Maybe. That’s the short answer. The more comprehensive answer requires a bit more dialogue. Perhaps we should look backward before we move forwards. We need to get a sense of why bitcoin isn’t regulated and how China’s recent move to ban trading may spur a slew of changes in the industry.
A look back
Bitcoin appeared on the market on January 12, 2009 with the first transaction awarding a software developer 10 bitcoins. At that time, the combined value of the ten coins was $0. Within two years, the value of each Bitcoin hit $1; today, one bitcoin is valued at ~$55,000. Analysts forecast that a single bitcoin (BTC) could be worth over $100,000 – or even as high as $1,000,000. That likely won’t happen until BTC mining reaches its predefined termination point which is 21,000,000 BTCs and is expected to occur in the year 2140.
It takes about four years to mine 210,000 blocks; that milestone triggers a financial halving. New block rewards earned by miners for the upcoming four years is reduced by 50% which also halves the number of BTCs released into circulation. This is a means of controlling and stabilizing bitcoin value. The USA capitalized on digital currency early and now holds 24.88% of the world’s total BTC. Germany follows closely behind at 20.27% and France is a distant third at 6.04%. This has implications for market regulations, taxes, and international trading.
Why is bitcoin mined?
Natural resources like gold, oil, and diamonds are obviously mined: this process requires heavy equipment like drills and excavators. Bitcoin mining is entirely different. Even though you can’t physically see or touch a BTC, the mining process has an arguably and equally large and negative impact on the environment. Significant resources, including electricity (where the bulk is purportedly fossil fuels versus renewable sources) and water for cooling, are essential for the computing power required to “mine” the bitcoin. At the dawning of the bitcoin era, computer enthusiasts could easily mine it. However, today’s efforts require sophisticated and massive computing server farms to make the endeavor profitable.
An algorithm, called Difficulty, is constantly adapting. Adjustments to the algorithm are essential to control the rate of mining so that only one new bitcoin is “unearthed” globally every 10 minutes. Each time the algorithm puzzle is solved, a new BTC is generated. As more miners go online, the computation required becomes more intensive because the puzzles become increasingly more challenging to solve. A constant production rate is required to control the value of the digital currency, which swings widely as a volatile market entity.
How do you regulate something like that?
Mining is essential as it serves as a check and balance on the currency being traded. Trades valued at $1,000 or less require a single confirmation; trades up to $10,000 require three confirmations, and trades larger than that require six or more confirmations. Miners effectively track and authorize transactions to make it difficult for hackers to attack, alter, or stop the trades. More miners equal more security.
Every single transaction is recorded on a public ledger that is visible to everyone. This is a fundamental requirement behind cryptocurrency because no centralized authority, government, or other entity can influence the supply, exchange, or value of a bitcoin. That makes it difficult to levy taxes on transactions and drives some traders into the black markets to avoid financial penalties, which can be substantial given the explosive increase in value of most cryptocurrencies.
Blockchain protocols record the time and the amount of the trade, along with details regarding which digital wallet issued the digital coin and which wallet received it. You can hold a digital wallet and keep it idle, but, as soon as you receive a deposit or send cryptocurrency, new regulations require that the owner of that digital wallet register with a “KYC” (Know Your Customer/Client) profile. Those KYC data can include personal information like your name, your address, your social security number, or your account numbers on your home utility bills. In essence, making it easier to trace who traded what. Having a KYC code is now required to trade bitcoin on reputable exchanges. However, trades can and are being facilitated without a KYC code on the black market and via the dark web.
Transactions aren’t fulfilled anonymously – they’re simply extremely hard to trace. Anonymity, or at least pseudo-anonymity, was one of the original drivers attracting some early adopters, particularly those that sought to conceal their spending. Today, companies like Zcash and Monero are developing technology that makes transactions more difficult to trace. RegTech vendors and authorities definitely have their work cut out for them.
China’s latest move
Here’s where things get really interesting. Experts believe that about two-thirds of all crypto mining is conducted in China. Direct access to the specialty computers required to do the mining, which is typically manufactured in China, coupled with the availability of low-cost electricity (via coal) and other resources, make the country an attractive place to set up a crypto mine.
Back in 2013, China banned its banks from handling cryptocurrencies, but trading continued. The new ban, issued in September 2021, provides the strongest language yet. Perhaps the ban was issued to clear a path for The People’s Bank of China to release their electronic yuan to facilitate cashless transactions that can be tracked. And taxed accordingly. Comparatively, the US has recently stated that it has no plans to ban crypto.
Binance, one of the crypto exchanges, was originally headquartered in China but moved out last year as scrutiny increased. Now located in the Cayman Islands, Binance is under investigation by the US Internal Revenue Service (IRS) and the US Department of Justice for money laundering and other tax offenses. Currently, cryptocurrency falls under the jurisdiction of the Securities and Exchange Commission (SEC) as an investment and is taxable under the codes of the IRS. Earlier this summer, the UK Financial Conduct Authority (FCA) suspended all trading on Binance within the UK. So, there are already financial consequences despite the absence of regulations.
Will crypto be regulated?
The answer is, “probably.” Answering the question about when it will be regulated is tougher to gauge. Right now, there’s a lot of guessing as the SEC has yet to set any guidelines. To date, thousands of new tokens and digital currencies have been introduced spurring the establishment of hundreds of companies that store and trade them. In the absence of regulations, the digital trading market is rife with fraud. During the period October 2020 through March 2021, the Federal Trade Commission reported that consumers lost more than $80,000,000 in crypto schemes.
A first step on the path to regulation requires a clear and unanimous definition; neither of which prevail today. The SEC currently regards cryptocurrency as a security, the US Treasury classifies it as a currency, and the Commodity Futures Trading Commission (CFTC) considers Bitcoin a commodity. No wonder there’s confusion! Crypto exchanges operating within the US must register with the Financial Crimes Enforcement Network and comply with anti-money laundering laws. Looking down the path to regulation, taxation reporting and Initial Coin Offerings (ICOs) is likely the first aspects to be regulated.
Indeed, regulating crypto does seem like a cat and mouse game. Each month, new cryptocurrencies are coming online. Despite their volatility, investors are attracted by the convenience of bitcoin, no need for paper documentation, lower transaction fees versus credit cards, the inability to reverse a transaction or for one to be counterfeited, and numerous other benefits. With that many benefits, it’s unlikely that the crypto craze is going to stop anytime soon.