2021 was a significant year for crypto market, but it was also a wake-up call for the governments. As the virtual market grows bigger, gets even more powerful and uncontrollable, many state and local legislatures have been shifting their focus to Bitcoin and other cryptocurrencies.
As a result, we saw regulators flexed their muscles on cryptocurrencies this year, with China completely banning all crypto-related activities and U.S. authorities cracking down on certain aspects of the market. Regulators have also begun scrutinizing the DeFi space. Earlier this month, central bank umbrella group the Bank for International Settlements called for the regulation of DeFi, saying it’s worried about services marketing themselves as “decentralized” when that may not be the case.
Insight into these laws, David Lifchitz, managing partner and chief investment officer at ExoAlpha, explained that instead of restricting crypto, the governments want to regulate virtual coins to keep them on a tight leash vs. fiat currencies and also see them as a source of taxable income to replenish their coffers.
Meanwhile, there will be more regulations to enact as a controlled manner to the sector.
Which regulations are coming in 2022?
Some policies that will call for the crypto market in 2022:
- More scrutiny is forthcoming around stable coins as regulators look under the hood at the soundness of the underlying collateral and amount of leverage deployed.
- In 2022 and upcoming years, there will be substantial fleshing out of the crypto regulatory systems.
- With all the potential of wide adoption of DeFi, banks have also decided that they will be entering the crypto ecosystem. But how and when they do it is going to depend a lot on the details of the regulatory structure.
- U.S. will soon issue new legislation and laws for blockchain and crypto technologies as bipartisan recognise this sector.
- The bipartisan infrastructure bill signed into law in November includes tax reporting provisions that apply to digital assets like cryptocurrency and nonfungible tokens, or NFTs, and will require cryptocurrency brokers to report cryptocurrency gains in a type of 1099 form.
- House Democrats proposed legislation to close a tax loophole for cryptocurrency investors. The bill would impose “wash sale” rules on commodities, currencies, and digital assets. That means Bitcoin, Ethereum, Dogecoin, and other popular crypto investments would be subject to the anti-abuse rules, which apply to stocks, bonds, and other securities. If passed, this would prevent cryptocurrency investors from immediately buying back the same asset after selling at a loss.
Crypto assets are potentially changing the international monetary and financial system in profound ways. To control such a wide ecosystem, there is an urgent need for setting up a comprehensive, consistent, and coordinated regulatory approach to crypto. But if we start now, we can achieve the policy goal of maintaining financial stability while benefiting from the benefits that the underlying technological innovations bring.