Thomson Reuters recently released a report on the state of cryptocurrencies, which studied regulations involving them around the world. At the Berkeley Fraud Fest, Todd Ehret, author of the report, joined Gina Jurva, also of Thomson Reuters, to talk about the report and its findings.
In search of regulatory certainty
They noted that cryptocurrencies such as bitcoin have been making news headlines on a daily basis. U.S. financial regulators like Gary Gensler, the incoming chair of the Securities and Exchange Commission, are widely viewed as crypto-friendly.
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Many enthusiasts expect a crypto regulatory framework to be developed under his leadership, but the SEC recently released its planned agenda for the next 12 months, and cryptocurrencies weren't on it. Ehret said he believes the crypto community wants regulatory certainty amid the optimism and euphoria. However, what will happen with the regulatory environment is still unclear.
Ehret noted that there are lots of misconceptions about cryptocurrencies and a massive disparity in regulations around the world. Some countries are talking about banning it entirely, while others are open to it, and still others are in the process of developing regulations.
Taxes and regulation on cryptocurrencies
Unsurprisingly, one area in which most countries have taken a stand on cryptocurrencies is taxation. Ehret said most countries have already written digital currencies into their tax codes and found a way to tax them. However, he added that the regulatory regime is fragmented when it comes to how they see cryptocurrencies.
"In the U.S., it's very interesting, and I would say the U.S. better get going quickly because other places are quickly developing [regulations]," Ehret said. "Europe has MiCA [the Regulation of Markets in Crypto-assets] proposing rules and regulations to build a framework."
However, the U.S. is still in dispute. He noted that the Commodity Futures Trading Commission calls cryptocurrency a commodity, while the SEC says it's a security. Ehret said certain aspects of cryptocurrency make it a security, and the agency wants jurisdiction.
On the other hand, the Treasury Department calls it a currency, making it subject to anti-money laundering (AML) and know your customer (KYC) rules. Ehret said there's a turf war over cryptocurrencies going on among U.S. regulators.
"I guess the us is a bit of a mess at this point and really needs to get on the same page," he said.
Cryptocurrency in other countries
Ehret said Europe is moving faster than the U.S., although the U.S. has moved faster than the U.K. in some aspects. He pointed out that the U.K. doesn't have any derivatives or futures, while the U.S. quickly approved bitcoin derivatives. However, the U.S. has yet to approve a bitcoin exchange-traded fund, while Canada has approved multiple ETFs.
Ehret added that some countries don't allow cryptocurrency to be used as a payment method, but they allow residents to hold or mine it. China has begun cracking down on bitcoin mining. Last year, 60% of the mining of new bitcoin was in China. On the other hand, El Salvador is all-in on bitcoin, which it has now classified as a fiat currency, making it the first country to do that.
He said there is a lot of mining going on in Iran, but the only place a miner can sell it to is the Iranian central bank. Meanwhile, other countries, including Turkey, have cracked down on cryptocurrencies as they're worried about an exodus of the current from the country.
Myths around cryptocurrency
Ehret and Jurva also discussed some myths surrounding cryptocurrency, especially the belief that digital currencies are used exclusively for illegal activities.
"Unfortunately, the political narrative has been it's all used for illicit activity," Ehret said. "Janet Yellen said in her hearings she was nervous about illicit us, but in her follow-up, she dialed back those statements. Politicians are very quick to focus on the illicit aspect."
However, he also said the amount of illicit activity bitcoin and other cryptocurrencies are used for is "falling off a cliff." Ehret said that just $10 billion worth of cryptocurrency was used for illicit activity last year, which is less than half a percent of the total activity.
He believes that as the general population becomes more interested in the activity and broader global adoption occurs, others will keep squeezing out the illicit aspect into a smaller and smaller percentage of the total activity.
"Unfortunately, something like the Colonial Pipeline and the company paid in bitcoin to get control of its servers back steal the headlines and shine a spotlight and continue to perpetuate the belief and misbelief that it's only for bad actors," Ehret said.
He also believes it will get harder and harder for illicit activity to occur because hackers will have to go to an established firm to change it into cash. As the banking industry embraces cryptocurrency, there are fewer places for them to hide. Additionally, Ehret said bitcoin isn't as anonymous as previously thought.
This post first appeared on ValueWalk Premium