At the height of the digital finance boom, the cryptocurrency market was valued at more than $2 trillion. Since the start of 2022, cryptocurrencies plunged 60%, according to data from CoinMarketCap.com. Economic factors like inflation, stock markets, and Fed monetary policy have a major influence on the value of the crypto market. Investors in digital assets have to plan and adapt to this high volatility regularly, but there are a few ways the government is attempting to mitigate it.
How governments will regulate cryptocurrency markets and custody is a key dispute. There are two issues that continually surface: taxation and debanking. There is a lack of consensus among tax authorities around how to treat cryptocurrencies as they don’t have the same tax reporting as conventional investments. For instance, similar to how cryptocurrencies are taxed, the majority of NFTs may be regarded as property. In some cases, they might also be regarded as securities or commodities. There isn’t a clear one-size-fits-all answer to the taxation of digital assets. However, a big factor is always whether the asset has the potential to grow in value over time. In these cases, NFTs start to look a lot more like investments than simply products.
Debanking is the process of traditional banks suspending the accounts of businesses with digital currency. This process is very indiscriminate in regards to where a digital asset business is allowed or not allowed to access banking services. Cyberattacks, extreme market conditions, or other operational difficulties could halt withdrawals and transfers without being backed by a bank. Being a digital asset without access to bank services is a big problem for cryptocurrencies. Some countries are already adopting their own central cryptocurrencies. This proposed idea of a retail digital dollar would result in a radical change and would not provide the same anonymity as cash.
Energy and Consumption
One of the main concerns is the environmental impact of crypto mining and the large-scale emissions. Bitcoin, the world’s largest cryptocurrency, currently consumes an estimated 150TWh of electricity annually. This massively energy-intense process is occurring at a time when entire sectors of the global economy are seeking to reduce energy use and decarbonize–posing environmental, social, and governance (ESG) problems. Without the intervention of a government incentive for blockchain companies, further opportunities for change could be lost.
No Regulation, Bad Regulation, and Good Regulation
Across the world, nations have different levels of excitement towards the crypto market. In the United States, specific cryptocurrency laws and regulations vary state by state under existing money transmitter rules. On the federal level, the House and Senate members have introduced a few bills addressing digital assets, most notably, The Responsible Financial Innovation Act. This proposed bill is a landmark bipartisan legislation that aims to create a complete regulatory framework for digital assets.“Digital assets, blockchain technology and cryptocurrencies have experienced tremendous growth in the past few years and offer substantial potential benefits if harnessed correctly. It is critical that the United States play a leading role in developing policy to regulate new financial products, while also encouraging innovation and protecting consumers,” said Senator Gillibrand. The main refute of the adoption of this bill is determining which tokens are to be monitored and by which agencies. The SEC and the CFTC have yet to clarify the distinction between securities and commodities for the thousands of digital assets in existence, making it difficult to access the legal status of each digital asset.
There is a spectrum in terms of countries looking at a blank sheet versus being locked in with their enacted legislation. Since virtual currencies are flexible, the region with the greatest crypto regulatory laws will also see the greatest adoption of cryptocurrencies. In countries like Singapore and the United Kingdom, there are already legislated systems. Some figures in the crypto industry continue to be against new regulations. According to them, it will stifle innovation and violate the fundamental decentralization that is at the heart of cryptocurrencies’ nature. Yet more regulation could mean more stability in a notoriously volatile crypto market. Proposing legislation that will give investors the certainty and clarity that their investment will be protected. Without a regulatory framework in place to ensure the protection of digital assets, few people will be enthusiastic to invest. Not all countries are following the lead of Singapore and the UK. Important exceptions include nations like Japan and New Zealand that use an income tax system as well as Switzerland, China, Germany, and the Netherlands, where there are separate tax laws for selling cryptocurrencies. Countries want to make sure that they are doing enough for these companies to want to stay and establish themselves.
So what sort of things will countries need to add to become a leader in the digital currency sector?
Having a crypto tax code: Using crypto assets exposes you to potential tax liability. By introducing tax exemptions, softening new tax reporting mandates, and deferring initial tax on digital coins earned from mining, will create an environment that attracts investors.
Adding banking services for the crypto market: A new regulatory framework will increase stability by safeguarding long-term investors, deter fraud in the cryptocurrency ecosystem, and offer enterprises clear guidelines so they can innovate in the market. For cryptocurrency enthusiasts, ETFs are the holy grail that will boost liquidity and the adoption of cryptocurrencies for investment purposes. They provide exposure to the crypto without the additional expenses of ownership.
The crypto market’s recent fall has given rise to some very real worries. Even the most fundamental details, such as who is in charge of regulating the area, are not entirely clear. Government action is a challenging task, but there is growing support as people understand that regulation is required for stability in the space.
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