Cryptocurrencies, which were once obscure and mainly used to fund illegal operations, have become mainstream. Cryptocurrencies are a sort of virtual currency that validates and secures transactions using cryptographic methods.
A distributed ledger, such as a blockchain, is used to record the transactions digitally. Governments worldwide are taking notice as more people invest in and trade cryptocurrencies.
While El Salvador made Bitcoin legal tender in September 2021, other countries, such as China, outright ban private cryptocurrencies. India has rejected Bitcoin’s application for legal tender status. It is said to be working on a Cabinet note to regulate an official central bank digital currency (CBDC) while prohibiting private cryptocurrencies.
The Impact of Cryptocurrency Regulation on the Market
Firstly, the market reacts most strongly to news about the legal status of cryptocurrencies. Aside from general prohibitions on their usage in financial transactions, news stories on their possible treatment under securities market law and events specifically stating that cryptocurrencies will not be treated as currency have had a significant negative impact.
News of new legal frameworks for cryptocurrencies and initial coin offerings (ICOs) coincides with robust market gains.
Second, regulatory changes like anti-money laundering/counter-terrorist financing legislation and prohibitions on cryptocurrency’s interaction with the regulated financial system have a detrimental impact on cryptocurrency markets.
Third, general warnings from authorities have little impact, and news about the possibility of central bank digital currency (CBDC) issuance has no effect. Finally, pricing disparities between jurisdictions can be significant, implying market segmentation.
The market disruption caused by bitcoin regulation also puts a lot of strain on cryptocurrency exchanges, which are the critical source of cryptocurrency liquidity.
It also puts a lot of strain on bitcoin miners, who use their computing power to validate transactions and generate new coins.
What are the Current Cryptocurrency Regulations?
Several state governments have proposed and passed legislation relating to cryptocurrencies and blockchain technology, with the legislative branch handling most of the work.
At the state level, there have historically been two regulatory approaches. First, some states have attempted to encourage the technology by enacting legislation that exempts cryptocurrencies from securities and money transfer rules.
These states aspire to boost local economies and improve public services by leveraging technological investment. Wyoming, for example, has been highlighted as a state wanting a more significant economic influence.
Colorado is another state where a bipartisan bill exempting cryptocurrency from state securities restrictions was enacted. Ohio became the first state in the United States to accept cryptocurrencies as payment for taxes.
Oklahoma has introduced legislation allowing cryptocurrencies to be used, bought, sold, swapped, and accepted as a monetary value instrument within the state’s government institutions. On the other hand, Iowa has submitted legislation prohibiting the state and its political subdivisions from taking cryptocurrency payments.
At least ten other jurisdictions, including Maryland and Hawaii, have issued cautionary statements about investing in cryptocurrencies.
Some argue that we should regulate cryptocurrencies since they are a type of currency that requires government oversight. However, others say that cryptocurrencies should not be controlled because they are decentralized and unregulated, allowing them to function freely.
