Whether cryptocurrency investors like it or not, regulation is helping to shape the direction of the budding crypto industry. The question is whether or not regulations will have a detrimental effect on investors. In many places in the world, cryptocurrency sits in a legal gray area, either lacking regulation, or inheriting rules pertaining to stocks, commodities, or securities.
However, cryptocurrency might sit in an asset class of its own. Michael Novogratz, CEO of Galaxy Digital believes that crypto does constitute its own asset class. The reason is that existing frameworks fail to account for the nuances embedded within cryptocurrencies of all kinds. Hard forks, airdrops, staking, and block rewards are all novel financial concepts that require careful attention and new legal definitions.
What does crushing regulation look like?
Are there currently any examples of countries that have implemented regulations to the detriment of cryptocurrency investors? India comes to mind. After flip-flopping on a concrete stance for several years, in early 2022, India settled on a 30% capital gains tax, with a 1% tax on every cryptocurrency transaction.
Creating the law is one thing, enforcing it is another thing entirely. While Indian cryptocurrency exchanges can enforce some of the at-source deductions, citizens transacting on the blockchain itself must take it upon themselves to correctly report and remit taxes.
A 1% tax on every cryptocurrency transaction is damaging. Every transfer, trade, swap, and interest payment is subject to this 1% tax. It becomes a bureaucratic nightmare for both the investor to keep track of, and the regulator to hold investors accountable for. However, there are automated tax softwares such as Koinly that help investors keep track of their transactions and calculate what they owe at the end of the year.
The reason this 1% tax is a crushing form of regulation is because it makes using cryptocurrencies top-heavy from a paperwork and tax perspective. It creates a massive disincentive for investors to ever start buying or using cryptocurrencies. And it makes using cryptocurrency as a medium of exchange unviable as the spender and receiver would each owe 1% of the transaction value as tax.
Supportive cryptocurrency regulation
Crushing legislation looks like significant taxation, or an outright ban, which is the case within China. However, it is possible that legislation actually leads to a boon in the cryptocurrency industry, rather than a bust.
This type of legislation is actually sought after, as companies that wish to operate within established financial capitals of the world need a framework to do so. When regulators define the rules for companies to abide by, it creates clear guidelines for companies to adhere to. This reduces guesswork and overall risks for innovators creating products and services, and allows them to focus on building, instead of worrying about whether or not what they're doing is legal.
From an investor's perspective, it helps to know that the companies providing the ability to buy digital currencies and financial products are operating in accordance with the law. Many investors can appreciate that regulators ultimately exist as overseers that make sure crypto companies such as exchanges aren't taking advantage of them or building 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 sector that is wrapped in red tape. A longer-term perspective will show that reasonable regulation is actually healthy, both for investors and companies.
Will investors be crushed by regulation?
The answer to this question depends on where in the world the investor lives. Every country will end up regulating digital currencies differently. Additionally, countries will end up handling various types of cryptocurrencies differently.
For example, some countries such as El Salvador have already taken a progressive approach with respect to regulating Bitcoin (BTC 0.76%), going so far as to make it legal tender. However, many countries tend to follow the more developed nations after they've taken a stance. So when the United States and the European Securities and Markets Authority create regulations around cryptocurrency, other countries and regions are likely to follow.
The rules need to be flexible enough not to stifle innovation and genuine entrepreneurial value creation. They also need to be stringent enough to detect and snuff out any wrongdoing by bad actors.
From this perspective, it looks more like companies and institutions will be held to a higher level of accountability and scrutiny than individual investors. As long as regulators don't create overbearing rules, it appears that investors stand to benefit.
