Why cryptos and government simply don’t mix well

Governments are always welcoming to new sources of revenue or new ways of increasing their economy, but an overwhelming majority of them has been quite hostile towards the new kid on the block, known more commonly as cryptos.

For years now government officials have been struggling to draft, maintain and enforce regulations. But that does not mean that they’ve stopped trying. One by one we have seen various countries introduce draft after draft after draft, but still not change their stance about the blockchain technology.

The most recent country to enter the list of regulators is the Russian Federation, which will most likely have its regulation drafted by the end of May, and by the end of June, it will be enforced on a national level. But, Russia starting the regulatory framework quickly arose questions as to why one of the most crypto-heavy countries would like to restrict one of their best sources of income. Was it true that governments and cryptocurrencies simply cannot mix well? Or were there some other reasons?

Well, there are more than a few to name. But the most important issues about cryptocurrency regulation is directed towards fair taxing, controlling the industry and maintaining national safety. So let’s dissect these three main points.

Controlling the industry

We all know that cryptocurrencies are notorious for their anonymous transactions, and very hard trading procedures to the original issuer. In the past, this was seen as a dangerous activity done by fraudulent individuals, but quickly grew on most people, but not the government.

You see, when the officials are not able to track most of the transactions happening within the country, they cannot draft statistics and make plans for the future. For example, what part of the economy needs a little push or what type of monetary law is not working. Therefore they needed to track these currencies somehow.

The best thing they were able to come up with was accountability. The crypto exchanges located within their borders were required to deliver information about a specific customer’s transaction histories when requested. And it worked in the beginning, the process was going smoothly in most countries, but soon enough, traders started migrating over to foreign platforms such as Binance or OKEx, which are basically considered as nomad companies.

The regulation was then amended to force traders themselves to keep ledgers of their transaction histories, which was a bit more hands-on by the government. Every suspicious transaction onto their bank accounts or any other traceable eWallet would have to be documented with facts and proof. So, for example, if you got a $10,000 deposit on your bank account without explanation (if of course, it isn’t natural for your account), you’d have to either explain why it happened or simply provide the recorded history of crypto transactions to the relative authorities.

This is why the enforcement of the “crypto tax law” first started in Spain not too long ago. The local agencies were simply not receiving any information from known crypto traders, therefore they had to somehow incentivize it.

Another reason why regulation was so important for control is the various other regulations that were present in a country. For example, let’s take a country like Canada. Its judicial system was able to handle pretty much anything that was thrown at it, but they had a very specific regulatory framework for online gaming.

The only requirement was that a company operating these online services in Canada, be located somewhere outside of the country, and hold the local license. This was quite restrictive to local companies wanting to tap into the market, so they had to find alternative methods of passing the firewall.

Many started using crypto payments as to mask their location and the identity of their players. It worked for a while as more and more Canadians started using Canada-based platforms for their online gaming needs. Naturally, it was discovered and a whole new argument was introduced to the crypto regulation topic. These types of cases can be seen in any country with similar regulations. Places such as Australia and New Zealand were also subject to such machinations.

Additional reasons for taxation

For the government, it’s imperative to maintain a stable economy and always be in search of new ways of revenue. Be it for the benefit or detriment of the local population. This is usually justified by developing an economy for the future and creating a better environment, even though here and now gets much much worse.

Countries, where cryptocurrencies are classified as tradable assets, have a legal justification to impose a Capital Gain tax on their citizens. If the classification is not there, then any attempts of imposing such taxes are deemed illegal and can be taken to court—which has happened numerous times, by the way.

The most recent one was in Israel, where a blockchain entrepreneur was forced into paying $4 million in taxes when the judge classified cryptos as taxable on the spot.

There are a number of issues connected to taxes though. Yes, the government does receive some revenue through taxing these capital gains, but many economic experts have said that it’s much better to abolish the tax and increase the consumer purchasing power in the country.

Their arguments stem from the spending habits of the local community. If the majority of the population spends their “extra income” on supporting local businesses (meaning they simply spend more on buying various stuff), it’s much healthier for the economy in terms of growth, than taking that extra income away from the population and investing it in infrastructure or anything else.

This argument has not been covered on a scale that it should be, unfortunately, as most governments simply ignore the consumer purchasing power, justifying the fact that it’s already high enough. But there can never be too much of it, can it? It simply provides the local population with the ability to participate in larger markets in the future, or simply save up enough for retirement, which takes some of the weight off the government itself.

So it’s understandable why many officials, as well as experts,  think that Capital Gain tax is nothing but a detriment to the local economy, rather than a benefit, regardless of the assets they tax.

National safety and protection

As already mentioned in the beginning, one of the main issues with cryptos for the government is the anonymous transactions which are very hard to trace.

Soon enough, cryptos became a means of laundering money out of the country, which was a large detriment to the local economy. That’s why the government requested justification on large crypto transactions or at least asked the companies to demand it.

I think that this argument is the most realistic. Protecting the local population from a scammer who’s trying to cash out his or her funds should be a priority for the local central bank or financial regulator. In fact, thanks to these new laws, many scammers have been ousted when they tried to cash out. The most recent case was with a Brazilian Ponzi scheme that tried to buy dozens of luxury cars.

Overall, there is no real opposition against this part of the regulation.

Should there be regulations?

In short, there should definitely be a regulation in the country, but it needs to cover only the most important parts of the market. Such as safety, investor security, and scam prevention. Imposing a tax may benefit the country in the short term, but the long term gains of consumer purchasing power trump that benefit by at least ten-fold in the long-term.

The control is also understandable, as laws need to be enforced, but the regulation pretty much destroys all of the value of crypto if it touches that point.

Overall, a crypto regulation will be accepted by the community, only if it is there for the sole reason of protecting them.

(Featured image by DepositPhotos)

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DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.