Crypto regulation prediction in 2022

2022-03-15, 05:46

[TL;DR]

1. Why do legislators call for regulation?
2. What regulations on cryptocurrencies do US lawmakers want to put in place in 2022?
3. Three predictions for cryptocurrency regulation in 2022

Regulators are responding to the rapid growth of cryptocurrency markets, but cryptocurrency exchanges must also build oversight into their infrastructure to ensure market integrity.

2021 was the year that cryptocurrencies truly entered the mainstream. Previously foreign terms such as "bitcoin" and "NFT" entered the domestic lexicon, and news story after news story explored what these trends might mean for the future of investing, banking and the stock market. Legislators in the US and around the world have sometimes struggled to keep up with the rapidly changing landscape. Although one of the fundamental tenets of cryptocurrency is its decentralised and so far unregulated nature, lawmakers and government agencies have unveiled a series of policies and plans that they believe will protect investors and limit cryptocurrency-related crime.

Regardless of their stance on the need for these regulations, it is clear that the evolution of the market will require investors to rethink their strategies and potentially change their behaviour to comply with new laws and government policies.

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Why do legislators call for regulation?

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Blockchain, the underlying technology that allows cryptocurrencies to exist, is well known for its security and supposed "tamper-proofness". Its distributed and chained nature makes it one of the most secure ways to store data, if not the most secure. However, the lack of a centralised institution or government supporting this system has made it vulnerable to bad actors who can exploit their anonymity.

Ransomware attacks are a well-known example, with attackers demanding payments in bitcoins in order to remain untraceable. One such attack targeted the United States Colonial Pipeline, causing a rush to the pumps as consumers worried about a possible gasoline shortage. Other illegal activities using cryptocurrencies, such as tax evasion, are becoming increasingly difficult for authorities to detect, leading to the series of bipartisan regulatory proposals we see today.

What regulations on cryptocurrencies do US lawmakers want to put in place in 2022?

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Cryptocurrency investors are currently required to report their taxable transactions on their federal tax returns. If you are not an investor, you may be surprised to learn that the Internal Revenue Service (IRS) began monitoring this industry in 2014. Non-fungible tokens (NFTs) are subject to the same tax laws as fungible tokens, with profits from their sale or trade subject to capital gains tax.

In 2022, the US government is expected to reduce the regulatory uncertainty surrounding cryptocurrency traded funds. (ETFS). The SEC has yet to approve any cryptocurrency ETFs, although it has received 12 applications in 2021 alone. ETFs are index funds that can be bought and sold like stocks. In the cryptocurrency world, they allow for diversification of ownership and are far more convenient than buying coins directly from an exchange. With SEC approval, the general public could include cryptocurrencies in their investment strategy without needing direct knowledge, in the same way that many people entrust their investment accounts to large firms like Fidelity and Vanguard.

Three predictions for cryptocurrency regulation in 2022

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- The first target will be stable currencies

Stablecoins will certainly be the first target of any regulation, as they are the most accessible form of cryptocurrency and the most perceived threat to consumers, due to the potential loss of value or access to the initial investment. Stablecoins, on the other hand, are a type of cryptocurrency that is issued and traded on blockchains and is linked to a "stable" asset such as gold, reserve currencies or government bonds. Because of its resemblance to a tangible asset, this digital currency is supposed to be less volatile and more secure than other crypto-assets.

Politicians are concerned about stablecoins for the following reasons:

- A drop in the value of the anchored asset could make it impossible for stablecoin issuers to meet holders' redemption requests.
- The complete lack of safeguards for investors, such as FDIC insurance in case of loss.
- Some stablecoins are vulnerable to liquidations by investors who empty their accounts in a single transaction. This phenomenon is analogous to a "bank run", in which lending institutions have only a percentage of total assets, but fearful investors rush to withdraw funds, causing economic turmoil.
- Some stablecoins are backed by commercial bonds, which can lose value or prevent investors from withdrawing funds.

Finally, stablecoins may be perceived as competing with the US dollar, which could jeopardise the use of the greenback and its status as the world's reserve currency. In addition, regulations on stable currencies could easily fall under the Fed's purview, and legislators want to focus their regulatory firepower on stable currencies first, in order to protect their turf.

- Existing regulations will be enforced by the regulatory bodies.

This question is not too difficult to understand: Fed, SEC and Treasury officials have all said that this is what they intend to do. In a recent interview with Bloomberg, for example, an undersecretary of the Treasury publicly urged Congress to act quickly to regulate stablecoins because of the risk they pose to the U.S. economy and individual investors.

"If Congress doesn't enact legislation, the regulators [SEC, Fed, Treasury, etc.] will try to use the authority they have," Nellie Liang, Treasury undersecretary for domestic finance, said in an interview. "They can do a little bit here and there, but if these are fundamental to crypto-assets and are not stable, that could potentially be a big risk."

Democrats, meanwhile, are likely to see losing control of one or both houses of Congress as an even bigger risk. And, because cryptocurrencies are not a major campaign issue that motivates people to vote, we could see much more of the same in terms of cryptocurrency regulation until after this year's election cycle.

- Competing priorities will hamper Congress' ability to act.

Lawmakers met for the second half of the 117th Congress, with a number of other issues requiring their attention. The Democrat-controlled legislature is debating a number of policy priorities, including approving a scaled-down version of President Biden's "Build Back Better" programme, raising the debt ceiling to keep government credit lines open and passing a controversial voter registration reform bill. However, they are running out of time before the November mid-term elections.

The stakes are high. The only significant achievement Congress can boast in the past year is the bipartisan $1.2 trillion infrastructure bill. So far, their more progressive initiatives have fallen by the wayside. The lack of major legislative items is likely to translate into poor polling results.

Conclusion

While US lawmakers have expressed optimism about the widespread adoption of cryptocurrencies, some countries have jumped the gun, such as El Salvador, which became the first country to adopt cryptocurrencies as legal tender in 2021. Hong Kong's central bank has also announced its intention to study the adoption of a digital currency, while other countries such as Dubai, Gibraltar and Malta are positioning themselves as crypto hubs.

On the other hand, some countries have slowed down the development of cryptocurrencies, citing the unknown nature of the new technology. China, for example, has announced plans to crack down on bitcoin mining from May 2021, and members of the Indian government have introduced bills to ban all private currencies. These measures have underlined the importance of global oversight of these deregulated platforms that easily cross borders. Chinese mining companies have relocated to more welcoming shores such as North America and Kazakhstan, calling into question the effectiveness of national policy decisions.

The Global Financial Action Task Force has urged nations to work together to implement global standards, such as the travel rule, which would prevent jurisdictional arbitrage. The rule would require cryptocurrency companies to share specific customer information as part of a transaction. Countries such as the US, Switzerland and Singapore have already implemented the travel ban, with more countries expected to follow by 2022.

Author: Victor KOMBOU, Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
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