While Bitcoin and crypto-currencies have been under the radar for a very long time, since the end of 2017, we have witnessed a very strong media exposure. Many investors, both institutional and private, are investing in cryptocurrencies and many risks have (re)emerged. Since then, countries, institutions, politicians and others have chosen or plan to regulate cryptocurrencies. In this article we will try to explain why and how this could affect the market. We will also explain the positions of countries vis-à-vis crypto-currencies and blockchain.
Why regulate cryptocurrencies?
There are many reasons for regulating cryptocurrencies, here are a few:
- To fight against money laundering and illegal activities. Illegal activities and mafia and terrorist organizations use cryptocurrency to transfer money. In addition, these cryptocurrencies can also be used to evade taxation and launder money.
- To protect investors. Indeed, there have been many hacks and scams since the creation of Bitcoin in 2008.
- The hack that made the most noise is the piracy of the trading platform Mt. Gox, founded by the French Mark Karpelès, during which more than 800,000 Bitcoins were stolen. The latter is not free from suspicion in this case and is currently being tried in Japan.
- The latest hacking is that of the Japanese exchange platform Coincheck, with the theft of more than 500 million dollars in cryptos.
- The exit-scam during the ICO. Since the launch of ICO (Initial Coin Offering), it has been estimated that hundreds of millions of dollars have been stolen or misappropriated by malicious people. The last scam concerns the ICO Bee Token and Titanium Bar, during which hackers have embezzled millions of dollars.
- To promote the development of blockchain and crypto-currencies to enable the creation of jobs in a more stable and controlled environment.
- A potential capital flight from banks to cryptocurrencies that could “weaken” banks and states.
How to regulate cryptocurrencies?
According to Juan Llanos, expert of blockchain and Bitcoin, there are 3 types of regulators:
- Policies – which aim to stimulate the economy in order to boost the job market and thus gain popularity in order to be elected. Even if it is a little (completely) reductive, the idea is there. They have the power to ban crypto-currencies and it is essential that they understand the full potential of blockchain and cryptocurrency.
- Institutions – they aim to protect investors and ensure trade security. Their role is preventive, they want to ensure that no drift can harm consumers.
- Public authority – it is an organ of repression. She is responsible for prosecuting and convicting crooks and thieves.
According to Juan Llanos, to date, there are no laws allowing the blockchain to be used in a “legal” way. The legislative mechanics of the countries being of rather slow nature, it can take years before a perennial regulation is put in place. During this time, many projects risk being aborted. We can note the example of crypto-currencies allowing to carry out anonymous transactions, these pose fundamental problems concerning the traceability of money, and it would not be surprising to see this first category targeted by the authorities.
The topic of the regulation of crypto-currencies and blockchain must be addressed during the next G20 taking place in Argentina.
Is it useful to regulate them?
In my opinion, it is necessary to regulate this sector for several reasons:
- Many projects are simply phony and have no use except to reap the investors’ money. Indeed, in recent months, projects and fundraising in the cryptocurrency sector are multiplying. Unfortunately, many projects are of no use, their founders simply try to ride the wave to easily raise funds in ethers and bitcoins.
- Better control the use and source of funds at the ICO and avoid exit scams (founders who abandon projects and leave with the fund).
- Many blockchain projects and exchanges are complicit in the manipulation of courses, it is indeed possible to call a “Market Maker” who will be responsible for artificially increase the price of a currency. Crypto-currencies are not under the yoke of stock market legislation, so we often find Pump & Dump operations to pluck investors.
- The simple fact of using the word blockchain in the name of a company detonates its value.
What can be the consequences of a regulation?
One of the risks of regulation is simply the “death “of crypto-currencies and Bitcoin. This scenario is very unlikely because it has become impossible to block access to the internet and all sites related to cryptocurrencies (even if the Chinese government plans to do so) around the world.
States may wish to launch their own cryptocurrency. The latter will then compete with other crypto-currencies which means the end of the monetary monopoly. Regulations that are too harsh and restrictive may have the effect of driving capital away from the country and fueling the black market.
Some countries do not measure the blockchain’s technological revolution and “waste” time discussing regulations for years instead of focusing on the innovation that stems from this novelty. They are likely to get ahead of other countries fairly quickly. It is important to identify the risks of this new technology but still promote innovation and creation that are related. We recommend that regulators adopt a flexible attitude in order not to slow down the development of blockchain and cryptocurrencies.
Regulation would increase confidence in the cryptocurrency and blockchain market. Thus, investors could be protected in case of scams and new projects could be more easily financed and accompanied.
Creating a legal and framed framework would create new jobs and explore this new technology and the opportunities it offers as much as possible.
A new tax system could emerge, less burdensome and less restrictive.
To better inform and educate our fellow citizens on the characteristics (benefits and risks) of blockchain and cryptocurrencies.
The creation of trainings, debates or courses in schools and universities.
What are the news concerning the regulation of crypto-currencies around the world?
- On February 2, 2018, the European Union announces the desire to end anonymity in cryptocurrencies in the fight against terrorism and money laundering. She wants to know the users of the exchange platforms, what they do and when.
- April 19, 2018, the European Parliament votes a measure in favor of the regulation of the cryptocurrency sector. The goal is to end “anonymity” in this sector. For example, exchange and wallet users may be subject to identity checks. (Source: com)
- The Security and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) voted against the ban on cryptocurrencies and ICOs on 6 February 2018. Before this decision the country was in limbo and make arbitrations case by case (although many platforms and ICO refused the registration of US citizens, like Bitfinex for example). The will of the United States is the establishment of a global regulation, topic that will be on the agenda of the next G20 in Argentina.
- The KYC (Know your Customer) has become commonplace in the case of entries in exchange platforms and for participations in ICO, it allows to verify the identity of investors.
- The Chicago Stock Exchange now offers futures (futures) on Bitcoin.
- The Arizona Senate announces on February 8, 2018 that it will be possible for its residents to pay its taxes in Bitcoin.
- In September 2017, China banned ICOs, causing a sharp drop in Bitcoin prices.
- On February 6, 2018, the Chinese government announces that cryptocurrency exchange sites based in China and abroad will no longer be accessible.
- Sometime before, the government had chosen to increase the price of electricity for cryptocurrency mining farms because they consume a lot.
- The main objective of the regulations in China is to protect investors and to avoid potential economic problems related to large cryptos fluctuations.
- The government of Nicolás Maduro seeks to circumvent economic sanctions by creating its own cryptocurrency, the petro. This virtual state currency would be indexed to the price of a barrel of oil. The huge inflation of the bolivar (the latter is not worth much) could therefore make Venezuela the first country to adopt a cryptocurrency currency.
- Venezuelans invest in cryptocurrencies to preserve their economies against inflation.
- To cope with price hyperinflation, many citizens use their computers to mine Bitcoin, because the meager reward sometimes allows them to feed for several weeks.
- After a ban on crypto-currencies announced by the Korean Minister of Justice on January 11, 2018, the price of Bitcoin fell by more than 10%. This announcement was denied by the Ministry of Strategy and Finance, which said that South Korea is working on a cryptocurrency regulation and not a ban.
- The ICO (Initial Corner offering) have been prohibited since September 2017.
- With 2 million investors in cryptocurrencies for 51 million people, South Korea is the country with the largest number of investors in this area (per capita).
- Strong demand for Bitcoin in South Korea is reflected in a higher than average price. A Bitcoin costs about 20% more in the South Korean market than in the US market.
- It seems to be the most open country vis-à-vis cryptocurrencies. Although institutions such as the Monetary Authority of Singapore (MAS) warn of a possible risk when investing in these currencies, the government indicates that it does not differentiate between transactions in fiat and digital currencies.
- Switzerland, like Singapore, approaches crypto-currencies with a progressive and benevolent attitude. According to the Minister of Economy, Switzerland wants to become a “crypto-nation “.
- March 30, 2018, the exchange Bitfinex announces its intention to want to settle in Switzerland.
- Second country in terms of Bitcoin transactions, the government has officially recognized it as a means of payment in 2017. This has allowed many companies to get started and thousands of merchants accept this method of payment across the country.
- On January 25, 2018, the Russian Ministry of Finance published a bill, which would establish ICO’s procedures, determine the use as well as the legal regime of mining and cryptocurrencies.
- Vladimir Putin is one of the most vocal heads of state in Bitcoin. He also met Vitalik Buterin, the founder of Ethereum (second cryptocurrency behind Bitcoin), during the year 2017, which shows Russia’s growing interest in digital currencies and related projects to the blockchain.
- The country wants to create its own virtual currency (the Estcoin token). This provoked the wrath of Mario Draghi (President of the European Central Bank). Estonia said the Estcoin would probably be a token used to raise funds.
- Second country with the largest mining farms in the world. There are two reasons for this: the low cost of electricity and the low temperatures that make it possible to cool the machines.
- The Israel Tax Authority (ITA) has announced that cryptocurrencies will be taxed as assets. As a result, investors will have to pay 20 to 25% of taxes. For trading cryptos for commercial purposes, a VAT of 17% will be applied. Finally, “professional” miners (companies) will be taxed in the same way as other industrial activities.
- April 5, 2018, the Indian central bank prohibits Indian banks buying cryptocurrencies .
Some digital players and online advertising are also taking a stand against crypto-currencies, like Facebook or Baidu (the equivalent of Google in China) that ban advertisements promoting crypto-currencies. Indeed, many of these advertisements promoted deceptive projects with the sole purpose of ripping off investors. Canada also asked Google kindly ban advertisements on ICO and crypto-currencies of its network (YouTube, partner sites, search engine …).