What You'll Learn
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What are the main risks of investing in cryptocurrencies?
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What is the attitude of large investors to cryptocurrencies?
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How Countries Regulate the Cryptocurrency Market
What You'll Learn
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Understand the risks of investing in digital assets
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Choose the most suitable jurisdictions for investing in cryptocurrencies
In this lesson, we will look at the opportunities and risks associated with cryptocurrencies, as well as their legal status and the prospect of the emergence of state-owned digital currencies.
Most investors who have paid attention to the crypto market are wondering: is it worth buying now? Is this a good time to enter or not? Of course, there is no definitive answer to these questions. Each investor has their own goals and planning horizons. In the long term, established cryptocurrencies are rising, but short-term price drops and corrections are not ruled out.
Future price increases cannot be guaranteed, but due to limited supply (for example, there cannot be more than 21 million bitcoins) and gaining popularity, demand pushes prices higher and higher. Crypto assets are still present in the portfolios of very few investors, so in the event of further penetration of blockchain into the economy and the recognition of cryptocurrencies, prices may continue to rise.
It is worth remembering that all financial markets are closely related. Crisis phenomena in the economy can undoubtedly affect the cryptocurrency industry as well. The outflow of investors' funds from high-risk assets is a traditional reaction to the deterioration of economic indicators in the world, the rise in central bank rates and the outflow of liquidity from stock markets.
It so happened that due to a combination of different factors, 2021 was a record year in terms of investment inflows into the crypto industry. The amount of funds invested in blockchain exceeded the indicators of all previous years of observations and amounted to almost $30 billion, which suggests that venture capitalists see great prospects in the industry and are ready to take risks in anticipation of its growth.
Venture (risky) investments in the crypto industry
In addition to the risks associated with the high volatility of the crypto market, there are other risks: technical, regulatory, as well as risks inherent in individual projects. Let's start with the last point. Tokens of blockchain projects depend on the success of the project itself. Here, the risks are related to the competencies of the team, the presence of competing projects, as well as the overall perception of the product by users.
What are the risks?
Technical risks can be divided into two components. Firstly, there may be problems in blockchain protocols due to errors in the software code. For example, in January 2022, the Solana blockchain was unavailable for transactions for several hours and users were unable to transfer their assets.
Secondly, there are technical vulnerabilities in exchanges, cryptocurrency wallets, and other services. Every year, various blockchain projects are hacked, as a result of which users lose funds. As a rule, the targets of hacker attacks are exchanges and small blockchains, which imply "hot" (with an Internet connection) storage of cryptocurrency.
To solve these problems, blockchain developers conduct code audits. Insurance platforms are also developing.
Thirdly, regulatory risks have an impact on both the prices of cryptocurrencies and fundamentally important indicators and mechanisms, such as mining. For example, the ban on bitcoin mining in China in mid-2021 caused the so-called miner migration. Miners turned off the equipment and transported it to other countries. During this period, both the power of the network and the price of the currency fell significantly.
U.S. Regulation
Investors pay the most attention to the regulation of the cryptocurrency industry in the United States. This is due to the large volume of cryptocurrencies on the balance sheets of American investors, including institutional ones. For example, only one company, Tesla, held bitcoins worth about $2 billion, and the American exchange Coinbase is one of the leading cryptocurrency trading volumes in the world.
In the U.S., regulation of the industry is in progress. Cryptocurrency is considered from different points of view: a means of payment, property, security, exchange commodity. There are special services for accounting for taxes, and each state has its own legal regulations. For example, in the state of Wyoming, you can register companies whose shares can be presented in the form of tokens.
At the same time, many legislators consider cryptocurrencies to be a phenomenon that threatens traditional finance. Blockchain is considered separately as a technology that can be used, among other things, to issue state digital currencies.
Currently, the legal status of cryptocurrencies is not defined in all countries of the world, but the consideration of this issue is an urgent task almost everywhere, because the value of all cryptocurrencies is already estimated at hundreds of billions of dollars and it is very short-sighted to ignore such an asset class.
Regulation in the EU
In the European Union, cryptocurrencies and crypto assets are classified as qualified financial instruments. EU laws do not prohibit banks or investment firms from owning, accessing, or offering related services to crypto assets.
In the European Union, cryptocurrencies are considered legal, but the rules for their exchange depend on individual member states. Taxation also varies, but many member states levy capital gains tax on profits made from cryptocurrency at a rate ranging from zero to 50%.
Regulation in Japan
Japan currently has the world's most advanced cryptocurrency regulation and recognizes bitcoin and other digital currencies as legal property under the Payment Services Act. Cryptocurrency exchanges in Japan must be registered and comply with traditional anti-money laundering obligations.
Regulation in other countries
A number of countries have introduced a direct ban on the use of cryptocurrencies as a means of payment, including Bangladesh, Vietnam, Egypt, Indonesia, the UAE, and Turkey. In 2013, the People's Bank of China imposed a ban on the use of cryptocurrencies for financial and payment organizations. In 2017, the Chinese government banned cryptocurrency exchanges from working with users within the country.
There are also countries where the crypto sector is legal. For example, in Mexico, Argentina, Brazil, Venezuela, and Chile, cryptocurrencies are freely accepted as payment by retailers. Cryptocurrencies in the region are mostly treated as assets and are subject to capital gains tax. Authorities in Brazil, Argentina, and Chile levy income tax on profits from crypto transactions.
State-owned cryptocurrencies
Government digital currencies are also referred to as central bank digital currencies (abbreviated as CBDC – Central Bank Digital Currency). CBDCs are seen as part of the state's money supply, which is different from existing cash and electronic forms of money.
Attitudes towards state cryptocurrency projects around the world
Among the major CBDC projects is the digital yuan in China. For example, during the Olympic Games in Beijing, the turnover of the digital yuan exceeded transactions in the Visa system. France, Canada, the UAE, and other major economies are also developing their CBDC projects.
Different countries approach CBDC technology in different ways. Blockchain technology will not necessarily be used in all government digital currencies. The use of public blockchains (e.g., Ethereum) to issue CBDCs is not currently on the table. However, the principle of traceability of all transactions is likely to be maintained.
At a glance
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Since the U.S. is a key player in the financial markets, government regulation in this country will be crucial for a variety of projects.
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The status of cryptocurrencies in Russia is in limbo, but due to the turbulent economic situation, the situation may be resolved in the near future.
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A private investor should keep an eye on government cryptocurrency projects, as they give a signal about the dynamics of regulation.
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