What makes cryptocurrencies different from fiat currencies is that they are not under the control of a regulatory authority such as a bank or financial institution.
There are numerous benefits of a decentralized currency such as immunity from inflation, protection from bank failures, and security from varying exchange rates.
However, one serious issue with cryptocurrencies is how governments all over the world are reacting to them. This involves questions including but not limited to:
- Are cryptocurrencies recognized as legal tender?
- If so, what are the rules and regulations regarding their usage?
- Which cryptocurrencies are allowed in which geographical area?
- What is the stand of the governments on Initial Coin Offerings (ICOs)?
- What are the taxation rules on crypto?
Bitcoin and other cryptocurrencies are banned outright in some places while in others, it is under strict regulation. Japan is the only country, untill now, that has recognized Bitcoin and other digital currencies as a means of payment if not as legal currency.
There are some problems associated with digital currencies that are holding governments back from accepting them on a large scale. Some of these are given below.
Control over the Economy
By using fiat currencies, governments have significant control over the nation’s economy since this currency is issued by the government.
Matters such as investment, currency movement, taxes, employment, recession, and inflation are all directly affected by currency. By exclusively using fiat currencies, governments can keep all of these issues under their control.
Crime and Unethical Practices
It is quite clear how digital currency would invite all sorts of unethical practices with no issuing or regulatory authority.
Cryptocurrency is infamous as being used for transactions carried out relating to drug dealing, money laundering, terrorism, tax evasion, prostitution, etc. Understandably, governments are wary of authorizing cryptocurrencies to operate freely.
Right now, all currencies are under the control of national banks of different countries.
With cryptocurrency, the entire banking system would become redundant. This prompts some serious problems as to how any disputes and technical issues regarding coin transactions would be resolved.
Moreover, the implementation of any cryptocurrency that is decentralized and regulated by a network of peers will result in a major chunk of the population (those involved in banking) losing their jobs.
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Risk of Hacking
Since all cryptocurrency transactions take place over the internet, they are susceptible to attacks by hackers.
Different entities involved in handling crypto such as payment gateways, crypto exchanges, Initial Coin Offerings (ICOs), web wallets, etc. can be hacked. This has happened in the past with exchanges such as Mt. Gox and wallets such as Classic Ether Wallet.
Millions of US dollars were lost as a result of these hacking instances.
Frauds and Spoofs
The way that crypto works, with all information being exchanged online, makes it an easy target for people looking to take advantage and trick people of their crypto.
Even a single digit difference in the wallet address can cause the funds to vanish or go to a different account. Special malware exists which is meant to replace the address in the clipboard with a different one.
Websites exist which trick users into entering their crypto wallet details and passwords so that funds can be deducted from their accounts.
There is no single body or department that you can complain to if you fall prey to a crypto fraud either.
For the reasons stated above, governments of different countries around the world have been varying in their responses to cryptocurrency.
Some countries where crypto is banned outright are Nepal, Bangladesh, Ecuador, Bolivia, and Kyrgyzstan.
Other countries have different laws and rules when it comes to crypto.
In Japan, crypto exchanges are regulated with a licensing system in place for them to function with. It is the first country in the world to recognize Bitcoin, and other cryptocurrencies as legal tender.
China used to be a strong supporter of cryptocurrency until recently. Crypto exchanges and ICOs are banned. Access to offshore trading platforms is closed and Bitcoin miners are unable to carry out their operations.
The Commodity Futures Trading Commission (CFTC) of the United States, has classified digital currency as a commodity as of September 2015. However, FinCen, a bureau of the Treasury Department has stated that virtual currency does not have the status of legal tender in any geographical area or jurisdiction.
The Internal Revenue Service (IRS) has categorized cryptocurrency as a property. Cryptocurrency exchanges are considered legal depending on the state you are referring to.
The European Union is still taking things slowly when it comes to cryptocurrency. There is no specific legislation regarding crypto.
Crypto exchanges and ICOs operate in a gray area. Crypto payments are not banned, and VAT/GST is applicable to them.
Conversion from fiat to virtual currencies, on the other hand, does not include any GST or VAT. Warnings and alerts have been issued by local regulators.
Authorities in Canada have declared that ICOs can be treated as securities and any products linked to them are high-risk products.
Virtual currency is not considered legal tender. However, a “bitcoin legislation” has been passed with the C-31 bill.
Mexico does not recognize cryptocurrency as legal tender either. However, it can be used for payments.
It is regulated as a virtual asset according to FinTech law.
Bitcoin and other cryptocurrencies are not regulated in Russia and operate in a gray area.
However, the Central bank of Russia has stated that it is definitely against regulating cryptocurrency and using it as a means of payment for goods and services.
Bitcoin sites are blocked in Russia and Bitcoin is outlawed in the Russian Federation.
In the UK, a parliamentary committee is currently working on how to regulate and monitor digital currency.
Bitcoin is treated as “private money.” Rules for GST/VAT are similar to those followed by the European Union.
The Governor of the Reserve Bank of Australia has declared that there is nothing stopping citizens from using Bitcoin as a mode of payment.
It is not subject to double taxation either. With that said, cryptocurrency exchanges have to register with Australia’s financial intelligence agency and follow strict customer verification procedures.
There are no fixed laws regarding the regulation of Bitcoin or other cryptos.
The president of the Bank of Korea has suggested that such regulations for Bitcoin be put in place in the future.
Earlier in 2018, South Korea banned all anonymous virtual currency accounts.
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It is evident that governments of many powerful countries – USA, UK, China, Russia, Japan – are actively looking into cryptocurrency and its implementation. Like with any new technology, government bodies are reluctant to adopt crypto fully.
There is no doubt that cryptocurrency is the revolution in finance and banking sector that the world needs. It isn’t an overstatement to say that blockchain and crypto could be as groundbreaking as the internet.