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The U.S. government will often do whatever it takes gets its piece of the pie, especially when something new and exciting comes onto the scene. We’ve seen it time and time again, and the executive order signed by President Biden in March is clearly the first of several steps that will bring the IRS and regulators closer to your crypto wallet.
Why does the government want inside your crypto wallet?
The government’s stated reasons why it wants to peek into your crypto wallet and the real reasons it wants to get in there are two different considerations. The official position of the White House is that it wants to regulate cryptocurrency wallets because:
- There could be a heightened risk of money laundering in these wallets.
- These wallets could be used for criminal activities.
- It has virtually no oversight over these wallets, and it would like for that to change.
- It hopes to gain an edge in the global financial system by investigating and leveraging digital-asset technologies.
- It is exploring the possibility of a U.S. central bank digital currency (CBDC).
The government would very much like full transparency around the wallets so that it can properly tax any profits that traders may have made in cryptocurrencies. On the surface, that does not sound terrible, but the reality is that this could turn the world of cryptocurrencies upside down.
Cryptocurrencies thrive only in a decentralized environment
The theory behind cryptocurrencies and why they work is that they are meant to be used in a decentralized environment. That means central banks and governments can’t seize your assets or limit your transactions. When given the freedom to operate without the oversight of any government, cryptocurrencies can be valued based on the free market.
Traditional or fiat currencies have a pricing structure that is greatly influenced by government policy, and that is precisely what cryptocurrency users are trying to avoid when they purchase their crypto. They want the value of the thing that they buy to be determined only by what others are willing to pay for it.
New regulations could crush an up-and-coming inflation hedge
Many cryptocurrency optimists point to the idea that cryptocurrencies could prove to be a valuable hedge against inflation as the easy money policies of the Federal Reserve continue to have an impact on the retail price of nearly everything. The Motley Fool summed up the sentiments of those who believe this by saying:
Bitcoin, like gold, is characterized by its scarcity and low correlation with other financial assets. There is only a fixed supply of gold in the world, and there will only be 21 million Bitcoin ever. This supply cap means that as demand for the asset increases, prices will as well.
The piece went on to say that currencies like bitcoin are not a perfect hedge against inflation, given that they are so new to the world and still relatively speculative. However, investors are on the hunt for investments that can outperform inflation, and there are fewer of those to be had. Therefore, it is particularly cruel that the government is using a time like this to attempt to impose new rules and regulations on investors who are trying to find alternative ways to earn a return.
Proposed regulations on stablecoins
Different from the fluctuating prices of popular cryptocurrencies like bitcoin, stablecoins are a type of crypto with a fixed value that is tied to the U.S. dollar. These are the most likely to be subject to regulations, since they have the potential to be used as a replacement for money-market funds and regular currency when making purchases.
The proposed regulations would treat the issuers of stablecoins as banks, and create new rules related to the trading and use of stablecoins. These regulations would require stablecoins to be insured, be subject to federal oversight and risk-management standards, and be restricted in terms of affiliation with commercial entities.
The outlook
The wheels of government and its bureaucrats are largely on board with imposing new regulations and oversight into the cryptocurrency space. They would like to see changes made as soon as possible to capitalize on all of the wealth that is being actively traded.
Many lawmakers are on board with these proposals as well. In a glimmer of good news for those who would like to keep the government out of cryptocurrencies for as long as possible, the Biden administration didn't go as far as it might have when it recently ordered a study of cryptocurrencies rather than dictating particular regulations (outside of stablecoins) to put in place in those markets.
Just a study of the markets is more heat than some would like from the federal government, but at least they can take comfort in the fact that the White House didn't push the matter harder than that.
Given that nearly one in five Americans has either traded in or used cryptocurrencies for their own purposes (per CNBC data), it is no surprise that they are finally garnering attention from regulators. That said, those same regulators could be what causes the crypto industry to lose its intended purpose and mission. It will be a sad and dark day for cryptocurrencies if they are regulated to the extent that some would like to see. For now, traders have to wait and see if the next shoe will drop on this story.
Steve Larsen, CPA, CFP® is co-founder of PlannerDAO, a cryptocurrency education community for financial planners. He is also co-founder of the Certified Digital Asset Advisor (CDAA) designation, as well as an adjunct professor of finance at Gonzaga University, where he teaches classes in cryptocurrency and financial planning. To learn more about PlannerDAO, please visit plannerdao.com.
Read more articles by Steve Larsen
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
