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Cryptocurrencies and the Problem of Regulation

Bitcoin protection
Image Credit: Kabiru Yusuf

There has been a gradual rise in the adoption of cryptocurrencies, and rightfully so. Cryptocurrencies have the potential to become huge disruptors to global financial systems in that they intend to perform the same functions as the traditional fiat currencies, but more efficiently. Cryptocurrencies are known to be digital assets, native primarily to a chosen network of interconnected devices. They can either be transacted basically as a utility (i.e native to a particular sector) or on a broader scale where they are bought and sold for a price determined by market conditions. They are traded on exchanges similar to the stock market, where investors buy and sell cryptocurrencies just like they would buy and sell shares on the stock exchange.

Cryptocurrency is extremely unpredictable and volatile, especially since it has no intrinsic value. This volatility is a main feature of cryptocurrencies, and the main reason the UK’s financial regulatory authority, the FCA, has described cryptocurrencies as high-risk, speculative investments that could potentially lead to a total loss in investment due to manipulations that can occur as a result of individual or institutional factors. Despite this, crypto has massive support from the financial industry. Institutional investors and companies like Tesla, and investment banks and financial services firms like JP Morgan, include Bitcoin in their portfolios.

Despite the growing popularity, there are few consumer protections and regulations for cryptocurrency, and in the wake of this many fraudulent activities are on the rise based on the supposed feature of anonymity that cryptocurrencies operate upon.

Legal Concerns Around Cryptocurrency Use

The U.S. Attorney General’s cyber-digital task force 2020 report identified three areas of concern with cryptocurrency use:

  • Direct use of cryptocurrency to commit crimes and finance terrorism
  • Using cryptocurrency to launder money and evade taxes
  • Cryptocurrency theft and investment fraud.

In general, a common legal concern about cryptocurrency is the level of anonymity  that cryptocurrency can offer. This creates a perfect environment for criminal activities. Cryptocurrency developers are now offering anonymity enhanced cryptocoins (AECs) like Monero, Zcash, and Dash, specifically to make tracking transactions more difficult.

With all of these in view, the regulations and policies around cryptocurrencies and their adoption in different countries of the world literally differ from each other. While a nation such as Nigeria would ban financial institutions from performing any form of transactions using crypto currencies, owing to the basic ideology that it fosters more harm than good in the nation, countries like the United States would adopt the use of cryptocurrency for the enhancement of financial transactions.

Comparative Summary of Regulations

One of the most common actions identified across the jurisdictions of different nations is government-issued notices about the pitfalls of investing in the cryptocurrency markets.  Such warnings, mostly issued by central banks, are largely designed to educate the citizenry about the difference between actual currencies, which are issued and guaranteed by the state, and cryptocurrencies which are not.  Most government warnings note the added risk resulting from the high volatility associated with cryptocurrencies and the fact that many of the organizations that facilitate such transactions are unregulated.  Most also note that citizens who invest in cryptocurrencies do so at their own personal risk and that no legal recourse is available to them in the event of loss.

Many of the warnings issued by various countries also note the opportunities that cryptocurrencies create for illegal activities, such as money laundering and terrorism.  Some of the countries surveyed go beyond simply warning the public and have expanded their laws on money laundering, counterterrorism, and organized crimes to include cryptocurrency markets, and require banks and other financial institutions that facilitate such markets to conduct all the due diligence requirements imposed under such laws.  For instance, Australia, Canada, and the Isle of Man recently enacted laws to bring cryptocurrency transactions and institutions that facilitate them under the ambit of money laundering and counter-terrorist financing laws.

Some jurisdictions have gone even further to impose restrictions on investments in cryptocurrencies, the extent of which varies from one jurisdiction to another.  Some (Algeria, Bolivia, Morocco, Vietnam) ban all activities involving cryptocurrencies.  Qatar and Bahrain have a slightly different approach in that they bar their citizens from engaging in any kind of activity involving cryptocurrencies locally, but allow citizens to do so outside their borders.  There are also countries that, while not banning their citizens from investing in cryptocurrencies, impose indirect restrictions by barring financial institutions within their borders from facilitating transactions involving cryptocurrencies (Bangladesh, Iran, Nigeria, China, and Colombia).

While Bitcoin and other cryptocurrencies have generated dizzying returns for investors, there are significant risks and regulatory issues to consider. There are very few consumer and investor protections that address cryptocurrency, and the exchanges that deal in it.


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