Regulating Cryptocurrencies – And Why It Matters

Nations that attempt to limit cryptocurrencies’ ability to solve these problems will find that protecting high costs and systemic friction will grind their economies into dust.

There’s a great deal of confusion right now about the regulation of cryptocurrencies such as bitcoin. Many observers seem to confuse “regulation” and “banning bitcoin,” as if regulation amounts to outlawing bitcoin.

Further confusing things is the regulation of cryptocurrency exchanges, where cryptocurrencies are bought and sold.

In China, for example, cryptocurrencies are not outlawed, but exchanges were shut down until regulators could get a handle on how to deal with the potential for excesses such as fraud, misrepresentation, etc.

A Wild West free-for-all is conducive to scammers, and so some thoughtful regulation that protects users is to be welcomed.

Governments tax income and capital gains. This is how they fund their activities. Clearly, gains reaped from cryptocurrencies are no different from gains reaped from other speculations and investments, so they should be recorded and taxed in the same manner.

Some enthusiasts of cryptocurrencies seem to think that regulations requiring the reporting and taxation of gains made buying and selling cryptocurrencies is tantamount to destroying cryptocurrencies.

I think this view has it backwards: fully legalizing and regulating cryptocurrencies as financial instruments legitimize them in a much wider circle of potential users, and common-sense regulations are to be encouraged and welcomed, not viewed as threats to cryptocurrencies.

I want to stress that beneath all the speculative frenzy we see in the cryptocurrencies, what will retain value and remain scarce and in demand is whatever solves problems.

Cryptocurrencies have the potential to solve two problems:

1. reducing the cost and friction of financial intermediaries.

2. holding value as the $250 trillion in phantom wealth created in the asset bubbles of the past 12 years vanishes.