What are Some Current Trends in Cryptocurrency Regulations?

2019 has been a formative year for cryptocurrencies. A torrent of institutional investment has reinforced the sense that digital assets are about to become much more prevalent in banking, governance and consumer retail. Crypto has historically been plagued with uncertainty over regulations – and while that’s hardly changed, there are a number of trends that point to a more coherent regulatory landscape in 2020.

More collaboration

One of the biggest concerns in the crypto industry is whether regulation and compliance will sacrifice consumer benefits like safety and transparency and stifle innovation.

While a few countries such as India and China have taken a very strong stance against cryptocurrencies, most regulators are now choosing caution over hostility. Regulatory sandboxes are cropping up around the world in an effort to develop the industry in a more collaborative manner.

Clearer tax guidelines

In the US, it is expected that the Internal Revenue Service (IRS) will soon release new tax guidelines for cryptocurrency holders. While it’s still uncertain when this will happen, it will be the first time since 2014 that the tax collector updates its guidelines on cryptocurrencies.

In July, the IRS sent a series of “educational letters” to more than 10,000 US crypto traders, asking them to verify if they correctly filed their taxes on crypto gains and losses. For example, one of these notices reads:

We have information that you have or had one or more accounts containing virtual currency and may not have met your U.S. tax filing and reporting requirements for transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies. Virtual currency is considered property for federal income tax purposes.

US traders are now being advised to look at the exact date and time they conducted a transaction as opposed to applying what in 2014 was ambiguously termed “the exchange rate, in a reasonable manner that is consistently applied”.

There are still many unanswered questions, such as whether airdrops or withdrawals based off losses will be treated as income, but any step towards clearer tax guidelines is a step in the right direction.

In the UK, HM Revenue and Customs recently asked major crypto exchanges to disclose information about their customers and in Australia, tax authorities will start collecting bulk records from third party cryptocurrency data providers in order to ensure residents are paying the right amount of tax.

Decoupling clean crypto from black market crypto

The Financial Action Task Force (FATF) is an independent inter-governmental body that sets global recommendations for anti-money laundering (AML) and counter-terrorist financing (CTF) policy. Earlier this year, finance ministers and central bank governors at the G-20 summit in Japan reaffirmed their commitment to implement FATF standards for virtual assets. Applied to cryptocurrencies, this could mean an end to anonymity.

In June, the FATF published a guideline detailing how crypto markets ought to be regulated. One recommendation was that whenever a user on one exchange sends cryptocurrency exceeding 1,000 USD in value to a different exchange, the first exchange must “immediately and securely” share information about both the sender and the recipient to relevant authorities upon request.

The jury is out on this one. Any exchanges that don’t comply with these standards could automatically be labelled “black market”. Some argue that banking-style regulations could push more people away from trusted exchanges and towards direct peer-to-peer transactions, resulting in less transparency.

But the fight against money laundering and terrorist financing cannot be separated from the question of anonymity. Similarly, the European Union’s regulatory framework states that “[t]he key issue that needs to be addressed is the anonymity surrounding cryptocurrencies.”

Genuine interest from up top

One promising outcome from the G-20 summit is that world leaders made it clear “crypto-assets do not pose a threat to global financial stability” and “[t]echnological innovations can deliver significant benefits to the financial system and the broader economy”.

Despite regulatory uncertainty in many regions, there are also a number of promising developments that show governments are approaching cryptocurrencies with fresh eyes.

The WEF’s Head of Blockchain recently commented:

We may be moving beyond the hype, but blockchain isn’t going away. Central banks are experimenting with digital currencies and supply chain networks are piloting blockchain policies. We are also seeing companies like Facebook and Starbucks entering the blockchain and cryptocurrency space. This means practical use cases of the technology will become more widespread.

Even attention – albeit negative – from US President Donald Trump has received mild delight from the crypto world as it signals a shift in public rhetoric from cryptocurrencies being seen as “esoteric internet money” to a legitimate disruptor of the global financial system.

The debate over Facebook’s Libra is another catalyst for more defined regulation. Although pundits argue the tech giant’s digital money can hardly be categorized as a real cryptocurrency, the reality is that what gets decided for Libra will have ripple effects for all cryptocurrencies.

Global precedent is also being set in small ways, such as New Zealand recently legalizing salaries paid in cryptocurrencies in its latest tax information bulletin.

Conclusion

Many countries are choosing to work with the crypto industry and not against it. As money from capital markets continues to flow into digital assets, regulation will have to catch up in order to match a rapidly growing and maturing industry.