Regulating Cryptocurrencies
The increasing use of cryptocurrencies, combined with the decentralized nature of the asset, presents difficulties for regulatory authorities in framing the regulations
Framing regulations about something is a massive task. It involves lots of research, discussion with stakeholders, and evaluating the overall impacts (financial and social).
Considering that the vast majority of blockchain/crypto projects are not regulated by a single person, there is no underlying regulation for cryptocurrencies. This creates a lot of issues in terms of identifying how regulations can control the use of cryptocurrencies and underlying projects.
Most of the genuine cryptocurrencies (e.g., bitcoin) are based on blockchain technology. Crypto to blockchain is the equivalent of Gmail to the internet.Blockchain has a wider application apart from cryptocurrencies. It is challenging for policymakers to adopt blockchain as a technology while disregarding the trading, investment, and use of cryptocurrency.
The use of cryptocurrencies has also resulted in anti-money laundering, which is something that is detrimental to any nation. People also use cryptocurrency as a way to avoid paying taxes, in addition to using it for illegal activities.
We have seen a number of cases where investor money is lost due to hacking or scams. Despite the fact that blockchain is founded on principles of openness, many crypto businesses continue to operate under false pretenses and have little regard for the financial safety of their customers. There are significant financial, operational, and transparency risks that negatively impact investors.
The crypto regulations can protect the interests of investors and also strike a balance between the adoption of blockchain and the adoption of crypto. We need international rules that cover everything and work well to stop the problems that cryptocurrencies and the ecosystems and activities that surround them pose to the monetary system.The core provisions of the regulations should be applied across jurisdictions without any issues. This requires a lot of communication and coordination between countries on a consistent basis.
When it comes to regulation of crypto, it cannot be only one regulation. There will be tax, foreign exchange, accounting and KYC regulations. It would mainly cover:
a) Provisions for regulating the crypto exchanges, i.e., similar to SEBI's controlling stock exchanges. There should be clear provisions in relation to eligibility for opening the crypto exchanges, capital required, liquidity, reserve fund, etc. Also, detailed provisions should be introduced for operating an exchange and its boundaries.
b) Tax regulations for levying taxes on cryptocurrency.
c) Foreign exchange regulation to limit the use of crypto for anti-money laundering and black money.
d) Accounting rules for proper crypto transaction disclosure
There could be a lot of operational implications of these regulations, i.e., controlling the data of exchanges, managing user data, security & privacy etc.
Instead of outright prohibiting cryptocurrency, regulation would provide the business with much-needed structure. As a result of governments' hazy stances on cryptocurrency regulation, the crypto industry is currently in a state of disarray that makes it impossible to make important operational decisions.
The technological, legal, regulatory, and supervisory concerns of cryptography require immediate international cooperation and collaboration. The establishment of a uniform and well-coordinated crypto regulatory framework is a massive undertaking. However, if we begin immediately, we may fulfill the policy goal of maintaining financial stability and reap the benefits that the underlying technological breakthroughs bring.