Cryptocurrencies were launched in 2008 as alternate digital currencies to disrupt the traditional banking and payment systems, and make them more efficient, convenient, and secure by eliminating the onerous operational and security processes associated with conventional money.
Despite their extreme volatility, these currencies managed to create an extraordinary buzz worldwide, resulting in an explosion in the number of users, which now includes established financial services institutions and leading companies.
In their current state, cryptocurrencies are not considered a substitute for money, as several points of contention pertaining to their value stem from the fact that they are not issued by any sovereign authority and are not backed by the majority of central governments.
Crypto: Currency or investment asset?
As a result, cryptocurrencies are still classified as financial assets, securities, commodities, or taxable properties. The only exception to this is El Salvador, which has become the first country in the world to classify Bitcoin, one of the leading cryptocurrencies, as a legal tender since June 2021 officially.
Nonetheless, the overall observations indicate that the widespread shift from hard cash to digital currencies is an inevitable long-term trend.
The dynamic rise of cryptocurrencies has linked them to several other issues, such as market manipulation, scams, and risks related to money laundering, trafficking of illegal goods, hacking, identity theft, fraud, and unregulated business activities, and putting them under increased scrutiny by financial regulators and regulations authorities.
Will crypto ever be regulated?
However, as of now, the regulatory systems that govern cryptocurrencies are fragmented, ineffective, and, in some countries, non-existent. Consequently, creating confusion since no prominent international actor is certain about a number of factors. This includes which legal cryptocurrency classifications should be considered when defining regulatory policies and applying the rule of law, which of the current laws apply, how much government influence is required, and when taxes must be paid, among other considerations.
Against this comprehensive background, today's article casts light on a number of themes associated with the legal aspects of cryptocurrencies and identifies the rationale for establishing a regulatory framework for them, as well as the benefits of such a framework and its current status.
Cryptocurrencies' anonymous and decentralised nature and the difficulties of tracing their transactions have led many to believe that cryptocurrencies facilitate illicit activities such as cybercrime, money laundering, terrorist financing, tax fraud, and drug trafficking.
Illegal use of crypto grows rampant?
Nonetheless, there has been no conclusive proof so far to establish that cryptocurrencies are used in illegal acts. Regardless, these perceived threats have made a strong argument for expediting the establishment of a regulatory framework for cryptocurrencies, all in an attempt to mitigate any potential risks associated with the absence of national and international regulation and the unpredictable nature of cryptocurrencies.
Furthermore, the absence of a regulatory and legal framework introduces risks and confusion into the cryptocurrency space, potentially compelling businesses and individuals to avoid locations and countries with inconsistent as well as unclear policies and regulations governing these currencies and their operations. This may result in the abolition of any additional revenue generated by taxing cryptocurrencies’ trading.
Additionally, the worldwide trend is toward the preservation of personal and private information or data, hence, the inability to manage it poses a significant privacy issue and may result in uncertainty around these currencies, if not already. All of this reaffirms the need for a robust regulatory framework that addresses the aforementioned matters.
Evolving need for crypto regulation
The regulatory framework for cryptocurrencies will strengthen the existing ecosystem by adding different layers of safeguards to it. Separately, it will result in shifting the government's position toward cryptocurrencies from passive recommendations and warnings to a protective protection stance.
The race to develop such a regulatory system is underway, intending to regulate virtual currencies further and possibly bring them up to the same regulatory density as conventional currencies. Currently, there is no uniform regulatory regime for cryptocurrencies, and regulations and restrictions vary significantly according to their intended use for payments, investments, derivatives, and taxation.
For example, the majority of countries have enacted legislation to tax gains or income from cryptocurrencies, and some have more specific requirements than others. Additionally, most countries that deal with cryptocurrencies apply the securities regulatory framework to them, and the majority of regulatory efforts are directed at regulating cryptocurrencies’ trading platforms by requiring them to obtain licenses.
Countries attempting to enact legislation
Separately, there are countries that have attempted to enact legislation to address block chain technology more effectively and strengthen data security. By this, cryptocurrencies’ intermediary platforms are required to adhere to financial authorities' obligations, including the Know Your Customer (KYC) principle, suspicious transaction reporting, and record-keeping obligations.
One might wonder who should regulate cryptocurrencies and whether any international body will take on the task of policing these emerging currencies. The answer to that is unclear, but there is a strong track record of efforts in this area.
According to media reports, international organisations such as the World Economic Forum (WEF), the Global Futures Council, and the Financial Action Task Force (FATF) have been debating the risks associated with digital assets and money laundering. This is in addition to the International Monetary Fund's (IMF) call for a global cryptocurrencies discussion and cooperation among regulators in 2018.
Global stance favours crypto regulation
While attempting to establish itself as the primary international institution for facilitating collaboration on cryptocurrencies regulation and facilitating the adoption of block chain technology, the IMF garnered consensus on the importance of regulating crypto-related activities and protecting consumers from fraudulent operations involving these currencies. As a result, the Group of Twenty (G20) finance ministers and central bank governors have committed to assisting in developing and implementing the necessary regulatory framework.
The IMF's call on cryptocurrencies in 2018 was not the final one; shortly after El Salvador’s adoption of Bitcoin as legal tender in June 2021, the IMF warned countries to avoid such "shortcuts" as these currencies are not backed by a sound monetary policy and give authorities no control. This implied the need for introducing one, as this step could have a domino effect that could spread to more small countries, potentially resulting in long-term ramifications to the global economy.
Regardless of these efforts, in addition to international cooperation, developing an agile and practical framework for cryptocurrencies will require regulators to collaborate with technology experts, consider intergovernmental collaboration, and possibly create new institutional governance that fully understands the technical and economic issues underlying these currencies.
Unified legal crypto framework necessary
In a nutshell, while cryptocurrencies are not a substitute for money in their current state, they are classified as financial assets, securities, commodities, or taxable properties.
Regardless of their classification, a unified legal framework for cryptocurrencies is necessary, as they have been linked to a variety of financial crimes, including market manipulation, scams, and risks associated with money laundering, illegal drug trafficking, and fraud. This framework will strengthen the existing ecosystem and add additional safeguards.
As a result, our governments will become more proactive in addressing the challenges associated with cryptocurrencies. At the moment, cryptocurrencies are regulated in the majority of countries under securities or commodities laws, which is somewhat confusing given the cross-border nature of these currencies.
Thus, emphasising the importance of developing a framework that is entirely dedicated to cryptocurrencies. However, the question of who will take the lead in facilitating cooperation on cryptocurrencies’ regulation, on the other hand, will remain.