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How Regulation Could Aid Cryptocurrency Growth

Regulation could aid cryptocurrency by facilitating more investors from a larger pool, ensuring more safety in transactions. It is also a necessity owing to tax implications.

Cryptocurrency currently is not governed by any central authority. Its decentralized nature lends it some benefits like more transparency, autonomy, faster transactions, lack of governmental hierarchies operating in its transactions, etc. over fiat currency. Its structure facilitates transactions in a manner that eliminates the requirement of a third party. Cryptocurrency has evolved into an accepted payment mode in everyday commerce as well. As of 2021, it is also evolving rapidly as legitimate digital currency and supplementing fiat money across a number of sectors.

The lack of regulation, however, has proven to be a setback in some instances.  A number of people reject the possibility of institutional regulations, believing that decentralization is one of the key attributes of cryptocurrency, designed to take away financial control away from intermediaries like banks. Bringing in some regulation to the ecosystem, however, could actually assist in the further growth of cryptocurrency especially in the context of its past performance and history. This article seeks to explain just why.

  1. Less volatility, larger investor base

Since cryptocurrency came into widespread circulation in 2010, there have been numerous highs as well as lows through the course of its transactional history. These large fluctuations have earned it the reputation of being a highly volatile investment. With the turn of the pandemic, more volatile investments are also less likely to attract investment over time. 

Regulation of cryptocurrency would increase its dependency as a long-term asset class for investment. Financial institutions, centrally governed or otherwise, can facilitate its development as well. Regulation through these can provide a legal backing to cryptocurrencies, which would result in increasing the pool of investors for the asset class. It would also come with a more pronounced consumer protection establishment. 

  1. Safety and security 

One of the most germane reasons for the requirement of regulation within cryptocurrency is security threats. Regulatory authority overlooking the transactions  would contribute to preventing fraud and illegitimate transactions. Another consideration for security of the asset class comes from the fact that even though it is completely legal to buy or trade crypto in India, there is no legal guarantee for the investment. Bitcoin as virtual currency in India for instance, has not been declared as legal tender yet. 

Section 26 of the RBI Act requires banknotes or legal tender to be guaranteed by the central government. This however does not exist for cryptocurrencies. Thus, regulations would go a long way in bringing cryptocurrencies within the ambit of a legal definition, so as to help provide its investors with more security and better rights. 

  1. Tax purposes

Much of the dialogue on regulating cryptocurrency arises from taxation related concerns. A large part of why regulation is sought is to obtain clarity on taxing of these transactions. The taxation of cryptocurrency currently across the world has been carried out under four broad classifications. The manner in which they are taxed would be contingent on how it would be slotted: whether it would be classified as legal tender, securities, as capital gains or lastly, as a goods and services-based tax. There is a lack of uniformity in the way the regime is operating right now.  

  1. Securities – Crypto taxation as securities for instance commenced with some countries like Singapore offering initial coin offerings for it. 
  2. Capital gains – The discourse on cryptocurrency regulation for tax as capital gains commenced with the United States taxing crypto as property. But this has a lot of complexities. Even when crypto is being used as capital gains, how it would be taxed would be dependent on how it was acquired. This means that if it was acquired through mining, it could be a self-created asset which in some jurisdictions is exempt from tax. However, if it is being used as an investment and changes hands, it is subject to capital gains tax.
  3. Goods and services – Australia started the discourse on this by introducing crypto as either ‘goods’ or ‘exchanges’ depending on the transaction. This model however did not gain ground as concerns like double taxation arose in context of this. 

Regulation would prevent indiscriminate taxation of crypto transactions. It will also provide more uniformity to the taxation framework on crypto. The manner in which it is being done right now, as mentioned above, is rather fragmented and there is no concrete precedent or successful models to tax it. Regulations will help prevent indiscriminate taxing by local and international governments. 

The manner in which different countries have attempted to address the regulatory vacuum in cryptocurrency has also been varied. The United States has not issued any concrete laws on cryptocurrency, however the profits from it are taxed as property. Germany on the other hand deemed it a unit of account for trading, and Singapore and Thailand have been contemplating concrete regulations. There is however, no uniformity in the manner in which crypto regulations are being contemplated across the world. 

  1. More Adoption

Perhaps the most obvious impact of crypto regulation will be a surge in mainstream adoption and usage. Crypto regulation will give the industry the boost it needs for the masses to experiment with it, embrace it, and adopt it. This will be made possible because of a general high confidence generated in the concept once it has backing from national governments. What may follow is its acceptance in general transactions, and perhaps even government dabbling in its applications and potential. These could be very exciting times for all stakeholders!

Conclusively, regulation could aid cryptocurrency by facilitating more investors from a larger pool, ensuring more safety in transactions. A world with crypto regulation may be a world that both the crypto community and the crypto skeptics desire. How quickly we get there on a uniformly global level, remains to be seen. But sentiment is positive.