What Would Be the Best Outcome for Crypto Regulation in the USA?

The controversial proposal requires “brokers” to avail customer information to the Internal Revenue Service (IRS). But the definition of “broker” is overly broad and confusing, and it leaves too much room for interpretation.

Crypto proponents fear the ambiguity of the proposal could deter a wide range of crypto businesses from participating fully in the industry, or worse, it could force innovators out of the country.

But US legislators have better options to regulate the sector without antagonizing players.

Why Crypto Proponents are Against the Proposal

Crypto proponents have slammed the proposal as “unworkable,” “erroneous,” and “disastrous.” Democrats and Republicans may have struck a rare united chord to pass it, but crypto fans are not thrilled.

The provision mandates cryptocurrency “brokers” to provide customer information and details such as price points when users buy and sell crypto. It also requires them to report transactions worth more than $10,000 to the IRS. But it’s the former that’s left crypto adherents less than pleased.

In the bill, “broker” is referred to as “any person who is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Advocates of the technology argue the term is too broad and could target players who can’t get such information — such as miners, protocol developers, and stakers.

If such a proposal came into effect, it could roil crypto innovation and investment. Most businesses would rather quit altogether than operate under rigid and unfriendly requirements. Since crypto businesses in many ways are the glue that holds the industry together (exchanges, fiat on-ramps etc..), investments would be dealt a blow.

Industry advocates have contended that crypto businesses would be faced with two options: close shop or go offshore. This would deal a devastating blow to the industry — and pretty much the United States’ global economic prestige.

However, not all lawmakers are for the proposal. Wyoming Senator Cynthia Lummis — a long-time crypto proponent, has been at the forefront trying to amend it. Lummis was joined by Pat Toomey (R-Pa.), Ron Wyden (D-Ore.), Kirsten Sinema (D-Az.), and Rob Portman (R-Oh.).

What’s in the Balance

Here at CryptoVantage, we’ve said before that it’s better for the crypto industry to be regulated than not. Regulation — with care not to drive the market down or discourage innovation can aid crypto’s public look.

Crypto needs to be seen as a legitimate industry at par with traditional finance. Leaving it be a freewheeling Wild West does no favors for its (already fragile) reputation.

Here’s what’s in the balance if crypto is not properly regulated:

Consumer Protection

The dizzying pace with which the cryptocurrency space evolves has left regulators almost unable to respond properly. Also, most crypto activity remains outside regulatory protection for consumers. With no proper regulation, consumers are prone to be defrauded.

Past events in which consumers were defrauded led to crypto’s reputation as only good for crime. Such a reputation does no favors for the industry, especially when it remains on the fringes of mainstream finance.

Public Security

We’re talking about how cryptocurrencies — especially anonymous ones make such a good candidate for illicit deeds. Make no mistake — the prevalence of criminal activities fueled by cryptocurrency only undercuts security and safety for communities. This was certainly the case with Silk Road — people had easier access to illicit substances. The irony in the Silk Road is that many of the substances were of better quality (less adulteration) than what would otherwise be found on the streets.

However, there is no silver lining to cryptocurrencies being used for human trafficking and child exploitation. Thankfully, due to the nature of open ledgers like Bitcoin, these types of transactions can be tracked using blockchain forensics. Private blockchains like Monero still need more discussion on how to thwart organized crime from taking advantage of this technology.

Protecting the Integrity of Crypto

Much as the industry has exploded recently and people talk about it more, crypto remains a baffling concept for most. Proper — but favorable regulation of cryptocurrencies can help rein in rogue aspects of the space.

Think of OneCoin — which defrauded investors across several countries of billions worth of dollars. Events like those can erode public trust and the legitimacy of crypto in the eyes of users and investors.

Ways to Regulate Crypto

Care must be exercised not to over-regulate the industry to oblivion. The path US lawmakers are on could very well threaten the core fabric of the industry. Instead, here are some proper ways to regulate the industry for better outcomes:

Regulating Exchanges

Exchanges are where the bulk of crypto activity happens as investors buy and sell different types of cryptocurrencies. The first thing is to ensure exchanges adopt a Know Your Customers (KYC) policy and Anti-Money Laundering (AML) guidelines. Such measures prevent exchanges from being used by criminal elements for money laundering and other illegal activities.

Another way to regulate exchanges is to require them to report any suspicious-looking activities. A delicate balance should be maintained between preventing crime and respecting customer’s privacy.

Self-regulation, a code of conduct for market players to adhere to, has also been proposed. Per Investopedia, several crypto markets have already implemented self-regulation. Japan has the Japan Blockchain Association, the UK has CryptoUK, India has the Blockchain and Cryptocurrency Committee (BACC). The US could follow suit and create a body that self-regulates the crypto market.

Have a Framework for ICOs

ICOs are some of the main conduits for fraud in the cryptocurrency space. ICOs are a lot like the traditional IPO. But this time, their aim is for companies and individuals to raise money for crypto startups. ICOs are a chance for crypto investors to inject money into a crypto project they like.

However, ICOs have proven to be a pathway for scammers to milk money from unwitting crypto investors. In the past, the SEC has cracked down on several fake ICOs being promoted by celebrities.

Such actions to swoop down on ICO scams help protect the integrity of such methods of raising money. To avoid incidents of fraud, the US can require ICOs to be registered before launch. Regulators should also require lCOs to show proof of completed milestones and actual progress already achieved before asking money from investors.

Nowadays there are a whole plethora of ways to launch and monetize a new token. Much of these tactics are difficult if not impossible for authorities to hold anyone accountable for. Self-education and diligence on the part of the individual seem like the best courses of action in the short term to prevent mass defrauding of investors.

Final Thoughts

The United States has better options to regulate the cryptocurrency industry than policies that could kill the industry. Lawmakers are now training their sights on the space more than ever – and that can be a good thing, but only if measures are taken that strengthen the sector.