What is the future of cryptocurrency regulation?

The cryptocurrency industry rose to prominence in the United States in 2014. Since then, people have debated whether the U.S. government should get involved in regulating the new form of commerce and to what extent.

On one hand, Congress doesn’t want to stifle the innovation resulting from the burgeoning crypto industry. On the other, regulation would increase safety and encourage investors to feel more confident in cryptocurrency. The future of crypto is up in the air, but professionals agree that any regulation would have to be done delicately.

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Recent Legislation and Why Some Experts Push for Regulation

Lawmakers are aiming to find a balance between regulation and crypto freedom. This is partly because, as it stands now, cybercriminals can take advantage of some of crypto’s weaknesses. For example, cybercriminals often demand cryptocurrency payment when they launch a ransomware attack.

One piece of the infrastructure bill passed by Congress in 2021 requires cryptocurrency exchanges to report their transactions on 1099-B tax forms, just like a traditional broker would have to. Because this extra paperwork connects crypto transactions to individuals, the government will be better able to catch criminals capitalizing on crypto.

This provision allows the government to keep track of what people earn from crypto so they can apprehend any individual trying to get away with tax evasion. It is set to take effect in 2023.

Regulation That Could Become Legislation

U.S. SEC Chair Gary Gensler suggests regulating crypto similarly to how traditional financial institutions are regulated and protected. Three possible options for crypto regulation that could come to pass in the future include expansion of the wash-sale rule, implementation of the de minimis rule, and regulation of stablecoins.

The Wash-Sale Rule

One way cryptocurrency could expand in the future is via the current wash-sale rule. The wash-sale rule currently applies to stocks and securities. It prohibits investors from claiming tax deductions on assets they claim at a loss, only to buy back the same securities or purchase substantially identical securities within 30 days of the deduction.

This does not currently apply to cryptocurrency, meaning investors can claim deductions on cryptocurrency while holding it.

In 2021, President Biden proposed expanding the wash-sale rule to include cryptocurrency as part of his Build Back Better plan. The plan failed to pass the Senate, but not because of the proposed expansion of the wash-sale rule. It will likely continue to show up in legislation again – and possibly get passed.

De Minimis Tax Rule

Another possible area for regulation is the implementation of the de minimis tax rule. Under this rule, investors do not have to report their crypto transactions or pay taxes on crypto under a certain dollar amount.

Stablecoin Regulation

An entirely possible solution that could take place in the near future is the regulation of stablecoins. Stablecoins are easy to trade because each one has a value of $1.

However, because cryptocurrency and stablecoin are not regulated, it is difficult to guarantee their stability. For example, in May 2022,  the stablecoin Terra Luna dropped from its $1 amount, resulting in a crash of its cryptocurrency, Luna.

Crashes like these encourage federal regulators to continue pushing for crypto regulation. They believe investors and the public could benefit from added stability in the cryptocurrency industry, citing different benefits.

Possible Benefits of Cryptocurrency Regulation

Some of the possible advantages of introducing new legislation to the world of crypto include:

• More stability in a volatile market.
• Increased investor confidence in cryptocurrency.
• Provide clear guidance for companies looking to accept crypto payments.
• Prevent fraudulent activity and crypto crime.

Sensible Crypto Regulation May Be on Its Way

"Sensible regulation" is seen as a win in the eyes of many crypto experts. In an industry that is notoriously volatile, regulation can provide some balance. However, the journey to crypto regulation will have to be a very delicate process so as not to upset the innovation happening in the industry.

Image credit: Wit Olszewski / Shutterstock

Devin Partida writes about AI, apps and technology at ReHack.com, where she is Editor-in-Chief.