Many investors continue to experience uncertainty about reporting taxes on their cryptocurrencies. So far, however, regulators are still winding their way through more fundamental questions. The truth is that there isn’t even a consensus on how to classify cryptocurrencies, at least from a legal and financial perspective. Until recently there has been very little specific regulation relating to digital currencies.

As a consequence, regulators and businesses are having to apply laws written with the traditional company and trust structures in mind to entirely new (crypto-related) situations.



Unfortunately, these patchwork efforts create more complexity in the end. To quote Arnold Spencer, Coinsource general counsel and former attorney for the U.S. Department of Justice, such regulations are,



“…all reactive. All these new efforts to adopt digital currency regulations are piecemeal. One country passes regulations for exchanges. Another country adopts policies for ICOs. A third country passes new tax policies. But no one seems to have a comprehensive, forward-thinking digital currency strategy.”

A few solitary voices are now recognizing that a more consistent regulatory approach is needed. As Joachim Wuermeling, a member of the board of Germany’s Bundesbank, asserts “Effective regulation of virtual currencies would only be achievable through the greatest possible international cooperation because the regulatory power of nation-states is obviously limited.”



The ICO Regulatory Landscape

Not surprisingly, current regulatory concerns tend to revolve around ICOs. They’re might best be viewed as a double-edged sword, helping spur blockchain innovation but raising red flags about investor safety as well. As a result, governments take different regulatory approaches toward them.

For instance, while China has outright banned ICOs, many western nations simply require ICOs to follow an existing regulatory framework. However, Estonia and other lightly regulated countries effectively allow free reign for ICOs. Many countries are just now planning to implement ICO regulations, leaving the ICO landscape for investors volatile and likely to change at a moment’s notice.



To make matters worse, an ICO will need to heed securities laws from both their home country and those of any potential investors. For example, US securities laws classify as securities any tokens sold to US investors and thus must follow the relevant reporting requirements. In brief, unless an ICO is willing to turn away investors from specific countries, the due diligence required isn’t just regional or national anymore – it’s global.

If you consider that data privacy, securities law, tax, financial regulations, and various other legal issues remain immensely complex, regulators have every incentive to seek consistency. For now, an ICO will likely need dedicated legal researchers to keep abreast of the appropriate regulations. And that uncertainty and inconsistency is bound to hurt innovation.



Cryptocurrency Exchanges

Cryptocurrency exchanges are another area of concern for regulators. While less frequent, exchange exit scams are just as severe and in the past hackers have stolen hundreds of millions of dollars from exchanges. In theory, a comprehensive, forward-looking set of regulation for centralized exchanges should result in increased safety and security for the consumer. Such rules are why some people are more trusting of exchanges in jurisdictions with traditionally strong consumer protection laws – such as Australia.



As the law currently stands, Australian exchanges are required to be registered with the state and must regularly report suspicious activity to the Australian Transaction Reports and Analysis Centre (AUSTRAC). They must also keep transaction records for at least seven years. While not all exchanges are companies, those that are incorporated must also follow any existing legislation that applies to them. Not incidentally, this legislation includes provisions against engaging in the deceptive and misleading conduct).

Many notable exchanges welcome such regulation. As Oleksandr Lutskevych, CEO of CEX.IO, notes



“Until now, the industry has not had its say on regulation. It has been widely supposed that crypto companies want to avoid a regulated environment, but this is far from the truth. The industry is all too aware that regulation will lead to the maturity of the market and ensure businesses remain free from suspicion of involvement with illegitimate uses of cryptocurrency.”

Conclusion

Regulations are likely to become more and more common as countries attempt to safeguard their citizenry from scam exchanges and reduce money laundering. While cryptocurrency investors generally chafe at such regulation, the average person prefers centralized exchanges be above-board before investing in them. The added confidence that derives from such regulation will drive cryptocurrency adoption and improve its reputation as a whole. As the cryptocurrency industry matures, expect a concerted effort by regulators worldwide to streamline these regulations in order to promote investor confidence.