Since the value of crypto assets has been constantly growing in the last decade, their regulation has become the object of close attention of investors, traders and other market participants. We present our forecast regarding global regulatory changes in the crypto space.
Increasingly, we hear news that some countries are making various regulatory decisions regarding cryptocurrencies. On the one hand, this suggests that cryptocurrencies have become too large to ignore. Their recent growth and expansion of crypto platforms and assets have made the government’s response a necessity rather than a choice.
On the other hand, regulatory decisions have long-term implications for the crypto space, including its development potential. That’s why the decisions of such economic giants as China and the United States have directly affected the value of cryptocurrencies. The ability to predict such decisions allows us to expect a downward and upward movement of the crypto market.
What happened in 2021?
One of the biggest news about regulation in 2021 was the registration of bitcoin (BTC) in El Salvador. The Congress of El Salvador in June 2021 made BTC legal tender in the country. This decision legalized the payment of goods and taxes in BTC, thereby excluding the exchange of cryptocurrencies from capital gains tax. Despite the fact that the economy of El Salvador ranks 104th in terms of GDP, this has become an important precedent. Such an experiment also had an impact on the demand for BTC, pushing its value up.
Then China banned all cryptocurrency-related activities in the country. Mining was previously banned, which led to the execution of these operations outside the country. As of October 2021, the United States has become the No. 1 destination for cryptominers. This decision was expected to have a negative impact on the market, but over time, exchange rates recovered.
In addition to being the first in the field of cryptomining, the United States has begun preparing a regulatory framework for regulating the crypto space with the participation of the Securities and Exchange Commission (SEC) and the Federal Reserve System. At the same time, US President Joe Biden signed a law that introduces provisions on the provision of tax reporting on digital assets, including cryptocurrency.
Launch of the first ETF based on cryptocurrency futures on the New York Stock Exchange (ProShares Bitcoin Strategy (NYSE:BITO)) in October 2021, it preceded the decisions of the regulatory authorities. The maturity of the cryptocurrency markets has led to the creation of new tools and regulatory requirements.
The European Union (EU) has focused on transparency and anti-money laundering (AML) initiatives. In particular, in June 2021, the “Sixth Directive on Combating Money Laundering and Countering Financing” (6AMLD) came into force for cryptocurrency firms. 6AMLD entailed criminal liability for legal entities that do not comply with it.
What to expect in 2022?
All these regulatory changes in 2021 indicate that the crypto market is entering a maturity phase. The US will continue to play an important role as a financial regulator, which sets the rules for most banking institutions around the world. Due to the pressure of US senators on the head of the SEC, we can expect that in 2022 they will adopt a new set of rules focused specifically on cryptocurrency markets. However, given the launch of new instruments, such as BITO on the NYSE, it is already possible to talk about the minimum level of their acceptance by the traditional investment community. The EU will follow the same path, emphasizing transparency and traceability to prevent illegal activities.
At the same time, China chose a different path. The Central Bank of China, or the People’s Bank of China, is developing its digital currency eCNY, which may launch in 2022. The digital currency has become a response to the growing popularity of cryptocurrencies and a measure aimed at gaining full control over the digital payments market. These efforts are a limiting factor for the entire crypto space.
A possible contender for the role of El Salvador in 2022 will be Panama. Unlike El Salvador, Panama is considering the option of accepting all cryptocurrencies as legal tender. Ukraine and Cuba have also recognized cryptocurrency transactions at the legislative level. However, these countries did not fulfill the requirements for the mandatory adoption of cryptocurrencies, as happened in El Salvador. Given the harsh criticism of major financial institutions, such as the IMF, it is unlikely that any country will repeat this path in 2022.
We are confident that the new regulatory frameworks prepared by the US and the EU will play a major role in 2022. Clear rules will stimulate the markets and reduce the current volatility, as well as limit the risks associated with it. The cost of permits and licenses of regulatory authorities will continue to grow due to the tightening of state control. In this aspect, financial ecosystems that have received state licenses, such as the Maltese VFA Class-4 License, will take a dominant position in the market.