Whether cryptocurrency investors like it or not, regulation helps shape the direction of the nascent crypto industry. The question is whether or not regulation will have a detrimental effect on investors. In many places around the world, cryptocurrency sits in a legal gray area, lacking regulation or inheriting stock, commodity, or securities rules.
However, cryptocurrency could belong to an asset class in its own right. Michael Novogratz, CEO of Galaxy Digital, believes that crypto is its own asset class. The reason for this is that existing frameworks do not take into account the nuances embedded in cryptocurrencies of all kinds. Hard forks, airdrops, staking and block rewards are all new financial concepts that require special attention and new legal definitions.
What does overwhelming regulation look like?
Are there examples of countries currently having regulations in place to the detriment of cryptocurrency investors? India comes to mind. After flip-flopping on a concrete stance for several years, in early 2022 India opted for a 30% capital gains tax, with a 1% tax on every cryptocurrency transaction.
Creating the law is one thing, enforcing it is another. While Indian cryptocurrency exchanges may apply some of the withholding tax deductions, citizens transacting on the blockchain itself must take it upon themselves to report and remit taxes correctly.
A 1% tax on every cryptocurrency transaction is harmful. Every transfer, exchange, exchange and interest payment is subject to this 1% tax. It becomes a bureaucratic nightmare both for the investor to track and for the regulator to hold investors accountable. However, there are automated tax software such as Koinly that help investors track their transactions and calculate what they owe at the end of the year.
The reason this 1% tax is an overwhelming form of regulation is that it makes the use of cryptocurrencies very cumbersome from a paperwork and tax perspective. This massively discourages investors from starting to buy or use cryptocurrencies. And that makes using cryptocurrency as a medium of exchange unviable because the sender and the receiver would each owe 1% of the value of the transaction as tax.
Overwhelming legislation looks like heavy taxation, or an outright ban, which is the case in China. However, it is possible that the legislation will actually lead to a boon to the cryptocurrency industry, rather than a collapse.
This type of legislation is actually sought after because companies that want to operate in established financial capitals of the world need a framework to do so. When regulators define the rules that companies must follow, it creates clear guidelines that companies must follow. This reduces guesswork and overall risk for innovators creating products and services, and allows them to focus on building, instead of worrying about whether what they’re doing is legal or not.
From an investor’s point of view, it is useful to know that companies offering the possibility to buy digital currencies and financial products operate according to the law. Many investors can understand that regulators ultimately exist as supervisors who ensure that crypto companies such as exchanges do not profit or construct malicious financial schemes. This generally increases investor confidence in the industry and reduces panic selling.
So, in the short term, regulation may seem like the cryptocurrency industry is just another industry shrouded in bureaucracy. A longer-term perspective will show that reasonable regulation is actually healthy, both for investors and for businesses.
Will investors be overwhelmed by regulation?
The answer to this question depends on where in the world the investor lives. Each country will end up regulating digital currencies differently. Additionally, countries will end up handling different types of cryptocurrencies differently.
For example, some countries like El Salvador have already adopted a phased approach to regulation Bitcoin (BTC 0.79%), going so far as to make it legal tender. However, many countries tend to follow the more developed countries after taking a stand. So when the United States and the European Securities and Markets Authority create regulations regarding cryptocurrency, other countries and regions will likely follow.
The rules need to be flexible enough not to stifle innovation and true entrepreneurial value creation. They must also be rigorous enough to detect and quell any wrongdoing by bad actors.
From this perspective, it seems more like companies and institutions will be held to a higher level of responsibility and control than individual investors. As long as regulators don’t create authoritarian rules, investors seem to benefit.