Bitcoin Regulation is Simple in Theory, Incredibly Complex in Reality

Bitcoin’s digital footprint theoretically makes it easy to regulate, but the reality is a lot more complicated.
Bitcoin’s digital footprint theoretically makes it easy to regulate, but the reality is a lot more complicated.

Regulators have been struggling to come to a consensus, keep in touch and set a working relationship with Cryptocurrencies since they became big enough to worry about. The idea is simple, but implementation is much more difficult due to the quasi-anonymous nature of digital currency.

Regulators worldwide have not yet decided on a consistent approach. Some go the direct route, like China, and try and implement bans which are not as effective as they would hope. Others, like Switzerland, embrace the digital coins, hoping to attract more Blockchain builders.

Thus there is a large gray area at the moment, with regulators floundering in the middle.

Simple, in theory

Regulating cryptocurrencies should be quite simple, in theory. After all, unlike fiat money which can be transferred without any records, cryptocurrencies leave a digital footprint. That footprint is not as simple to follow as a bank transfer, for example, but it is not impossible.

Professor Andrei Kirilenko, director of the Centre of Global Finance and Technology at the Imperial College of London, believes that by their very nature, cryptocurrencies have a reporting system built in, but individuals sometimes obscure their identity in various ways.

He believes that if digital currency transactions were regulated in such a way as to compel transparency, cryptocurrency would be no harder to regulate and tract than bank transfers. Of course, it’s unlikely that users would just accept such regulation without protest.

The difficulty keeping up

Kirilenko adds that the 2008 financial crisis created a perfect environment for the rise of digital currencies. Rapid technological development, in conjunction with a mass talent exodus, the failure of previous systems and the affordability of computing, meant fintech was given the space to flourish.

But that flourishing has been so rapid that regulators can’t keep up with the evolving cryptocurrency space. However, there will come a time when regulators keep up, believes Dr Co-Pierre Georg, senior lecturer at AIFMRM and Director of the UCT Financial Innovation Lab.

“This means it is only a matter of time before they are so widely used that their regulation will be non-negotiable.”

This battle to keep up currently is coupled with the fact that Cryptocurrencies are unprecedented, creating far-reaching complications.

De-prioritised

There exists a desire in many parts of the world, and by many citizens of the global cryptocurrency ecosystem, to see some form of regulation as it would add legitimacy. However the drive for regulation has been de-prioritised in many areas because the resources required for regulation require justification to taxpayers and there are frequently more pressing problems. As such, cryptocurrencies are often dealt with on a case-by-case basis.

There is no leading law, or jurisdiction, or precedent out there that states how to deal with cryptocurrencies; instead, regulators must resort to experimentation. Kirilenko says:

“There are multiple aspects to the regulation of cryptocurrencies. Suppose I’m a regulator. What do I regulate? There are different ways to touch that elephant, There are different pieces of regulation. If you are going after one, some or all of them, you have to know what would be your main mandate — whether it is a monetary policy mandate, for instance.”

Long road with bright future

Regulation may seem like a dirty word in the decentralized Bitcoin community, but smart regulation will increase adoption. The fact that only 802 people paid tax on Bitcoin in the US in 2015 has galvanized the IRS, who is now using a company called Chainalysis to try and catch tax cheats. Regulation is inevitable, if for no other reason than tax agencies wanting their cut. Proper regulation and taxation will bring Bitcoin in line with existing monetary systems and spur investment by mainstream finance players.