As a rule, I’m loath to suggest more regulations on anything. But in this case, I really think it would make the currencies more stable and by definition, less volatile.
I’m writing this piece on the airplane as I travel back to the states after two weeks in Belgium and the Netherlands. There were only a few occasions, namely grocery stores, where I was able to buy something with euros, the form of money in the European Union, or EU. It was shocking, really. Nearly every purchase required an EU pin or debit type card or a credit card – from parking meters, to restaurants, to souvenir shops, to museums, to gas stations, to geez, the ice cream cart on the sidewalk. I suppose it started with COVID and the necessity of limiting anything passed between people that could be a carrier of the virus, including currency.
The problem I kept running into was the difficulty in using American credit cards and debit cards. That’s why I tried getting euros in the first place, which are hard to get. I unsuccessfully went to a bank to get my dollars converted into euros. It turns out that the banks in the Netherlands don’t carry money anymore. Let me repeat that, the banks don’t carry money. You have to go to an ATM and do a withdrawal from your U.S. debit card for a very high fee and lousy exchange rate. I don’t know why I bothered. I had almost all of my euros left over when I returned home.
For now at least, the Netherlands has opened up and people aren’t wearing masks anymore, even on the trains, but they still won’t accept euros. I think perhaps the government started with the pandemic limitations and realized that pin and credit cards make tracing purchases a whole lot easier and were able to cut out the shopkeeper or vendor from putting two euro out of every five in their pocket. The end result is that currency has become almost entirely digital in the Netherlands.
Which brings me to cryptocurrencies which are digital money. With various cryptocurrencies collapsing and the outrageous price volatility of the others, establishing some consistent regulations would be incredibly helpful. States already regulate cryptocurrencies, but all the regulations are different depending on the state. There is no federal regulation and there needs to be. If nothing else, regulations would establish some legitimacy and I, for one, believe and hope cryptocurrencies are here to stay and thrive.
As a rule, I’m loath to suggest more regulations on anything. But in this case, I really think it would make the currencies more stable and by definition, less volatile.
There are all kinds of federal regulations with currency and stocks and bonds. There are regulations with banks, too. U.S. banking regulations address privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending, and the promotion of lending to lower-income populations. And your money is insured by the FDIC for up to $250,000. Plus the Federal Reserve requires banks and other depository institutions to hold a minimum level of reserves against their liabilities. As I write this, the marginal reserve requirement equals 10 percent of a bank’s demand and checking deposits.
The federal regulations for stocks are sweeping ranging from the Securities Act of 1933 to the Jumpstart Our Business Startups Act of 2012. Same with bonds. There are just too many regulations to list here.
But what about cryptocurrency?
According to Skadden, Arps, Slate, Meagher & Flom LLP, in recent months, the increased focus on cryptocurrency regulation and enforcement at both the federal and state levels demonstrates the digital currency’s place as an established component of the financial landscape. At the same time, the cryptocurrency industry has become more attuned to and engaged with the U.S. government. Growth in this space appears likely to continue.
On August 10, 2021, the U.S. Senate passed a $1 trillion bill aimed at increasing infrastructure funding over the next eight years. To help pay for these expenditures, the Senate included a provision imposing reporting requirements on cryptocurrency “brokers,” with estimates that such reporting would allow the Internal Revenue Service to collect an additional $28 billion in tax revenue over 10 years. But the broad definition of broker — any person responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person — sparked significant backlash throughout the cryptocurrency community, resulting in several days of proposals and counterproposals among legislators. While the original definition remained in place, the debate marked the most serious consideration of a cryptocurrency issue by either chamber of Congress.
President Biden has just proposed federal regulations, but like most things that need to get through congress, it may take a while. I for one think that we do need some basic federal regulations for cryptocurrency to start with.
Why?
It is hugely risky. Cryptocurrencies have a serious supply problem, or specifically, an oversupply problem.
That’s why their prices are collapsing. Bitcoin is limiting the ultimate number of coins mined, but there are over 10,000 other cryptocurrencies out there to buy. And let’s face it, there are only so many people that are buying cryptocurrency. My mom isn’t. And the U.S. government isn’t doing anything to address this supply problem.
Yes, that is one of the jobs of the government – to protect people from themselves. That’s why we have things such as social security and have to pay into it with every paycheck. Because I know people that are seriously not to be trusted to manage their own retirement. If the FICA deduction is given back, they will siphon off that amount each and every paycheck and spend it faster than you can say, “old ladies eating cat food.”
For the same reason, it makes me cringe every time I hear a commercial for retirement accounts held in cryptocurrency.
It’s also why we make it illegal for loan sharks to charge 100% interest rates. Because people get desperate for something and all their common sense goes out the window.
And it’s why the government makes banks hold ten percent of their money in reserves. Because just like unscrupulous business people, there are plenty of unscrupulous banks that would lend out just about every cent they get if it meant making more profits.
No one likes regulation, but it does serve a purpose as long as it’s not too onerous. Besides, I’m not making laws. I’m just suggesting them.
Common-sense regulations will make people feel safer and encourage more cryptocurrency use.
How?
1. Limit new cryptocurrencies.
As of March 22, 2022 there have been 18,465 different cryptocurrencies created. Nearly half of those are “dead,” which leaves about 10,000 and change left. There should be some minimum requirements to develop a new cryptocurrency. Anyone can start their own cryptocurrency. Practically every metaverse and NFT platform and even celebrities have their own. How strict are the requirements to start a cryptocurrency? Governments are talking but no real regulation has been passed. Some states have passed crypto friendly laws allowing cryptocurrencies to bypass state securities regulations. According to Investopedia, anyone can create a cryptocurrency, but the process does require a commitment of time, money, and other resources, in addition to advanced technical knowledge. The main options are creating your own blockchain, modifying an existing blockchain, establishing a coin on an existing blockchain, or hiring a blockchain developer. If you are modifying an existing blockchain, and can do a bit of programming yourself, it would cost hardly anything. In fact, I may start my own cryptocurrency as an experiment. I’ll write about it.
Back to regulations, I think there should be some minimum amount of cash established to start your cryptocurrency, and a minimum amount of inventory of your new cryptocurrency on hand.
2. Create federal regulations that would be consistent across all states and U.S. territories.
Naturally, when there is a lack of federal regulations, a vacuum is created and that vacuum is often filled by a hodge-podge of state laws and regulations. This situation will only make cryptocurrencies riskier and more confusing across state lines.
The state laws regarding cryptocurrencies are wildly different. Bloomberg Law has compiled a good summary.
3. Solve the problem of using traditional monetary policy with cryptocurrency.
As cryptocurrencies grow in number and value, it will be more difficult for the FED to achieve their monetary goals and adjustments.
What affects money? Monetary policy, mainly through increasing and decreasing the supply of money being printed and pumped into the economy. Read my prior article, “Fiscal Policy v. Monetary Policy.”
4. Paying taxes on crypto
Many types of crypto transactions are taxable events, each with its own set of rules and exceptions. If you sold, converted, spent, earned, or staked crypto, for example — you’ll need to report your transactions to the Internal Revenue Service.
Often, Crypto transactions are treated like stock sales, which means that if you hold it for more than a year, you can qualify for capital gains tax which is lower than ordinary income tax. But, again, states have different laws, and there should be consistent federal laws.
If technically, money is an intangible concept (it’s just an IOU from the federal government after all) and currency is tangible because it has a physical form (bills and coins), then cryptocurrency is not really currency and shouldn’t be called currency. Because it’s not like you can hold a Bitcoin or Ethereum in your hand. It’s just an IOU guaranteed by the blockchain.
However, If you really think about it, money or currency can’t be purchased per se. It can only be earned or received as a gift unless you’re talking about foreign exchange or illegal activities.
No one really buys money. And people buy cryptocurrency with money, or other cryptocurrencies that they’ve bought with money. It all starts with money. So cryptocurrency isn’t money. At this point, it is more of an investment vehicle like a stock or bond. Stocks and bonds are regulated to within an inch of their lives. But cryptocurrency is different of course and the difference is that cryptocurrency can be used as a payment for goods and services. You can’t do that with stocks or bonds. Perhaps, the conversation will evolve even more when it is accepted as payment on a widespread basis. But until then, I think this would be a good start.
