Cryptocurrency remains largely a financial wilderness, but some authorities are addressing issues such as consumer protection and taxation.
The global financial sector has yet to fully reckon with cryptocurrencies and ICOs, which have proliferated astronomically in recent years. This is despite the high volatility of virtual currencies and questionable legitimacy of some ICOs and cryptocurrency exchanges. Regulators remain unsure of how to classify ICOs and tokens, let alone prevent money-laundering and other nefarious usage. Some are also concerned about protecting retail investors, who can be exposed to extraordinary risk.
Various government agencies took steps in April to begin constructing a legal framework for cryptocurrencies. According to The Economist, the Financial Conduct Authority in Britain warned financial services firms that services linked to crypto-derivatives are subject to its rules. Taiwan’s finance ministry announced plans for cryptocurrency regulation aimed at cracking down on money-laundering. In the U.S., the attorney general of New York State asked 13 cryptocurrency exchanges to provide information about their operations, conflicts of interest, and customer safeguards.
Steps towards cryptocurrency regulation are being taken at the international level as well. At the G20 Summit 2018 in March, it was a major topic of discussion among central bank governors and finance ministers. The general consensus was that these assets are too small to be of systemic importance; nevertheless the leaders agreed on extending the same standards to which financial institutions must comply.
The most likely starting point for broader regulation are platforms that exchange virtual currencies for fiat currencies. These are already regulated in Australia and South Korea. In April, the European Parliament adopted a fifth Anti-Money-Laundering Directive, aimed at regulating exchanges. In most of the world there are still no rules, but some exchanges self-regulate, for example by following KYC standards. Banks remain wary of them.
Exactly how regulation should be used for consumer protection is a subject of debate. Regulators disagree over whether to protect investors or leave them free to gamble. Some want to protect consumers but also give legitimate crypto-businesses the space to operate freely. Gibraltar issues licenses, and France is developing a voluntary licensing system. On the other end of the spectrum, China banned ICOs and exchanges altogether last year.
Cryptocurrency also poses a quandary with regards to taxation. With capital-gains tax in place, cryptocurrency investors could become a lucrative new source of revenue. But the relationship is fraught, as virtual currencies can also be used to hide money from the government. In the U.S., the Internal Revenue Service ordered Coinbase, one of the biggest exchanges, to turn in the data of 13,000 users earlier this year. “Coinbase fought this summons in court in an effort to protect its customers, and the industry as a whole, from unwarranted intrusions from the government,” the company said.
