Regulation is among the key factors that affect Bitcoin’s price. The cryptocurrency’s rise in popularity has been arrested every time a government has cracked the policy whip, and countries have taken varying approaches to Bitcoin regulation.

For example, in November 2019, Bitcoin sank when China accelerated a crackdown on cryptocurrency businesses. Conversely, whenever a regulatory “victory” emerges, prices surge temporarily. For instance, in January 2024, after years of Bitcoin Spot ETF denials from regulators, Bitcoin Spot ETF approvals caused its price to climb over the following months to more than $73,000.

By their very nature, cryptocurrencies are freewheeling, not beholden to country borders or specific agencies within a government. However, this nature presents a problem to policymakers who are used to dealing with clear-cut definitions for assets. Here are two unresolved questions relating to Bitcoin regulation.

Who Should Regulate Cryptocurrencies?

Nothing is more symptomatic of confusion about cryptocurrencies than their classification by U.S. regulatory agencies and updates with former President Donald Trump’s tax reform law. The Commodity Futures Trading Commission (CFTC) treats Bitcoin as a commodity, while the Internal Revenue Service (IRS) treats it as property.

There is also a disparity in state and federal responses to cryptocurrency. While states have moved with alacrity and formulated rules for initial coin offerings (ICOSs) and smart contracts, federal responses are generally fueled by interpreting existing laws compared to how the cryptocurrencies are being used. For example, cryptocurrency startups in New York are required to obtain a BitLicense, which has stringent requirements regarding disclosures, before an ICO. Similarly, Arizona recognizes smart contracts. However, as of March 2024, Congress hadn’t enacted any legislation to guide regulators, although there have been several attempts.

How Should Cryptocurrencies Be Regulated? 

The unique characteristics and global portability of cryptocurrencies present another problem for regulators. 

For example, there are broadly four different types of tokens being traded on exchanges—transactional, utility, security, and governance tokens. As their name indicates, utility tokens serve an underlying purpose on a platform. For example, ether (ETH) is used on Ethereum to pay transaction fees and as collateral for participating in blockchain processes and earning rewards.

Such tokens are not subject to the SEC’s rules unless they are used as securities. On the other hand, security tokens represent equity or a share in a company and automatically fall under SEC purview. Governance tokens allow holders specific rights on a blockchain, and transactional tokens are designed to only be used in financial transactions.

Not surprisingly, several tokens have circumvented existing regulations by declaring themselves utility tokens. Such startups have been publicly rebuked, but that has not stopped tokens with questionable business models from being listed on exchanges outside their native countries.

In response, international agencies such as the International Monetary Fund (IMF) have called for an international discussion and cooperation among regulators as far as cryptocurrencies are concerned. The EU, which has been welcoming of the cryptocurrency revolution, may possess an advantage over other territories because it controls a 28-member bloc. In June 2023, the EU Markets in Crypto Assets (MiCA) regulation entered into force. MiCA defines cryptocurrency assets and how they are to be regulated in the bloc. This legislation answers how cryptocurrency should be regulated in the EU, but the U.S. and other countries are still working on solutions. Some countries have placed outright or partial bans on cryptocurrencies.

Creating Regulations for Cryptocurrencies

On his Twitter page, the former head of blockchain practice at law firm Cooley, Marco Santori, called bitcoin a “legal platypus” that doesn’t fit neatly into established asset categories. However, the platypus may not be such a big problem for taxation or purposes within the United States.

Bitcoin and cryptocurrencies are actually no different than cash, stocks, bonds, or other financial instruments—they can represent the same things. In the U.S., regulations already exist that can apply to how an investor, business, or consumer treats them. Creating definitions and applying them to these virtual assets for regulatory purposes, as is already being worked on, might be all that is needed.

Regulators Could Look to Asia for Guidance

Some countries, notably in Asia, are pointers in ways to deal with cryptocurrencies. The clearest indication of future policy for the region regarding regulation may come from Japan, which officially recognized cryptocurrencies as property in its Payments and Services Act and developed a framework in 2017.

Startups planning an ICO are also required to obtain a license that establishes a minimum set of requirements and disclosures for the offering. Finally, exchanges are also subject to capital requirements, strict IT compliance checks, and regulations about KYC (Know Your Customer). To achieve these changes, Japan had to amend its Payment Service Act. To be sure, the task is much easier in Japan since the country has only one agency, the Financial Services Agency, to operationalize the changes.

South Korea has plans to tax any cryptocurrency profits of more than 2.5 million South Korean won at 20%, a measure which is scheduled to be placed into effect in 2025.

The Bottom Line

Bitcoin regulations vary around the globe if they exist at all. But one thing remains certain—developed countries with financial services regulators are likely to develop regulations on cryptocurrency activities to protect the interests of consumers and governments and combat illegal activity.

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