Why do governments want to regulate cryptocurrencies?

Cryptocurrencies are one of the most popular assets of the 21st century. They gained this popularity for being one of the only decentralized financial features of our modern world. Now, its anonymity is being challenged all over the world as governments keep introducing stricter and stricter regulation policies.

The latest country to draft a regulatory framework is Russia, which was benefiting from large quantities of crypto mining farms and crypto possession in the country.

There are a few reasons as to why a government would want to introduce a regulatory framework, and only one of them seems to make the most sense.

Let’s look at the top 3 reasons and try to dissect them from both perspectives.

Taxation

One of the main reasons why the government wants to regulate cryptocurrencies is the millions of dollars it will gain from levying a tax on capital gains. A capital gains tax (CGT) is a tax on capital gains, the profit realized on the sale of a non-inventory asset that was greater than the amount realized on the sale.

Naturally, cryptos are a tradeable asset and usually fall under the capital gains tax category, but they don’t really have to in terms of general economics.

You see, when a trader has a large boost in their financial capability through crypto profits, it gives them the opportunity to inject those funds into the economy. Simply putting a tax and taking away a large amount of the profits diminishes the circulation factor of those finances.

The more money a citizen has, the better their purchasing power. The better the purchasing power, the more funds they are able to contribute to the economy, by simply buying a startup’s products, or spending more on various day-to-day items.

Whenever an investor is aware of the fact that their gains are going to be taxed, they will most likely try to not cash out their benefits. They’d rather keep them in crypto form and continue trading even if that puts their funds in danger.

However, if they knew that they’re free to spend it however they want, cashing out and diversifying into various other assets such as real estate would not be an issue.

Overall, putting a tax on capital gain on cryptos is probably the most contradictory law a government can implement. By taking away funds from tradeable assets, they are preventing the funds from being injected in the local economy.

Yes, they might use those taxes to support infrastructure, but does a developed country need that much more infrastructure? Isn’t it better to simply allow more circulation in the country, and help local companies grow larger?

Safety

This is probably the most justifiable reason why governments want to introduce crypto regulations. Preventing money laundering cases and terrorism financing is definitely a national safety issue, but is it really that big?

As a matter of fact yes. Most crypto scams happening all over the world, depending on the anonymity of cryptos to launder their scammed money out of the country and liquidate it somehow. By being forced to justify their transactions, the number of scams as well as money laundering cases is sure to decrease, same goes for terrorism financing as well.

Were the governments to introduce regulatory frameworks just for this purpose, then nobody would oppose their decisions whatsoever. Alas, there are other reasons such as taxing as well.

Control

Controlling the country can be a daunting task, but regulations very rarely provide enough benefit to make it easier. When it comes to overall control, crypto regulations very rarely have to do something with them.

In most cases, the government wants to regulate cryptocurrencies to remove the anonymity factor completely. The best examples of such governments are from Norway and Sweden, that are desperate for retaining their monopoly on the gaming business.

No company has the right to provide gaming services in these two countries besides the state-owned giants. Having an anonymous transaction take place from the country on to a foreign operator puts the local monopoly in jeopardy. Therefore, most conservative parties in countries like these push for strict regulations.

Is there anything we can do?

There is very little that the crypto community can do about a regulation once the government has made its choice. In most cases, all we can do is accept and prepare for the worst. But here are some tips for dealing with such regulations.

For taxes, try to keep your funds in the crypto state, avoid cashing them out in your country. Try to use the cryptos as payment instead of fiat. Also, make sure to keep them on a cold wallet.

In terms of safety, it’s in your best interest to comply with the regulation as it protects you from scammers and hackers.

When it comes to control, it’s best to use crypto exchanges that are located outside of the country. In fact, it’s best to use the largest crypto exchanges, as they usually comply with a single government’s regulations, due to their “global” operations.

Although there are dozens of more reasons why a government may introduce a new framework, these ones are the most common.