Cryptocurrencies have inarguably captured the headlines in 2017. During the fourth quarter of the year, cryptocurrencies became one of the most widely traded assets on the planet. However, are they really assets? This question has been bothering users, regulators, investors, and everyone in between during the past couple of years. Cryptocurrencies are supposed to be forms of digital tokens that can be used as medium for exchanging value. Moreover, like every other currency, they can also be traded by the public.
Whether or not cryptocurrencies can be considered as assets, depends on your intention behind their purchase. If you are buying bitcoins for the sake of carrying out transactions and participating in the process of cryptocurrency development, then yes, cryptocurrencies can be considered assets. However, if you buy bitcoins, or any other cryptocurrency, for the sake of speculation, then no.
Cryptocurrencies represent a special breed of financial instruments that are assets, currencies, and collectibles all at the same time.
Cryptocurrencies rely on the blockchain technology, through which the transactions are secure, decentralized, and relatively untraceable. This causes a headache for regulatory and security bodies all over the world. A currency, or an asset, that has value and can be used to move money from one part of the world to the other without any trace is a security risk to government authorities.
There have been considerable concerns that cryptocurrencies are being used to launder in money, provide funding for terrorists, and perform other illegal activities.
Considering the situation, most of the world's countries opted out of accepting cryptocurrencies, as they considered them too dangerous and risky. Transactions that cannot be monitored obviously pose a risk for governments, as they are almost impossible to tax. China was one of the first countries to promulgate regulations against cryptocurrencies – banning all trading and exchanges that participate in the trading process.
To help you better understand the current regulatory environment regarding cryptocurrencies, let's go ahead and describe the stance of each major economic power.
Before all the recent regulatory crackdown, China boasted an impressive 70% of Bitcoin’s collective hash rate. What this means is that the Chinese were the most dominant Bitcoin miners, as the hash rate is a measure of how efficient a miner is in performing transaction verification processes.
However, the Chinese government has been lately tough on Bitcoin, very tough. It all started in January 2017, when China started investigating one of its biggest exchanges BTCC (Bitcoin Company). After that, China enforced a complete ban on Initial Coin Offerings (ICOs) in September of the same year. The ICOs were the bloodline of the crypto industry, and billions were raised from investors using this technique.
Bitcoin’s price suffered a bit, but the exchanges quickly shifted their operations to crypto friendly countries like South Korea and Japan.
The story doesn’t end here though, and just at the start of January 2018, the Chinese government announced that it will be taking action against cryptocurrency miners. Ministries including the Central Bank, the Central Credit Information Office, and the Ministry of Industry and Information Technology will initiate joint effort to halt all mining operations across China.
After USA and Japan, South Korea is currently the third largest crypto market. The market only grew further when China started cracking down on crypto exchanges towards the end of 2017. Many major exchanges shifted their business operations to South Korea owing to its neutral to somewhat positive attitude towards cryptocurrencies.
At the same time, South Korea’s government has also been trying to promulgate regulations against cryptocurrencies. Like every other government, the South Korean is also concerned about the decentralized and relatively untraceable nature of cryptocurrency transactions.
However, the efforts of South Korea’s regulatory bodies cannot be considered anti-crypto, as the government only wants to make the whole industry a bit safer. The Financial Services Commission (FSC) of South Korea released a new regulation that came into effect on January 30th. According to the new legislation, cryptocurrency exchanges have to have creators of new accounts use the exact names, associated with their bank accounts, to be allowed to trade on the exchanges' platforms.
This rule will allow banks to comply with the well-known Know Your Customers (KYC), Anti-money Laundering (AML) obligations. By linking the accounts with bank accounts, it gets easier to track black money, and the crypto market will automatically be cleansed from illegal funds.
The FSC stated in their document:
"[The new rules will] reduce room for cryptocurrency transactions to be exploited for illegal activities, such as crimes, money laundering and tax evasion.”
USA has been neutral when it comes to cryptocurrencies, but is planning on regulating the environment soon enough. US Treasury Secretary Steven Mnuchin, while talking to the Economic club of Washington on January 12th, explained that he is afraid of Bitcoin becoming the electronic equivalent of a Swiss bank account.
The secretary further explained that the US has an edge over other countries, as under US laws, crypto exchanges need to have the basic information of their customers. Mnuchin further stated that the Treasury can track these activities and is working closely with feds to ensure that it does not become a place to keep illegal funds.
Exact comments of Steven Mnuchin were:
“We can track those activities. The rest of the world doesn’t have that. We will be working very closely with the G-20 in making sure that this doesn’t become the Swiss bank account.”
One important factor to consider here is how the US will treat cryptocurrencies. If they will be treated as currencies, then it would be easier to trade them. However, if the US decides that cryptocurrencies are to be considered securities, then that would pose greater hurdles for traders.
As far as the Securities and Exchange Commission (SEC) is concerned, they have clarified in their statement that to date, no ICO was ever registered with the SEC. The commission has also not approved the trading of cryptocurrencies and their related assets.
The SEC has not specifically banned cryptocurrencies, but has advised investors to be wary of “too good to be true” investments in the crypto market. Moreover, the SEC has started taking action against fraudulent ICOs and arrested a few culprits through its new digital unit.
Stephan Barclay, the previous Economic Secretary to the Treasury (he was appointed as Minister of State for the Department of Health and Social Care on January 9th), explained in a written answer in November the government’s plan to regulate digital currencies. The exact response of Mr. Barclay was:
“The UK government is currently negotiating amendments to the 4th Anti-Money Laundering Directive that will bring virtual currency exchange platforms and custodian wallet providers into Anti-Money Laundering and Counter-Terrorist Financing regulation, which will result in these firms’ activities being overseen by national competent authorities for these areas. The government supports the intention behind these amendments. We expect these negotiations to conclude at EU level in late 2017/early 2018.”
There have been growing concerns in the UK parliament about cryptocurrencies' use in money laundering and other illegal activities. However, the Treasury clarified that there is almost no evidence that cryptocurrencies are being used for illegal activities right now, but the risk is growing day after day.
UK and EU may have many differences about other policies, but both are joining their efforts to regulate cryptocurrencies.
EU policy makers are set to further scrutinize bitcoin and other cryptocurrencies for a possible bubble. If such a bubble pops, then there is a risk that investors may lose all of their investments. UK’s watchdogs are constantly warning investors of the risks associated with the unregulated crypto market. UK’s Financial Conduct Authority has also released warnings related to ICOs, explaining that they come with a good chance of losing all invested amount.
The regulatory environment of cryptocurrencies is ever changing on even a daily basis. The UK and EU are expected to announce regulations related to cryptocurrencies by this year's fall, and it will be interesting to see how the industry will react to the new regulations.
Currently, South Korea is leading the way by introducing the most crypto-friendly policies and regulating the environment in such a way that only the good players are allowed to do business in this sector. The president of South Korea has clarified that his government will undoubtedly be regulating the industry, yet it does not plan on banning cryptocurrency trading.
South Korea has become the hub of the crypto industry after China started cracking down on the ecosystem. The US, UK, and other countries also recognize the benefits of the industry and admit that the blockchain technology harnesses revolutionary potentials. However, cryptocurrencies are occasionally met with resistance, as some countries are hesitant to accept such an untested technology.