Ever since the cryptocurrency fad caught on, governments across the world have struggled to regulate them, especially after Bitcoin’s price explosion last year. The upward spike and outrageous profits led many to refer to it as the future of money. But the subsequent price fall gave way to a sobering awakening about the volatility of the nascent industry.
Cryptocurrencies utilize underpinning blockchain technology, which makes them especially hard to monitor and control. The technology works as a digital ledger where all transactions are recorded, eliminating the need for a middleman.
For fiat currencies, verification is usually undertaken by regulated financial institutions and sometimes, authorized government institutions. In the case of cryptocurrencies, their lack of a central authority makes them particularly cumbersome to deal with for national regulators.
The following are some of the main reasons why governments loathe cryptocurrencies.
Cryptocurrencies Can Be a Threat to Financial Markets
In certain cases, governments have gone to extreme lengths to curb the crypto fever and completely banned cryptocurrencies. This is in an attempt to shield their economies from the bursts and bubbles that can be brought on by unregulated financial markets. In China, for example, its susceptibility to economic bubbles forced the government to ban Initial Coin Offerings and cryptocurrency trading.
The move was to prevent domestic crypto-investors from participating in the cryptocurrency market, which is unstable and unregulated. Moreover, such an ecosystem could negatively impact the national currency and facilitate to substantial capital outflows.
In September 2017, Chinese Yuan to bitcoin trades made up about 90 percent of all transactions. Unnerved by the huge volume of its currency on the market, the Chinese government outlawed cryptocurrency purchases and even imposed travel bans on crypto-exchange company execs.
Huobi and OKCoin exchange officials were among the most notable figures to be subjected to it, pending an investigation into the exchanges. In total, 88 crypto exchanges and 85 Initial Coin Offerings (ICOs) were forced to close down operations. The Chinese Yuan now accounts for approximately 0.0063 percent of all bitcoin trades thanks to the crackdown.
Iran has also banned cryptocurrencies in a bid to shield its currency and markets. The country is currently facing a flurry of economic sanctions imposed by the U.S. government, following the collapse of the Iran nuclear deal. Sanctions that had previously been lifted by the Obama administration were recently restored following a signed executive order by U.S. President Donald Trump.
In April, Iran banned cryptocurrency trading after a $2.5 billion capital flight. The situation was the result of a scramble by Iranians to acquire digital currencies when news broke out about pending sanctions. A cryptocurrency ban was imposed soon after to prevent badly needed fiat currencies from leaving the country.
The Cryptocurrency Market Is Rife with Hacks and Scams
It is no secret that the cryptocurrency world is rife with scams and hacks, and that glitch-prone exchanges have become a common target for hackers. According to Carbon Black, a cyber-security company, over $1.1bn worth of cryptocurrencies has so far been stolen in 2018.
One notable breach that recently triggered increased regulation by a nation was the Coincheck hack. It prompted Japan’s Financial Services Agency (FSA) to implement stringent Know Your Customer (KYC) and Anti-money Laundering (AML) laws. 523 million NEM (XEM) valued at $400 million, at the time, was stolen from the exchange. Most of it has reportedly been laundered, with the NEM Foundation officially calling off the chase.
Following the incident, the Japanese government also enacted a blanket ban on all private cryptocurrencies because of their pseudonymization features, which makes them hard to track and regulate. Affected digital currencies included Dash (DASH), ZCash (ZEC), Monero (XMR) and Augur‘s reputation token (REP).
Cryptocurrencies Are Hard to Tax
Taxation plays a huge role in modern economies. It is used by governments to generate revenues which fund its operations. They include the building of critical infrastructure, education, welfare, and defense. Taxation is also used by governments to reduce inequality and facilitate resource distribution. In summary, it is a major contributor to social stability and security.
On the other hand, cryptocurrencies were created to bypass government regulation and taxation. Some offer enhanced anonymization features that obscure transactions, making it hard to subject them to taxation.
The United States
Governments are working hard to crack down on tax-evading crypto-investors. The U.S. government, in particular, has made major strides in collecting cryptocurrency capital gains taxes. In February, it made a move on Coinbase, and the exchange immediately issued a notice to its customers informing them that personally identifiable records would be handed over to the IRS following a court directive.
The IRS is said to have initially asked for the records in November 2016 and was particularly interested in entities that purchased bitcoin between 2013 and 2015. Coinbase resisted the summons but was forced to comply after a San Francisco court ruling. Records of people who had completed transactions totaling over $20,000 were required.
According to the court document, only 800 to 900 taxpayers filed bitcoin trading returns between 2013 and 2015. This was way below the expected figure.
That said, not all governments have the mechanisms to follow up on such issues and many have outrightly banned cryptocurrencies to get rid of this headache.
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