Why It Is Difficult To Find A Common Regulatory Framework For The Cryptocurrency Industry

The peculiarity of cryptocurrencies has contributed largely to the difficulties associated with its regulation across the globe. Cryptocurrency regulation has been minimal to date not because there is no interest by the government for digital assets, but because there is need for them to come to terms first with the technology before proceeding to dispatching it to regulatory bodies or making it open for regulations.

The regulation of cryptocurrencies varies based on different countries or jurisdictions. While some have been able to categorically give placement to them, others have sparingly managed to categorize them based on what they have defined the digital asset to be. Most regulators around the world are still trying to figure out how they should treat or define cryptocurrencies.

There is the need to understand this technology, its strengths, weaknesses or  vulnerabilities, opportunities and likely threats to a large extent before being  comfortable enough to entrust it with significant leaflets of the financial infrastructure. We need to know what aspects exactly need regulation so as not to stifle the industry by inhibiting the benefits or ignoring the risks.

According to Ulrik Lyyke; Co-Founder at Crypto Hedge Fund ARK36, cryptocurrencies are a new asset class that does not easily fit into the existing frameworks that regulators have for dealing with financial instruments. He notes that while the asset class itself represents something that is indeed entirely new, the task becomes even more complex when we realize just how different the nature of many of these assets are.

Currently, there are no steps taken globally to set policies and regulations around the use and trade of cryptocurrencies but previous years have shown that with the ubiquitous nature of cryptocurrencies it has led to the prompting of authorities to come up with a suitable form or need for regulation.

This article therefore aims to reiterate the importance of having regulatory dedicated authorities to be in charge of the industry affairs if more adoption in coming years is in sight.

Why It’s Important

Today, there are about 2,677 cryptocurrencies with a market capitalisation of roughly $237.1 billion as of 2019 of which Bitcoin and Ethereum have a dominant share hence giving an insight as to how much this new industry pulls weight.

Cryptocurrencies as we know, have been largely designed to operate without sovereign regulation and are protected from being discovered by government authorities for supervision. It is built to operate with limited or no control from the government. Hence, cryptocurrencies are structured to operate with absolute independence or no central authority. Government, financial or business cooperation has no access to the funds or personal information of cryptocurrency owners.

However, there are few other factors that will be contributing to the need for the regulation of cryptocurrencies such as;

First, consumer protection. This is of utmost priority if confidence has to be gained by investors. It has become evident that the absence of a specific central authority and regulation, which supervises activities and transactions involving the use of cryptocurrencies makes it prone to illegal or illicit exploitation.

There is a grave need to protect consumers and inexperienced investors from any possible emergence of scams, fraud or even cyber theft thus heightening a need for regulation.

Second, the feature of user anonymity in cyberspace has made provision for illicit or unlawful activities such as; illegal trading of goods and services, ransomware, money laundering, cryptojacking, theft, fraud and terrorism. If proper  regulations were put in place, most of these would be highly prevented.

Also, the warnings of  most governments against cryptocurrencies are further contributing to the fright of  investors. Such warnings usually  stems from the fact that they are unregulated and therefore it is impossible to enforce rights in any law court. As such, citizens who invest in cryptocurrencies do so at their personal risk since there can’t be any legal recourse available help in eventual case of loss of funds.

Again, the risk resulting from the high volatility associated with cryptocurrencies is another factor. The simple knowledge of the fact that there are no regulatory bodies helping to facilitate transactions by many organizations gives a cause for agitation. As we see in the event of January 2017 where the Central Bank of Nigeria stated that traders risked losing all their money when they trade in a currency that is not regulated. This risk is largely associated with the volatile nature of cryptocurrencies.

Moreso, cryptocurrency holders are clamouring for regulation because of the kind of certainty it will bring.  The feature of self-regulation at this early conception of the industry can be termed to be more destructive than helpful. Self regulation is workable in situations where the industry has attained a reasonable height of maturity and strong governance. Since this is not yet the case with cryptocurrencies, a need for regulation arises. Certainty comes the benefit of confidence and once this is achieved, adoption enlarges. 

Furthermore, regulation makes innovation easier to classify and therefore understand. As earlier stated in the introductory part of this piece, it’s delayed regulation is largely anchored on the fact that in most jurisdictions, it has not been clearly understood or defined. But then, there comes a need to put it in place so that others can clearly understand what it is, laws that back it and how it is defined by the jurisdiction. 

There is pertinent need for financial institutions to clearly understand the landscape in which this new digital asset class operates and it’s risk factors before placing regulations. 

Again, an effective regulation of the cryptocurrency industry will bring maturity, stability, and fungibility to all compliant digital assets thus heightening the interest appeal of institutional and individual investors that will view the industrial activities as a legitimate long-term investment, rather than mere short-term speculative opportunity.

Obviously, there is indeed a call for governmental introduction of distinctive regulations. This is because regulations are bound to present room for growth thus, wholesomely buttressing its importance to the industry.

Cryptocurrency Regulatory Bodies

As earlier stated, cryptocurrencies are founded on the principle of decentralization, which means it is structured in a way that boycotts regulation by a central authority as compared to other traditional currency. 

Although, some jurisdictions have taken  effort to impose forms of regulation on the usage or trading of cryptocurrencies, the fact still remains that as much as there are different views and perspectives to what crypto currencies may be termed to be, there will always be different bodies in charge of it’s affairs. 

Presently, the few regulations obtainable in certain jurisdictions took a snail pace as there was a struggle with getting a grip of what exactly the technology is and what it has to offer before attempting to assign certain regulations to its use and operations. Regardless of efforts taken, there exists no uniform international approach to regulating virtual currencies. As it stands, every regulation in place now, depends on the efforts taken by individual countries.

Take Nigeria for instance. One of the actions taken by it’s government is issuing very strong warnings about the impending pitfalls of investing in the cryptocurrency markets. These warnings were issued by the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC). These warnings were issued with a bid to help enlighten people, especially crypto traders about a difference between actual currencies; which are issued and guaranteed by the state, and crypto currencies; which are not.

Another example is the United State of America where cryptocurrencies are regulated through at least five (5) different Federal Agencies namely:

  • The Internal Revenue Service (IRS)
  • The Financial Crimes Enforcement Network (FinSEC)
  • The Securities and Exchange Commission (SEC)
  • The Commodity Future Trading Commission (CFTC)
  • Office of Foreign Assets Control (OFAC);

With each of the above named agencies viewing cryptocurrencies from different points. IRS classifies crypto-currencies as properties which should be taxed while the FinSEC rules cryptocurrencies as currencies. In contrast to those, the SEC defines cryptocurrencies as securities, while the CFTC declares crypto currencies as commodities. OFAC on the other hand, labels cryptocurrencies as assets. From this, it is evident that the USA is yet to come up with a specific national crypto regulation body.

Most African countries are yet to introduce a legal framework or legislation bothering on  cryptocurrencies, crypto trading or exchanges. Meanwhile, there is a great interest to develop one very soon as demonstrated with the moves taken by the CBN and SEC. Nigerian lawmakers and  regulatory authorities for instance are being urged  to speed up efforts in introducing a legal framework for cryptocurrencies in the country.

Why Regulations Vary

Digital assets because of their versatility so far are considered and treated differently across the globe. In some countries or jurisdictions, different regulatory bodies have their guidelines or rules separately, stating it’s enforcement style or principles on the asset.

The bodies in charge of a cryptocurrency regulation is dependent on what that country or jurisdiction views the digital asset as. If viewed as commodities, the body in charge of commodities is entitled to handle it. If viewed as securities, then the body in charge of handling securities for that country takes the horn so it is in other cases where it can be viewed as currencies, properties or assets.

For instance, different regulatory bodies in the United States categorise crypto assets as decentralised virtual currency, commodities, and assets that is why it is handled by more than three regulatory bodies.

Canada’s authority for instance views cryptocurrencies as commodities. This points out the fact why whatever income generated is being considered as business income thus subject to tax. Australia, on the other hand, treats it purely as a currency that can be mined, traded, or bought as such it’s authorities in charge of these activities foresee or stand as the regulatory body in charge of cryptocurrency affairs. The same goes on and on for other countries.

To Lykke, the earliest assets such as bitcoin probably fall closer to what we recognize as currencies or commodities, whereas the next generation assets such as ST’s would probably share more traits with securities. It is clear that it is not a trivial task to form legal frameworks to deal effectively with these new assets.

He further opines that the lack of a standard for how we can legally perceive this new asset class calls for the regulator’s own interpretation of how existing legal structures can encapsulate and regulate this new phenomenon.

Regulation is needed for more Adoption

One major challenge of regulatory authorities and the industry regarding cryptocurrency regulation, is that cryptocurrencies are so new that they do not neatly fit into laws that have been in existence already.

To that effect, the increasing use of cryptocurrency clearly portrays a need for not just a suitable law in place but also various regulatory bodies rising in order to establish the guidelines of the use of digital currency while clearly defining it’s structure. 

The eventual  regulation of cryptocurrency would to a large extent ensure more adoption as it would serve as an edge for investors just in case the going ever gets wrong. However, regulations that may evolve are likely to do so anchoring on three dimensions: an economic, technological and a  legal dimension.

 

Comments (No)

Leave a Reply