Bitcoin has long drawn together an eclectic crowd. It attracts libertarians, tech connoisseurs, corporate CEOs and internet vagabonds. Each person has their own reasons. But many of these reasons revolve around a central tenant: Bitcoin serves as an attractive alternative to the status quo.
Many people consider 2021 as the year bitcoin began to cross over to the masses. Large corporations such as MicroStrategy and Square publicly stated they will hold bitcoin on their balance sheet. And Ecuador made bitcoin one of its official currencies.
But with all this institutional adoption also comes increased scrutiny over the facets of Bitcoin that have long brought complaints: the lack of any real oversight. This came to a head with China's ban of cryptocurrency mining. The ban has raised the concern: What is the future of bitcoin, as it comes to regulation?
In this Article:
Why Bitcoin Is Not Regulated
Satoshi Nakamoto, the anonymous creator of Bitcoin, released his cryptocurrency white paper in 2008. He envisioned a decentralized currency free from the machinations of any single county's government or central bank.
He achieved this by creating Bitcoin, the first currency that was entirely decentralized. To put this in perspective, consider the times the U.S. adds money to the economy. It does so through the Federal Reserve. But the Fed is an organization with a committee that receives little oversight from the federal government.
- Bitcoin does not require an organization like the Fed and is not beholden to any one group or country.
- Because Bitcoin operates fluidly and without borders, there's an additional complication to attempting to regulate it: Under whose jurisdiction does it fall? The U.S. dollar is obviously managed by the U.S., the British pound by the UK, and so on. With bitcoin, however, there is no country that can claim any ownership rights.
- Another reason bitcoin isn't regulated is because the lack of regulation is what attracts many bitcoin enthusiasts. Today, many people view central banks with great skepticism. And they see fiat money as just pieces of paper whose worth is steadily eroding over time due to inflation.
That is to say that the biggest defenders and users of bitcoin are vehemently against Bitcoin regulation.
Further Reading: How to invest during inflation
Should Cryptocurrency Be Regulated?
Despite the attractiveness of an international currency that is not beholden to any one country, Bitcoin is not without its share of scandals.
- We have all heard of its most notorious use as a medium of exchange on the dark web — favored for its anonymity. Oftentimes bitcoin was used to purchase a range of illicit materials on the internet. These included items sold on the now-defunct drug marketplace, Silk Road.
- And this anonymity provides a possible method to evade taxes.
Both of these reasons increased regulators' skepticism of the cryptocurrency.
China's Current Cryptocurrency Regulation Status
In 2021 China shocked the crypto world by unveiling a slew of new regulations and crackdowns specifically targeting the bitcoin mining industry. This affects bitcoin because China contributes half of all bitcoin mining, mainly thanks to cheap power and legal gray areas that make it easy for large-scale bitcoin miners to operate.
These measures include outright bans on crypto mining. They come as a response to what the Chinese State Council views as risks to its own financial system. The council claimed that the Chinese public was at risk from speculative mania in cryptocurrency. The council also pointed out that the anonymous nature of bitcoin makes it easy to facilitate money laundering and other schemes.
But these new measures come as the Chinese central bank plans to roll out its own digital currency, the digital yuan. This leads many to believe that the Chinese authorities fear the competition to its own digital currency. That currency would allow them to regulate spending to a degree never before seen in history.
How Will This Ban Affect Global Crypto Trading?
As mentioned, China's regulations greatly impact crypto mining.
Cryptocurrencies were originally popular in China as a way for individuals to get around the authoritarian regime of the Chinese Communist Party. And the country later became a haven for crypto mining despite pressure from the government.
Mining is an integral piece of the currency's stability and continued health. Mining allows bitcoin to operate in its decentralized manner (More about it Read our Blockchain 101 guide for more information). With that said, it's no surprise that whenever there is a regulatory shock in China that concerns mining, bitcoin often takes a dive.
We're not too worried about the miners. And we believe it's a good thing that there is no concentration in one geographic location. Now miners across the world will be able to compete in a decentralized manner, just as it should have been from the beginning.
Popular mining destinations such as Iceland rely on their country's natural cold to provide cooling for the many computers that mine bitcoin. This has the benefit of also being a lot more environmentally friendly than the coal used for much of China's power.
U.S. Government Cryptocurrency Regulation Status
The U.S. government also enacted cryptocurrency regulations in 2021. Now any cryptocurrency transaction of more than $10,000 must be reported to the IRS. And you have to pay taxes on your crypto profits. Many see this as the first step in an attempt to assert more regulatory control on crypto assets.
The regulatory stance that the U.S. chooses will prove to be of vital importance for bitcoin's future, but not for the same reasons as in China.
China was important due to its high concentration of mining power. The U.S. is important because it houses the most influential economy and government in the world. This affects bitcoin in two ways.
- Institutions are only just beginning to make the leap to bitcoin adoption and are building up the financial infrastructure to be able to support bitcoin on a large scale. For example, JP Morgan recently announced that it would become a bitcoin custodian for its clients. We already mentioned how important this institutional adoption is for bitcoin's continued growth. And we believe it is important for the next big part of bitcoin's journey. But many of these institutions could be scared away from bitcoin if they see the U.S. policy become too anti-crypto.
- The second way U.S. regulation impacts bitcoin and crypto at large is due to the U.S.'s influence across the Western world. If the U.S. government decides to ban crypto, it could cause other large economies such as the UK's and EU's to follow suit.
Japan Cryptocurrency Exchange Regulation Status
While not as large an economy as in the U.S. or China, Japan's economy is also shaping up to be an important bitcoin player. Out of the major economies of the world, Japan has one of the most progressive regulations when it comes to bitcoin. Japan recognizes cryptocurrency as an official legal tender.
Japan's regulation generally leaves bitcoin alone and focuses more on the people fraudulently using bitcoin.
How Crypto Regulation Affects You as a Trader
All of these regulatory moves impact your crypto portfolio. After news of the Chinese regulatory sweep against bitcoin mining, bitcoin fell below $30,000, half the price it hit the previous month.
Bitcoin still is very much a volatile asset, both to the upside and downside, which is why it is so important for traders to keep up to date with these events. Many of these regulatory measures also act as foreshadowing for further, more serious regulatory action.
China is a great example of this. They began regulating cryptocurrency in 2017 when the government banned any locally based crypto exchanges.
Clearly, this served as the first step in the more drastic actions we are seeing today.
But it's not all doom and gloom. Despite these major roadblocks, Bitcoin hasn't seen any disruption in its service. This proves the power of its decentralized structure. Additionally, many Bitcoin experts see that the lost mining potential will simply migrate elsewhere.
Traders worried that this regulation could spell the end for cryptocurrency trading should pay attention to one of the most important factors that stabilize any asset: institutional adoption.
As mentioned, we are seeing more institutional adoption than ever when it comes to bitcoin. And regulation may just be the push that institutions need to see before investing. More institutional use leads to more buying and a much more stable and healthy long-term outlook.
Possible Side Effects of Crypto Regulation
Like with most things in life, nothing here is black and white. Many view all regulations as pure evil. But the truth is that some good can come from it in the end. Here are some of the biggest pros and cons of regulation in the crypto space.
Crypto Regulation's Upsides
- More regulation can ultimately give more stability to the cryptocurrency world. Institutions aren't interested in speculating on new coins that may go up 1,000x and then drop to 0. They want to invest in a mature cryptocurrency space (such as bitcoin and ethereum), where their risk is minimized. The faster we can transition to a mature regime for cryptos, the faster institutions adopt them and send their values soaring.
- On the face of it, China's anti-mining regulation seemed a big blow but we believe it did the Bitcoin world a service. Now mining is more decentralized than ever.
- This reduced Bitcoin's environmental impact, which is one of the biggest complaints against it. It is no secret that bitcoin mining is energy-intensive. China became a hub for mining mostly because the nation is not as committed as other Western nations in reducing its carbon emissions — hence the widespread use of coal to power mining operations.
- Previously, the double whammy of the IRS taxing bitcoin and China banning crypto mining would have cratered bitcoin's price. But this time, in relative terms, bitcoin managed to hold its own much better than expected. While the price fell after the news, it's managed to hold at a steady rate. We believe this is another sign of the maturing of bitcoin. And the fact that institutions are now in the mix is certainly helping the stability of the cryptocurrency.
Crypto Regulation's Downsides
- Bitcoin became increasingly popular among casual investors. But many people bought near the top and suffered a large 25%+ loss. Most likely, a large number of them sold at a loss and were possibly turned off from bitcoin.
- Such a large drop in price may still plant doubts in institutional investor's minds that bitcoin is still too volatile an asset. This has been one of the criticisms of using bitcoin as a currency and store of value. Many agree that bitcoin will need to lower its volatility in order to really become a household asset.
- Finally, there is a deep-seated fear that any regulation, no matter how beneficial, may be the first step to outlawing cryptocurrencies. This fear grew after China's recent moves, and it isn't without merit.
- Most governments are now considering creating their own digital currency, and bitcoin would be a direct competitor to that. There are few reasons a government would allow a currency it can't control to directly compete with its own.
Where Crypto Regulation Stands
Today, the cryptocurrency regulatory regime is still beneficial. While the crypto world is an exciting place, it doesn't instill the confidence needed for cryptocurrencies to be accepted and adopted by the mainstream.
That being said, government regulation can quickly get out of hand. And though today's regulations may support bitcoin in the long term, there's nothing stopping tomorrow's regulation from actively harming it.
As with any new technology, investors need to be vigilant and understand that adoption comes in waves. These waves can rise and fall drastically but can ultimately be rewarding. My advice is to hang on as bitcoin looks like it's here to stay.