Crypto Regulation Explained: How the Market Could Change in 2022

Investors and traders are entering the cryptocurrency market at increasingly higher rates. Here's what you need to know about potential restrictions and regulations legislators could turn into law in the United States and throughout the world.
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2021 was the year that Crypto truly went mainstream. Once-foreign terms like “bitcoin” and “NFTs” entered the national lexicon and news story after news story analyzed what these trends could mean for the future of investing, banking and the stock market. In the U.S. and around the world, legislators have at times struggled to keep up with the quickly changing landscape. Despite the fact that one of the core tenants of cryptocurrency is its decentralized and thus-far unregulated nature, lawmakers and  government agencies have unveiled a host of policies and plans that they say will protect investors and limit crypto-related crime. 

Regardless of where they might stand on the necessity of these regulations, it’s clear the shifting market will require investors to take a second pass at their strategies and potentially change their behavior to comply with new laws and governmental policies. In this article, we’re taking a look at regulations from the U.S. and around the world that we’re likely to see in the crypto space in 2022, and breaking down action items to take to prepare for any potential market shifts or disruptions. 


Why Legislators are Calling for Regulation

The foundational technology that allows cryptocurrency to exist, blockchain, is known for being secure and supposedly “unhackable.” Its distributed and chained nature makes it one of, if not the most secure way to store data. However, the lack of a centralized institution or government backing this system has opened it up to bad actors who are able to take advantage of their anonymous status. 

A well-known example of this is ransomware attacks in which hackers demand payments in bitcoin, which keeps them untraceable. One such attack targeted the U.S. Colonial Pipeline and induced a run to the pump as consumers worried about potential gas shortages. Other illegal activities that take place over crypto, including tax evasion are increasingly difficult for authorities to detect, leading to the bipartisan slate of regulatory proposals we see today.

Additionally, in the consumer-facing space, the lack of general knowledge about the new type of digital currency has left some worried that the general public is at high risk of falling for scams and fraudulent offers. This has started to play out, with one high-profile example being cryptocurrency EthereumMax being sued under the accusation that it used celebrity promoters Kim Kardashian and Floyd Mayweather to artificially inflate the price of their currency in a “pump and dump” scheme. As we’ll discuss below, the U.S. Security and Exchange Commission have been taking a much closer look at these promotions and wide-reaching celebrity partnerships. 


What Crypto Regulations are U.S. Lawmakers Advocating for in 2022

Currently, cryptocurrency investors must report their taxable transactions on their federal tax returns. If you’re not an investor, you might be surprised to know that the Internal Revenue Service (IRS) began overseeing this space all the way back in 2014. Non-fungible tokens (NFTs) are also subject to the same tax laws, with any profits earned through their sale or trade subject to the capital gains tax. 

Bipartisan bills under consideration would take these tax requirements further, particularly when it comes to major corporations. A potential new law would see companies that facilitate crypto trades be required to report tax information about those trades to the IRS starting in 2024. At present, some, but not all, exchanges report this information. If passed, the system would mirror the current setup requirements for brokers of traditional investments, like stocks. Another possible provision would actually expand the definition of brokerage to include digital asset traders. 

Another aspect of the market that has drawn significant attention from the Biden Administration is Stablecoin, a type of cryptocurrency pegged to an existing currency. The most popular among this type is Tether (USDT), tied to the price of the U.S. Dollar. Treasury Secretary Janet Yellen has called for Stablecoin to come under the same regulatory environment that banks currently operate in. As implied by the name, these types of crypto hold “stable”,” like the value of a dollar, which has caused experts to state that they hold the most potential for regular use by everyday consumers. 

To best  prepare for this reality, a report from the President’s Working Group on Financial Markets proposes Stablecoin issuers should be classified as banks, be subject to federal oversight and required to meet appropriate risk management standards. The vast majority of crypto-related crimes like money laundering and tax evasion take place in “crypto-to-crypto” transactions that bypass the U.S. dollar, so it is very much in the government’s best interests to promote the ethical and legal use of Stablecoin to reduce the risk of bad actors to consumers. 

Finally, in 2022, look for the U.S. government to reduce the regulatory uncertainty around Cryptocurrency exchange-traded-funds (ETF). The SEC has thus far, not approved any crypto ETFs, despite receiving 12 applications in 2021 alone. ETFs are a type of index fund that can be bought and sold, just like a stock. In the crypto world, these allow for diversification in ownership and are significantly easier than buying coins directly from an exchange. Approval from the SEC would allow for the general public to include Crypto in their investment strategy without needing direct knowledge, similar to how many hand off their investment accounts to major firms like Fidelity and Vanguard.  

In 2021, the market cap for cryptocurrencies hit $2 trillion and the first cryptocurrency ETF started trading. Given this, it is very likely that the SEC will take action to approve at least one crypto-backed ETF under the Investment Companies Act. This act gives consumers confidence in their investments, as it requires companies to disclose financial and investment information on a regular basis. 


What Crypto Regulations Might Take Effect Around the World in 2022

While U.S. lawmakers have given positive signs regarding the wide-scale adoption of crypto, signals are more mixed across the rest of the word. Some countries have dived headfirst into the crypto world, like El Salvador, which became the first country to adopt cryptocurrency as a legal tender in 2021. The Central Bank of Hong Kong has also announced their plans to explore the adoption of a digital currency, with other countries like Dubai, Gibraltar and Malta positioning themselves as crypto hubs. 

In contrast, some countries have clamped down on crypto development, citing the unknown nature of the new technology. This includes two of the largest in the world by population: China announced plans to crack down on bitcoin mining in May 2021 and members of the Indian government have brought forward bills that would prohibit all private currencies. If anything, these moves have revealed the need for global oversight of these deregulated platforms that cross borders with ease. Chinese mining companies have relocated to more welcoming shores like North America and Kazakhstan, calling in to question the effectiveness of domestic-level policy decisions. 

The global Financial Action Task Force has called on nations to work together to implement worldwide standards, including the travel rule, which would avoid jurisdictional arbitrage. This rule would require crypto companies to share specific customer information alongside a transaction. Countries such as the United States, Switzerland and Singapore have already implemented the travel rule, with additional complying nations expected to roll out into 2022. 


What Crypto Investors Can Do to Prepare in 2022 

With all these and more regulations coming down the line, it falls on crypto investors to pay special attention to their portfolios and transactions to ensure compliance. While this might seem like an  unwieldy system, it’s important to remember that crypto represents an entirely new way of transferring money and paying for goods and services. Laying the groundwork now can help guarantee crypto’s acceptance into mainstream markets across the globe in the future. 

First and foremost, investors must stay organized and be prepared to report their taxable transactions to the federal government. Cryptocurrency and portfolio management software tools can help track transactions, gains and losses, as required by federal and state laws. More and more certified public accountants (CPAs) are also gaining additional competencies into the world of crypto transactions, so investors can also turn to them as an additional resource.

With the heightened focus on regulation, one way to avoid any potential issues is to be aware of what’s being discussed by lawmakers and staying cognizant of any regulatory policy that is likely to pass or take effect in the coming months and years. Legal provisions tend not to take effect for several years once passed, giving industry players ample time to adjust to any new requirements. 

Time will only tell all the exciting developments that are sure to come in the crypto space in 2022 and beyond!


Note: The information provided on this page is written by our staff and for educational purposes only. CodingBootcamps.io does not offer investing services or platforms, nor do we counsel readers to buy or sell specific stocks, securities or cryptocurrencies.

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