There are a couple of reasons why the ruling party and lawmakers of a specific country would want to bring cryptocurrencies under their regulatory framework. Most of these reasons are connected to creating an additional source of income for the government, but they are usually masked under the “its too dangerous for the investors” excuse. However, besides the natural desire to create another source of income, there is another reason, more political than financial. Let’s discuss these two scenarios in detail.
The tempting tax
Like anything else connected to finance, cryptocurrencies are also prone to be taxed. For example, if you are self-employed and tend to trade on various financial markets, your profits are your main source of income. Therefore, the government needs to somehow tax you, therefore they tax your profits. The same thing goes with cryptocurrencies. However, there is one big problem that the lawmakers face at this moment.
Cryptocurrencies cannot be tracked, unless it is deliberately done by the service provider. The service providers don’t just hand out customer data, the reasons from the government need to be legitimate.
Tracking traders in traditional financial markets are much easier. For one, the companies are supposed to make reports to the financial regulation, which is just another branch of the government. The other reason is the trading software of forex brokers itself. You see, the data can be easily gathered from that software. The encryption isn’t very reliable as well.
Seeing the massive success of cryptocurrencies during the Autumn of 2017, the governments became more and more prone to the idea of a crypto tax. A crypto tax needs to be legitimate, therefore cryptos themselves need to be legitimate. Hence, the great scramble for a proper regulatory framework for cryptos all over the world.
Disrupting the “peace”
Having everything “under control” is very important for any government. It prevents multiple problems, like anarchy, social unrest and various dangers for the rule of law. Virtually every single person in a developed country employs the service of banks. The transactions made, the money withdrawn, the transfers and everything else is promptly recorded on these bank accounts. Therefore, when there’s a “questionable” transaction of a large sum of money, the bank may intervene and find out the truth. This helps to prevent money laundering, and in the most extreme cases, financing violence and terrorism.
Cryptocurrencies being so popular, and so fast to transfer, create a problem for this “rule of law”.
Problem #1 is the anonymity.
Nobody knows who sent what to whom and when. It is not recorded anywhere. And even if it is, the government has no access to it.
Problem #2 is the lack of information and education.
When the government says that it bans or regulates cryptocurrencies in order to protect the investor, it is not necessarily lying. Sure the tax and control may the bigger part of the motion, but the protection of ignorant investors is also a part of it. Having their population waste away their money on virtual currencies, which may not even continue circulation in the country is devastating for any economy. The government much rather have these people spend their money locally, with local vendors and businesses, further enriching the economy.
Having control over the industries in the country and extra tax money are 2 main reasons why governments scramble to make a regulatory framework. There are dozens of other reasons, but compared to these 2, they are insignificant. I think that the only one that comes remotely close to these 2 reasons is the desire to innovate. Innovation brings new companies, new companies bring investments, investments bring lower interest rates, so on and so forth.
It’s all a big loop when you look at it closely, and the government just tries to keep the status quo.