As cryptocurrencies continue to shape global finance, regulators are racing to keep up with the ever-changing landscape, sparking debates about how to find the right balance between financial oversight and decentralized finance.
Here’s a look at the pros and cons of crypto rules and where crypto regulations currently stand.
How crypto works
Before crypto regulations, there were cryptocurrencies, which are digital currencies largely managed without the regulations and protections of a central bank or government. Crypto works like this:
- Cryptocurrency is a digital asset that appeals to many investors because it operates on the blockchain, which is a decentralized ledger that records transactions across multiple computers. These computers validate transactions and leave a permanent record that is essentially a long receipt of every transaction ever made.
- Blockchain records the flow of information and, by design, aims to be transparent — provided you can access the blockchain database holding that data. Blockchain technology ensures information is stored securely, while also maintaining a ledger of modifications and prohibiting alterations after a transaction is entered, creating a clear audit trail of changes.
Major, regulated currencies — such as the euro or U.S. dollar — tend to be fairly stable and backed by a government. Conversely, cryptocurrencies are extremely volatile for a couple of reasons, including having fewer regulations. Most cryptocurrencies aren’t tied to a physical asset, such as a company with revenue, nor backed by a government. Instead, cryptocurrencies derive their value solely from what people are willing to pay at the time.
In fact, a 2022 study published in the journal Finance Research Letters identified four main drivers of volatility in Bitcoin’s price: Google trends, how many bitcoins are in circulation, consumer confidence within the U.S. and the S&P 500.
Pros and cons of crypto regulation
In the last few years, some governments have focused on incorporating crypto into existing or new regulatory frameworks in an attempt to protect investors. Others believe regulation could stifle innovation and limit financial freedom within a currency designed specifically to be out of government reach.
Pros
- Helps protect investors from fraud, scams and market manipulation
- Discourages illegal activities such as money laundering and terrorism
- Reduces price volatility and improves market stability
- Promotes trust and more secure adoption of digital assets
Cons
- Contradicts the decentralized nature of crypto and may stifle innovation
- Legitimizes of a volatile asset
- Limits inclusivity, especially for those who don’t have access to traditional financial services
- Decreases user privacy and increases monitoring from governments
How is crypto regulated in the U.S.?
These differences in opinion have led to variances in crypto regulation across the U.S. and the globe. Depending on how digital assets are structured, both federal and state regulators may have authority over transactions in the U.S.
The Securities and Exchange Commission (SEC), Internal Revenue Service (IRS) and the Commodities Future Trading Commission (CFTC) each define crypto differently as securities, commodities and property, respectively.
The SEC
The SEC classifies crypto as securities, like stocks, and requires that all sales or issuances of digital assets be registered by the issuing company. This means the SEC wants crypto to follow the same rules that publicly traded companies do. For example:
- Buying a digital asset means that the crypto must be registered and approved by the SEC, which those in favor of regulation assert gives the buyer more transparency about the risks associated with it.
- When selling a digital asset, it must also comply with SEC rules, including adding disclosures or other legal statements before selling crypto.
In recent years, the SEC has cracked down on crypto exchanges that allegedly haven’t followed these rules, including filing lawsuits against Coinbase and Binance.
The IRS
The IRS classifies crypto as property. This means that any time you sell or buy crypto, there may be tax implications associated with it.
- Capital gains taxes are applied when you sell or trade the crypto for more than you bought it for.
- Selling, trading or buying crypto can trigger a taxable event that investors need to report on their annual tax returns.
These rules have been in place since 2014, and that means investors have to keep track of their transactions to accurately report any taxes associated with them.
The CFTC
The CFTC views cryptocurrency similar to a commodity, like gold or silver. This means that buying or selling crypto can be considered a taxable event and capital gains rates may be applicable as well.
Additionally, this means that crypto can be traded in futures markets, which allows investors to speculate on a currency’s price on a future date.
States
Despite federal agencies such as the SEC and CFTC setting overarching rules for the U.S., individual states also have their own crypto regulations that vary widely.
New York, for example, has BitLicense, a business license for virtual currencies with strict requirements. Meanwhile, Wyoming — one of the most crypto-friendly states — plans to issue its own stablecoin and has passed about 30 laws since 2019 trying to attract crypto and blockchain businesses.
How is crypto regulated globally?
While U.S. government entities have focused on classifying crypto, other nations have taken different approaches. Some countries have banned crypto entirely, and others have opted for a more welcoming approach.
- In the European Union, the Markets in Crypto-Assets (MiCA) was introduced, providing a framework for how to view crypto across member states.
- In China, cryptocurrency is banned entirely.
- In Japan, crypto is considered legal property, and exchanges must register and comply with anti-money laundering laws.
- In Canada, crypto entities must register with the government and there are strict anti-money laundering rules and regulations.
Are stablecoins regulated?
Stablecoins also live within the regulatory Wild West of crypto. Stablecoins are a type of cryptocurrency built to hold a fixed value over time and pinned to a fixed asset, which is often a specific real currency, frequently the U.S. dollar. Unlike other cryptocurrencies, the price of stablecoins is meant to be stable.
Because of this, stablecoins can be easier to use for everyday transactions — and a lifeline for people living in struggling economies with sanctions and a weak local currency — and potentially transformative by offering the benefits of cryptocurrency without the volatility.
Regulations for stablecoins are also still being developed, but rulemakers in the U.S. and abroad are considering bank-like regulations for stablecoins.
Bottom line
Crypto regulations vary across the U.S. from state to state and even between federal agencies, which all have different ways of defining crypto that come with their own tax implications and laws. Investors should conduct their individual research to determine what crypto laws exist in their respective states. And above all, regardless of how crypto is regulated, remember that they are highly volatile assets and investors should be very cautious when investing in any type of crypto.
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