The current person assigned to the first Blockchain Resolution of the European Parliament has suggested that the benefits of a framework of rules in respect of the blockchain industry would allow for companies and customers operating in the sphere to have equality. Without knowing for sure how the technology will be regulated, she doubts that it will be able to grow to the size it needs to be. In other words, she proposed that ICOs should have their own regulatory structure, rather than trying to force them into the existing structures for securities or commodities. This approach is consistent with the perspective of the Bitcoin Foundation, who have indicated that any premature regulation of Bitcoin could limit it in the future.

China

In China, it is legal for individuals to trade Bitcoin. However, in 2017, the government clamped down on Bitcoin trading by requiring exchanges to delay or pause Bitcoin withdrawal services. This regulation of Bitcoin arrived along with an increase in the Chinese media noting the dangers of cryptocurrency as a tool for criminal activities. Officials in the People’s Bank of China have said that Bitcoin exchanges in China need to be closely supervised and licensed.

Tax

Authorities are investigating how best to regulate Bitcoin with regards to taxation. Bitcoin can be used to reduce taxation because it is semi-anonymous. Bitcoin and other cryptocurrency profits are taxed differently in different countries. There is no one uniform international approach. An example of this would be the EU declaring that cryptocurrency trading should not be subject to VAT, as the exchange transactions would be considered a supply of services and not goods. This is an approach that was also taken by the UK before the EU ruling. In 2014, the IRS in the US confirmed that it would treat cryptocurrencies such as Bitcoin as property, instead of a currency. This means that Bitcoin investors are only taxed on their capital gains, as opposed to their ordinary income.

Future Approach

There are a few different ways that the government could regulate Bitcoin.

  1. Cryptocurrency providers and exchanges will act as regulators of the currency by ensuring that AML and KYC regulations are complied with. Some of the existing exchanges, such as Coinbase, already enforce these regulations.
  2. Governments could take the nuclear option and completely block Bitcoin, or other cryptocurrencies that don’t abide by government regulation. As noted above, this would be difficult to enforce as governments have thus far found it difficult to completely block access to websites.
  3. Governments could alternative impose limited prohibitions, such as banning the sale of real-life goods in exchange for cryptocurrency in order to avoid Bitcoin being used as payment for illegal goods.
  4. Governments could also selectively regulate the industry, especially in respect of taxation. This is similar to the current UK and EU approach. This would result in some of the fundamental areas of the industry being regulated, such as tax and AML, without widespread regulations being put in place.
  5. Governments could provide supporting mechanisms whereby the consensus of users would enforce their own ‘community standards’. The downside of this approach is that it may result in regulators allowing illegal or fraudulent activity to go unchecked.

The EU proposals for regulation have followed broadly the approach taken by the French government, which included the following proposals:

  1. In order that users cannot remain anonymous, ensure that exchanges and intermediaries require proof of identity upon opening accounts.
  2. Publish a set of instructions for both consumers and regulators in respect of the taxation of virtual currencies.
  3. Propose caps on payments that can be made in cryptocurrencies, similar to caps that are already in place in respect of cash transactions.
  4. Regulate, at an EU level, any companies that offer exchanges between cryptocurrencies and fiat currencies.

Steve Keen, the Head of the School of Economics, History and Politics at Kingston University in London, believes that regulation of Bitcoin is inevitable. He said that because there is a futures market for Bitcoin, the price is likely to go down because people can bet on it going up or down. He suggested that without regulation, hard forks could be forced on users. He has suggested that the increased involvement of the futures market in Bitcoin means that holders of the asset are now linked to a greater extent to the financial system, meaning that what happens in other markets can affect the price of Bitcoin.

Even though there are different reasons why people in the industry think regulation is necessary, most people agree that it is. Some people believe that regulating Bitcoin would make it more legitimate. For some people, Bitcoin is not a priority because it is not a pressing issue. The cryptocurrency industry is opposed to large-scale regulation that would negatively affect the decentralized nature of Bitcoin. As suggested by the EU approach, another issue is that the regulators are unsure about what or how to regulate. If the cryptocurrency industry tries to fit into the existing structures, it will probably be restricted and held back. Although it would be costly for taxpayers to fund a new regulatory and tax system specifically for cryptocurrencies, it would be worth it in the long run.

2017 has been a big year for cryptocurrencies as they have gone from being a niche industry to something far more mainstream. Since this breakout occurred, Bitcoin has become a popular topic of conversation both at work and at home. Since it is nearly certain that some form of regulation is coming, The main concern that remains is what regulations will be put in place and how it will effect the industry.