Regulation is one of the key factors influencing the price of Bitcoin. The cryptocurrency’s growing popularity has been halted every time a government has taken action, and countries have taken different approaches to Bitcoin regulation.
For example, in November 2019, Bitcoin plummeted as China accelerated its crackdown on cryptocurrency companies. Conversely, whenever a regulatory “victory” emerges, prices temporarily increase. For example, in January 2024, after years of regulators rejecting Bitcoin Spot ETFs, Bitcoin Spot ETF approvals sent its price soaring to over $73,000 in the following months.
By their very nature, cryptocurrencies are free currencies, not dependent on national borders or specific agencies within a government. However, this nature poses a problem for policymakers who are accustomed to dealing with clear definitions of assets. Here are two unresolved questions regarding Bitcoin regulation.
Key takeaways
- Bitcoin regulation may vary at the national and local levels, depending on the country or geographic area.
- In the United States, the IRS treats cryptocurrency as property, while the CFTC considers it a commodity.
- Many cryptocurrency companies have attempted to avoid securities laws or requirements by claiming that their tokens are utility or transactional tokens rather than security tokens.
Who should regulate cryptocurrencies?
Nothing is more symptomatic of the confusion surrounding cryptocurrencies than their classification by U.S. regulatory agencies and the updates brought by former President Donald Trump’s tax reform law. The Commodity Futures Trading Commission (CFTC) treats bitcoin as a commodity, while the Internal Revenue Service (IRS) treats it as real estate.
There is also a disparity in state and federal responses to cryptocurrencies. While states have moved quickly to formulate rules for initial coin offerings (ICOs) and smart contracts, federal responses have generally been fueled by the interpretation of existing laws in relation to how cryptocurrencies are used. For example, New York cryptocurrency startups must obtain a BitLicense, which has strict disclosure requirements, before an ICO. Similarly, Arizona recognizes smart contracts. However, as of March 2024, Congress had not passed any legislation to guide regulators, although there have been several attempts.
How should cryptocurrencies be regulated?
The unique characteristics and global portability of cryptocurrencies present another problem for regulators.
For example, there are four main different types of tokens traded on exchanges: transactional, utility, security, and governance tokens. As the name suggests, utility tokens serve an underlying function on a platform. For example, ether (ETH) is used on Ethereum to pay transaction fees and as collateral to participate in blockchain processes and earn rewards.
These tokens are not subject to SEC rules unless they are used as securities. In contrast, security tokens represent equity or a share in a company and automatically fall under the SEC’s jurisdiction. Governance tokens grant holders specific rights over a blockchain, and transactional tokens are designed to be used only in financial transactions.
Unsurprisingly, several tokens have circumvented existing regulations by declaring themselves utility-based. These startups have been publicly reprimanded, but that hasn’t stopped tokens with questionable business models from being listed on exchanges outside their home countries.
In response, international agencies such as the International Monetary Fund (IMF) have called for international discussion and cooperation among regulators regarding cryptocurrencies. The EU, which has welcomed the cryptocurrency revolution, may have an advantage over other territories because it controls a 28-member bloc. In June 2023, the EU’s Markets in Crypto Assets (MiCA) regulation came into force. MiCA defines crypto assets and how they should be regulated in the Union. This legislation addresses how cryptocurrencies should be regulated in the EU, but the US and other countries are still working on solutions. Some countries have banned cryptocurrencies entirely or partially.
Create regulation for cryptocurrencies
On his Twitter page, Marco Santori, former head of law firm Cooley’s blockchain practice, called bitcoin a “legal platypus” that doesn’t fit neatly into established asset classes. However, the platypus may not be such a big problem for tax or revenue purposes in the United States.
Bitcoin and cryptocurrencies are no different than cash, stocks, bonds, or other financial instruments: they can represent the same things. In the United States, there are already regulations that can apply to how an investor, business, or consumer treats them. Perhaps it would be enough to create definitions and apply them to these virtual assets for regulatory purposes, as is already the case.
Regulators may look to Asia for guidance
Some countries, particularly in Asia, are showing early signs of how they might handle cryptocurrencies. Japan may be the first country to give a clear indication of the region’s future regulatory policy. It officially recognized cryptocurrencies as a good in its Payments and Services Act and developed a framework in 2017.
Startups planning an ICO must also obtain a license that establishes a minimum set of requirements and disclosures for the offering. Finally, exchanges are also subject to capital requirements, strict IT compliance controls, and KYC (Know Your Customer) regulations. To make these changes, Japan had to amend its Payment Services Act. Admittedly, the task is much easier in Japan since the country only has one agency, the Financial Services Agency, to operationalize the changes.
South Korea plans to tax all cryptocurrency profits above 2.5 million South Korean won at 20%, a move expected to take effect in 2025.
Will the SEC regulate Bitcoin?
The Securities and Exchange Commission (SEC) regulates assets that it considers to be securities. It does not yet regulate Bitcoin, but it does regulate investments or derivatives related to Bitcoin.
Will Bitcoin Survive Regulation?
Bitcoin has survived many regulatory changes so far, likely due to the cryptocurrency community putting pressure on governments and regulators and taking steps to avoid regulation. If this situation continues, Bitcoin will likely survive as long as it has the support of users who communicate with their legislative representatives.
Is Bitcoin legal in the United States?
Yes, Bitcoin is legal in the United States, but it is not recognized as legal tender, meaning it is not backed or supported by the US government.
The essentials
Bitcoin regulations vary from country to country, if they exist at all. But one thing is for sure: developed countries with financial services regulators are likely to develop regulations on cryptocurrency-related activities to protect the interests of consumers and governments and combat illegal activities.
The comments, opinions and analyses expressed on Investopedia are provided for informational purposes online. Read our disclaimer and warranty for more information. As of the date of this writing, the author holds BTC and LTC.
