Economics

Is It Possible for Governments to Start Regulating Cryptocurrency Exchanges?

The craze of cryptocurrencies has spread like wildfire. Even the experts of finance could not have predicted this kind of surge in this market, let alone the Governments of the countries across the world.

Is It Possible for Governments to Start Regulating Cryptocurrency Exchanges? 06.01.2018Leave a comment

With prices of cryptocurrencies going vertical, the people who own them are now super-rich. Someone who bought $5 worth of bitcoins in 2011 is a millionaire today. The point is that cryptocurrencies have now become valuable assets and they are only growing.

Bitcoin price
Bitcoin price

This means that cryptocurrency transactions now cause a major movement of money, which can affect entire countries’ economies. Given the rising influence of cryptocurrencies, countries are now considering the idea of regulation the cryptocurrency exchanges.

But, is it even possible? Let’s find out.

Why Do Governments Want the Regulation?

Why do governments introduce regulation in any industry? Without any set of rules to stick to, there can be complete chaos. Governments have to have rules and regulations for every industry to maintain a level of control, and for the ease of administration.

But, it is the level of regulation and how grounded it is in the reality that decides whether it will lead to better control or just further fuel the black market. Here are some of the goals that the world governments are trying to achieve by regulating the cryptocurrency market.

To Track Transactions

Physical cash is not a favorite among policymakers because it is not easy to track. If two individuals are entering a trade and are only dealing in cash, then it is a transaction that the government cannot track. They want people to use debit cards, credit cards, online transactions, and the like, all of which can be easily tracked and recorded.

With people like Edward Snowden bringing out the truth about the age of surveillance the citizens live in, it is clear that the Governments like to know everything about everyone. But, cryptocurrencies, especially the likes of Bitcoin and Monero that are completely anonymous are a nightmare for Governments. They cannot know who is earning what kind of money, who is entering a trade and worth how much.

Monero, Ethereum, Litecoin

While electronic transactions are a part of the solution for the problem, most cryptocurrencies are not easily traceable. They are more like an alternative to cash. With regulation in place, governments can make cryptocurrency transactions more transparent and hence, easy to track.

To Protect the Citizens

Any unregulated market, whether it is the cryptocurrency market or any other, is not very safe for anyone to invest in. It is a breeding ground for scammers. Let’s understand this with an example. You buy share of the ABC company from a stock market.

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But, after taking the money, the exchange does not transfer any shares to your account. In this case, you can file a case of fraud against the exchange and the company with the market regulator in your country. They will be punished and you will be able to recover your money.

In the case of cryptocurrencies, the exchanges are running without any regulation. Hence, if you buy a cryptocurrency from an exchange and are cheated, your money is gone. There is no regulation, so you cannot go to any regulator for help. With introduction of regulation in the market, the trust quotient in the cryptocurrency market will certainly go up.

To Create a New Source of Revenue

This also figures into the whole citizen welfare agenda of the Government. When the government is not able to regulate trade in a market, they have no way to trace the transactions that are happening there. This means that the government also cannot levy any kind of service charge or a tax on those transactions.

Lesser tax dollars mean lesser money to spend on the various programs of the government. With Bitcoin on its way to become a common form of transaction, there is an urgency to create proper regulations which can not only monitor, but also tax those transactions.

To Chase Criminals

The anonymous nature of transactions in the world of cryptocurrency not only helps people to evade taxes, but also makes it a haven for criminals. Any kind of illegal activity can be funded using this channel of money transfer. This makes the work of law enforcement agencies very difficult.

Moreover, unlike cash, with cryptocurrencies there is no need for the parties involved to come in physical contact. This will only become a bigger and bigger nuisance for governments to deal with in the future.

Is It Possible?

It is very interesting to understand that even with the will of the government to introduce regulation in this market there is a high probability that it might not be possible to put such regulation in place. But, what are the impediments that stand in the way of the government. Well, here are the top picks.

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The Area of Jurisdiction

This is the biggest problem in the face of the government when it comes to the regulation in the cryptocurrency market. Now, the jurisdiction of any government is determined by the land that comes under the control of the state. A cryptocurrency user might be a resident in the UK, but they might be conducting their business in Vietnam.

The regulations of which country will apply to such an individual. Let’s say the cryptocurrency is banned in Vietnam, but it is completely legal in the UK. Will the businessman still be arrested? What about if the coins are held in an exchange in Russia. How will his assets, which let’ say exist only in cryptocurrencies, will be confiscated? This is not an easy puzzle to resolve.

International Collaboration

Regulating any cryptocurrency means collaborating on an international scale. To create any kind of policy for or against the cryptocurrency market the countries will have to work together. A lot. The thing is that international diplomacy is pretty complex, and it will not be possible for high-ranking executives from both sides to sit over every single legal complication arising out of the millions of transactions.

Understand it this way. There is no doubt that global warming can potentially eradicate humanity. But, the world governments still cannot find a way to work together.

Conflict of Interest

Let’s say by some miracle world governments do come together to work on cryptocurrency regulation. But, how will they resolve the conflict of interest. Cryptocurrency market is worth billions of dollars today. This means that any kind of movement in these markets has the potential to take down whole economies.

What will happen when enforcing a regulation is going to benefit one country, while tearing apart the economy of another? The countries will start following regulations whenever it suits them. This will become another UN-like organization, which can bring countries together, but cannot enforce it. At that point, any regulation is as good as no regulation.

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Implementing the Rules

The one option that the countries do have is banning cryptocurrencies all together. That’s one solution, but it is not really implementable. Currently, cryptocurrencies work without regulations. They are making people rich and the transactions are anonymous.

So, even if the government knows about a transaction, they will not be able to pinpoint it to one person. There is already a cryptocurrency like Monero that is completely untraceable. And the technology will only get better in the future.

Even then, let’s consider than the crypto coins do get banned. And somehow they are able to trace it to a person who is trading in Bitcoin, let’s say. The policeman who goes out to arrest the suspect will be offered a very handsome bribe. Why stop there? The Bitcoin investor is not paying any taxes, so they have their income in entirety. What is stopping them from bribing the head of the station, the head of the police, or even the head of the state? Nothing.

So, everybody till the top dog in the chain of command will have their pockets filled with bitcoins. Even if there is an international understanding that bitcoins should be banned, it cannot be banned. This kind of regulation is only going to fuel the corruption in the country, which cannot be good for any nation.

Conclusion

So, will the cryptocurrency market never be regulated? It is hard to say right now. When coins made out of precious metals like gold and silver were exchanged with paper currency, it would not have been easy. It took hundreds of years for the new currency to be completely accepted.

It may take a shorter while for cryptocurrencies to be accepted, but it will still take considerable time. How the world governments will be able to build any kind of regulatory framework for the cryptocurrency market still remains to be seen.

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