How Government Regulation Will Change The Way You Invest In Cryptocurrencies

[Ozark]

(Disclaimer: Author holds investments in bitcoin.)

The launch of Bitcoin was supposed to be a declaration of independence. It was the people telling the government that we now had the technology to create our own currency. We didn’t need a central bank to tell us how much interest to pay or to set the rules for capitalism. We’d determine for ourselves how quickly the money supply grew and let the blockchain do its thing.

It hasn’t quite worked out that way.

Governments around the world soon started taking in interest in what was happening in the crypto scene, and they’ve been drawing up their own plans to regulate it ever since.

There are three reasons that regulators want to place rules on the use of cryptocurrencies.

The first is to prevent money-laundering. Many of Bitcoin’s first advocates were merchants on the Dark Web who saw a way to buy and sell illegal goods without leaving a money trail. That use of bitcoin soon spread to money laundering. Between 3% and 4% of all the money made by criminals in Europe is believed to be converted into cryptocurrencies to hide its origins. That could amount to as much as $5.6 billion.

Regulators also want to protect buyers. Companies that sell shares or look to win investors have to open their books and tell the public who they are, what they’re doing and how much they own. They’re required to supply a certain amount of information so that investors aren’t defrauded and can know exactly where their money is going as they use it to help entrepreneurs and share in the profits.

And regulators also want to protect the financial system. Taxpayers bailed out banks after the last economic crash because the alternative would have been a deeper and longer recession. If the public has to be the lender of last resort, they get to make demands in return for their guarantees. Governments want to be sure that the collapse of a cryptocurrency financial institution, like Mt. Gox, can’t cause such great harm that they have to intervene.

The challenge for regulators is to meet those requirements without laying down so many rules that they stifle creativity and limit the growth of blockchain-based businesses. They haven’t been successful everywhere. China has opted for a complete ban on ICOs, a way of protecting investors that blocks a very useful fundraising tool. Switzerland is moving toward a complex system that regulates cryptocurrencies based on their use. Different regulations will apply to coins exchanged as currencies, held as an investment or used as tokens. The same altcoin could face different rules at different times. In the United States, the Federal Exchange Commission appears to be preparing to consider cryptocurrencies as securities, with all of the reporting requirements that entails.

However the regulations end up developing, we investors can be sure of a number of things.

First, the regulations will come. Nature abhors a vacuum and governments hate things they can’t control. They will be rolling regulations into the crypto space, and those regulations will affect to some extent how you do cryptocurrency business.

That’s likely to be most apparent on the exchanges. Most exchanges already apply "know your customer" rules to account holders. Users have to upload photo IDs and prove who they are. On some platforms, access to functions depends on the steps taken to prove identity: The more information a user provides about themselves, the more they can do on the exchange. We can expect those voluntary standards to become requirements, and the only people they should bother are criminals and money launderers.

The second thing we can be sure of is that there will be more taxation, partly because there’s always more taxation but also because as governments find ways to classify cryptocurrency holdings and measure the profits made on sales, they’ll come up with rules to take an increasingly large share of those profits.

But the third change that regulation will bring to cryptocurrencies is positive. It will create trust. When investors know that an ICO is regulated, they’ll feel more confident about buying the coins. When they know that exchanges have to keep a certain amount of capital on hand or take particular steps to safeguard holdings, they’ll feel easier about keeping their coins there. When they know that money launderers have been kicked off the exchanges, they’ll feel easier about making transfers.

The result of that increased trust will be an influx of bigger money. Investment funds have shown interest in putting their money in cryptocurrencies, but as long as the environment feels like the Wild West, they’ll stay away. That keeps large funds out of cryptocurrencies. As regulations make it a more lawful place, we can expect those large funds to start buying up coins. Initially, that will put up prices. The prices will jump when a new regulation is announced, and they’ll keep rising as funds increase demand. Eventually, though, they’ll settle down as those big holdings bring more volume and greater stability to the market.

Government regulation isn’t a phrase that’s likely to warm the heart of any entrepreneur, but for cryptocurrency investors, it might mark a new, more profitable and more stable period.

SOURCE

[cowz]

Tax payers bailing out the banks is the main reason why bitcoin was created. The government should not use it as an excuse, crypto doesn't need them to bail it out, quite the opposite with America's multi trillion dollar debt