncertainties.

Due to this, cryptocurrency assets need to be legalised by governments as a legitimate asset class, and they should also be protected by law. These topics will likely be the subjects for future cryptocurrency regulations, which can consequently pave the way for the next big round of cryptocurrency adoption.