The Impact of Regulatory Developments and Government Policies on the Crypto Industry

Cryptos and related products have attracted regulatory scrutiny worldwide, yet regulating an industry that spans multiple sectors poses many difficulties.

Different agencies have conflicting frameworks and objectives – some prioritize consumer protection while others aim for financial stability and integrity – making a unified regulatory framework difficult to establish.

The US Treasury

Regulatory developments and government policies continue to have an impactful influence on the cryptocurrency industry. After more than a decade of expansion, its $1.7 trillion market remains subject to extreme volatility due to underdeveloped federal regulatory oversight resulting in frequent headlines about fraud and malfeasance, prompting some observers to ask whether an overhaul is necessary. Government regulation could help tame cryptocurrency markets’ “Wild West” nature while simultaneously discouraging criminal actors from using cryptocurrency technology for illegal purposes and protecting digital wallets holding cryptocurrency holdings against misuse by illicit actors as well.

Congress leaders and federal regulators have shown keen interest in the cryptocurrency industry, publishing reports and recommendations that have often been considered controversial. Federal agencies have taken enforcement actions against cryptocurrency firms with no apparent links to financial crime; while White House officials have launched their own reports but have yet to implement any policy changes related to cryptocurrency.

The Treasury Department has taken an aggressive stance toward regulating the crypto industry. In 2022, they conducted a comprehensive risk evaluation and reported significant money laundering and terrorist financing risks associated with crypto assets. Furthermore, coordination between regulatory partners was improved while monitoring of digital asset sectors continued; any gaps found will be identified for legal, regulatory, and supervisory regimes; in addition, investigations of illicit financing through decentralized financial technologies will also continue.

In July, the Treasury Department made public its intent to increase dialogue with crypto firms and increase efforts to ensure they understand their existing anti-money laundering and countering terrorist financing (AML/CFT) obligations. They will also encourage private sector innovation by developing tools and techniques which reduce AML/CFT risk exposure.

The administration is also exploring a plan for a central bank digital currency (CBDC), though details remain undetermined. They expect it to launch within five years but this requires cooperation from federal and state regulators.

The UK

Cryptocurrencies are digital forms of currency intended to circumvent limitations associated with traditional money and financial transactions. While Bitcoin is perhaps best-known among these, there are over 22,000 different cryptocurrencies or “coins.” Cryptocurrencies provide individuals and businesses with a secure, decentralized method for sending funds without incurring fees from banking institutions.

The UK government aspires to become a world leader in crypto and blockchain technology. Already it has unveiled plans to support new type of cryptocurrency called stablecoins as well as opening a consultation on regulatory framework for this sector. Their latest proposals seek to tighten regulation on crypto assets in order to safeguard consumers while encouraging innovation and increasing investor trust.

These new rules will require firms that trade regulated cryptoassets to register with the Financial Conduct Authority (FCA). Firms must submit details about their operations, services and business plans; as well as key staff identities and security arrangements. Furthermore, firms may need to conduct risk analyses that identify money laundering and terrorist financing risks; additionally they will be expected to implement policies and procedures to mitigate those risks.

However, it remains uncertain how these changes will impact the cryptocurrency industry. Some fear that stringent regulation may make it harder for legitimate businesses to compete with less regulated counterparts; others maintain that stricter rules will not only safeguard investors but also encourage innovation and bring legitimate crypto companies into the UK.

Furthermore, the British government has taken steps post-Brexit to bolster its financial sector. This can be seen through laws introduced which will enable the country to compete with EU financial hubs; furthermore, a second phase of rulemaking regarding cryptoasset regulation will soon commence.

The proposed regulations will impose several requirements upon ICOs, including publishing full financial information and disclosures. Furthermore, an equivalence regime would enable foreign firms to offer services within the UK if they meet specific criteria. It remains unknown when exactly these new rules will come into force but are expected to take effect before 2024.

The European Union

The cryptocurrency industry has seen explosive growth worldwide, yet regulatory environments remain fragmented around the globe. This lack of consistency combined with cryptocurrency’s inherent volatility has given rise to concerns regarding their negative impacts on markets, investors, and users; governments are therefore making efforts to establish regulations which protect consumers while discouraging unfair practices from emerging.

Cryptocurrencies have forced traditional financial institutions, regulators, and lawmakers to reconsider their policies on the sector. Some governments have increased oversight of crypto exchanges while others have banned or limited trading activity altogether. Still, most countries are making progress toward creating an appropriate framework for crypto-assets and stablecoins; two positive steps forward include the EU Markets in Crypto Assets (MiCA) provisional agreement and US Framework for International Engagement on Digital Assets providing regulatory clarity in this industry.

As the crypto industry expands, governments will face unique challenges. They will need to strike a balance between meeting industry needs and meeting important public policy goals like anti-money laundering/terror financing measures, consumer protection and cybersecurity; plus how best to regulate new types of crypto assets like stablecoins backed by traditional fiat currencies.

Countries and economies with high rates of crypto activity are creating comprehensive frameworks to regulate crypto assets, including licensing requirements for exchanges and service providers, disclosure rules, and cybersecurity measures. They are also exploring CBDCs – digital money issued by national banks – as a potential solution.

Future success of crypto assets and stability coins hinges upon global initiatives’ success, especially regarding standards development and cooperation among regulators. Furthermore, transparency of regulatory procedures must ensure all parties can fully comprehend how any regulatory change may impact them directly.

Japan

Japan’s government is taking steps to make its financial market safer and more effective for investors. In 2020, its House of Representatives passed an amendment to Japan’s Payment Services Act (PSA), specifically regulating cryptocurrency exchanges as part of their overall financial system – with this move designed to curb hacking attempts while improving transparency for investors.

The National Tax Agency (NTA) announced that profits generated from trading Crypto Assets will be taxed as miscellaneous income, similar to capital gains taxes in other jurisdictions. Furthermore, NTA mandated that providers of Crypto Assets must register as Financial Instruments Business Operators (FIBOs) and adhere to stringent anti-money laundering (AML) procedures in order to provide services; additionally FIBOs must segregate customer funds while employing risk-based approaches in order to ensure system safety.

As individuals who trade Crypto Assets in Japan are subject to various taxes, such as those levied by the National Tax Agency, Crypto Asset gains are subject to an annual 20% flat tax by this authority – although not as steep as capital gain taxes on traditional stocks; any gains from Crypto asset trading cannot be deducted against losses from other investments, and any estate holding Crypto assets must pay inheritance taxes as well.

To safeguard investors, the National Testing Agency has undertaken several investigations into cryptocurrency exchange operations. Particularly, the NTA is targeting individuals and companies that fail to report cryptocurrency trading gains on their tax returns; one recent case wherein an office worker was jailed for failing to do so shows how the NTA is exerting pressure on companies and individuals alike to properly report their cryptocurrency trading activities.

The National Testing Agency has also convened a task force to assess the security of Japan’s cryptocurrency exchanges. This team will assess each exchange’s level of security before offering recommendations to strengthen it further. Moreover, this task force will conduct inspections to ascertain if each facility and computer network meets investor safety criteria.