Crypto regulation has been a topic of conversation since these digital currencies started becoming more viable as investments. The financial implications of investing in crypto often draw scrutiny, especially because of its high level of volatility. On top of that, the anonymity that comes with cryptocurrencies raises plenty of concerns when it comes to issues like potential uses by criminal organizations.
Even with all of the attention and talk, though, the U.S. government’s approach to cryptocurrencies has remained relatively loose. But there’s always a chance this will change. The cryptocurrency industry is constantly evolving and maturing, and as cryptos become more viable investment vehicles and currencies, their regulation becomes more and more likely.
If you’re wondering whether 2022 will be the year we see implementation of wide-scale cryptocurrency regulations, here’s what you need to know.
What Regulations Could Be on the Horizon?
One of the biggest debates about cryptocurrency is actually what crypto is — in the legal sense. It isn’t treated as a traditional currency or a standard investment option like stocks or bonds. Instead, it’s largely handled like property.
This unclear nature has slowed some regulatory bodies from applying existing finance laws to crypto in the marketplace. However, because some regulators view cryptocurrency as risky for the national economy, it’s possible they may begin exercising their powers and applying regulations that are currently in place.
Whether this occurs quickly — or during 2022 at all — isn’t entirely clear. Some regulatory agencies, such as the Federal Deposit Insurance Corporation, would prefer to have Congress take action on cryptocurrency directly. But if that doesn’t occur, applying existing regulations in new ways and seeing what sticks could be the approach we see emerge this year.
Wash Sale Rules Could Arise
A popular approach for limiting taxation on crypto capital gains may not be an option in the cryptocurrency space much longer. What are known as “wash sale rules” could start applying to cryptocurrencies soon.
Wash sale rules keep investors from selling an asset at a loss to offset capital gains and then rebuying that asset within a specific time frame so they can hold onto the investment. These rules currently apply to many securities, but cryptocurrency hasn’t fallen in line with them just yet. That may change in 2022, limiting how crypto investors can offset taxation on crypto profits in future tax years.
Stablecoins Might Be Target Number One
Stablecoins are a type of cryptocurrency that represents efforts to make digital currency more widely realistic and usable for more people. Their values are tied to a fiat currency — government-issued currencies, like the U.S. dollar — which gives them an inherent level of stability we can’t currently find elsewhere in the crypto market. Their value is also easier to track and maintain, so more businesses and governments may be open to their use.
However, the benefits of stablecoins also make them a target. Because they have a higher potential for wider usage, regulating them first seems logical. If that ends up becoming true, though, it could actually harm the market. Investors who use stablecoins as safe havens or hedges may hold them, leading to less interest earned on these investments and, in turn, declining values.
We Might See More Monitoring of Cryptocurrency Exchanges
Another prime target for regulations is cryptocurrency exchanges. Finding ways to reduce the drastic fluctuations in value cryptocurrencies seem to go through regularly — potentially by regulating them — could protect investors. Similarly, the ability to monitor crypto activities and transactions more closely, even on a broad scale, could potentially reduce their risks.
In late 2021, SEC Chairman Gary Gensler asked Congress for legislation that could give the SEC, which enforces financial security laws to protect investors, the ability to monitor cryptocurrency exchanges. The reason for the request is that not all virtual currencies are classified as securities, limiting the SEC’s authority and scope of protection. By expanding the agency’s ability to monitor cryptocurrencies, there would be more oversight into the market — and theoretically more protection for invesstors.
How Developing Regulations Could Impact Consumers
Any new regulation in the cryptocurrency space has the potential to dramatically shake up financial markets. Generally speaking, some of the biggest appeals of cryptocurrency are its decentralized nature and growth potential. Also, the ability to conduct transactions instantly and anonymously has broad appeal for people concerned about privacy.
If tighter restrictions and regulations come into play, new constraints on what people can do with crypto are likely to emerge. Along with clearer oversight by government agencies and potential reductions in anonymity, laws designed to limit crypto’s volatility may reduce its overall growth potential. If you couple that with government-backed digital currencies entering the equation in the future, existing coins may become less viable as payment and investment tools.
Businesses might focus on accepting stablecoin-type digital currencies that limit volatility. That may make government-connected options the most attractive choice, causing companies to avoid some of today’s crypto leaders. If that happens, the values of many existing currencies, which aren’t government-backed, could plummet.
However, cryptocurrency regulations could also benefit consumers. With regulation, the perception surrounding the viability of crypto could change, and people might begin to see it as a safer option for investments and purchases. As a result, more businesses may begin accepting specific cryptocurrencies as payment. If that happens, consumers will have more options when it comes to making purchases.
Additionally, regulations could provide a degree of stability. While they could mean that the quickly skyrocketing values of the past may not occur again, they could prevent some of the dramatic lows, too. Of course, there would still be shifts in crypto values. Even long-standing fiat currencies see their worth change regularly, and it won’t be different with digital currencies. However, drops of 21% in a matter of hours or 53% in a week may taper off, which could boost consumer confidence in crypto’s stability.
What Can Investors Do to Prepare for Regulations?
If you’re currently investing in crypto or plan to do so in the near future, it’s important to have a plan that can help you respond to changing regulations. First, make sure you keep solid records of your cryptocurrency transactions, whether you’re purchasing crypto with cash, receiving it as payment, spending coins when shopping or cashing out cryptocurrencies.
Typically, cryptocurrency taxes are based on the coin’s value when it’s bought, sold, spent or accepted as payment. Because values can fluctuate dramatically on day-to-day, accurate records are essential if you want to avoid tax issues.
Being prepared for wash sale rules is also essential. Don’t assume you’ll be able to use this strategy to limit tax liability, as it may not be an option for much longer.
Finally, find reliable resources for cryptocurrency regulation news. Monitor proposed legislation closely to see what changes could be coming. With this information, you can better anticipate the impact on the market and your personal investing activities — and you can ultimately make wiser long-term choices.