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Unlike traditional markets such as forex, stocks, and commodities where even a price swing as low as 1% can be big news, price variations as high as 10-20% can be considered commonplace in cryptocurrency.
Many factors can constantly influence the rising and dropping of prices in cryptocurrency including the technical advancements in cryptocurrency, media reports, influence of celebrities, government regulations, and more. This article is dedicated to exploring the positive and negative impacts that government regulations have on the price of cryptocurrency.
Government Regulations and Crypto Prices
While cryptocurrencies were created as a decentralized alternative to fiat currencies, many countries have implemented policies and regulations to limit criminal activities and to support user interests. It is observed that the cryptocurrency market swings for the better or for worse when a government implements a new regulation regarding the usage of cryptocurrency.
To better understand this connection, let’s take a look at one of the most discussed regulatory changes of 2024, the Bitcoin Spot ETF approval in January. This regulation was better for the cryptocurrency market, which made more people confident about the longevity of the crypto market and investments rose.
Although other factors such as the Bitcoin halving were in play, one of the other major aspects that drove the price of Bitcoin to an all-time high in the beginning of 2024 is this amendment in the regulation.
Similarly, an unfavorable government regulation can send the crypto market in the other direction. One of the biggest examples of the negative impact of government regulations is China’s crackdown on cryptocurrency businesses in 2019. China has banned all cryptocurrency transactions since, which led to a severe price drop.
Cryptocurrency Regulations Around the World
Now we know that favorable cryptocurrency regulations can be a catalyst for the uptrend in the market and vice versa. So, let’s explore some of the recent government policies taken concerning the taxation, transaction, and other usage of cryptocurrencies:
1. United States
On May, 22nd of 2024, the US passed a new regulatory bill – “Finacial Innovation and Technology for the 21st Century Act”. This act established a framework that clearly stated the regulatory authority of the two government agencies – the Commodity Futures Trading Commission (CFT), and the Securities and Exchange Commission (SEC).
The regulatory authority of digital assets on decentralized blockchains is invested in CFT. whereas, the SEC can regulate the cryptocurrencies that belong to non-decentralized and functional blockchains. The US government aims to tackle illegal activities surrounding cryptocurrencies such as money laundering, rug pulls, and more.
2. European Union
The EU was one of the first government authorities that introduce a comprehensive cryptocurrency regulation – Markets in Crypto-Assets Regulations (MiCA). The regulation was introduced in May 2023, that outlines several regulations that users and cryptocurrency projects have to follow in the EU countries.
According to the regulation, any company that is planning, issuing, or trading a cryptocurrency should have a license. This improves user’s trust and limits bad actors from the market. Additionally, the EU directs service providers such as exchanges to obtain the information of the sender, beneficiary, and the amount being transferred in every transaction. Moreover, it requires users who hold more than 1000 euros to complete the KYC (know your customer) verification process.
3. Canada
Canada is another nation that has been proactive about cryptocurrency regulations, even though crypto is not recognized as a legal tender in Canada. They were the first country to approve Bitcoin exchange-traded funds (ETF), allowing the trading of cryptocurrency through traditional markets without owning them.
Canada considers entities that allow crypto investments as money service businesses (MSBs), to operate in Canada they need to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). The regulations require a trading platform to register with provincial regulators. It is also noteworthy that Canada considers cryptocurrency similar to other commodities in terms of taxation.
4. Other Parts of the World
While some countries such as China have taken harsh stands against the adoption of cryptocurrencies by banning all crypto transactions, the neighboring country – Japan has recognized crypto as a legal type of money. Similarly, El Salvadore has also recognized cryptocurrencies as legal tender.
In the United Kingdom, an exchange should register with the UK Financial Conduct Authority (FCA), to serve the citizens of the UK. India recently banned multiple exchanges due to non-compliance with the country’s regulations. South Korea is implementing robust measures to protect its users.
Why do Governments Interfere in Crypto Markets?
The original idea behind the creation of a cryptocurrency was decentralization and universal acceptability while providing pseudonymity for the user. However, the emergence of strict government regulations has stripped down these privileges cryptocurrencies have. Here are some of the reasons why:
- Limit Money Laundering: Since cryptocurrencies offer a level of anonymity and privacy, many individuals use them to avoid paying taxes. But this is not good for the economy of a country.
- Limit Criminal Activities: Again the pseudonymity of cryptocurrency allows users to use it for criminal activities in the black market. Many marketplaces on the dark web accept crypto payments for arms dealing, drugs, and other illegal activities.
- Scams and Frauds: Cryptocurrency investors are scammed out of their investments due to a lack of regulations many times. Scams such as rug pulls, socially engineered scams, and pump-and-dump scams, can be greatly limited with the introduction of proper regulations.
- Threats to the Monetary System: The introduction of a parallel currency that can be used universally with the help of the internet can be a threat to the dominance of the native fiat currency of a nation. This can have cascading socio-economic effects, which the governments are worried about.
Other Factors Affecting Cryptocurrency Prices
We have already seen how positive and negative government regulations can influence the uptrend and downtrend in the cryptocurrency market. Additionally, there are many factors at play contributing to the constituent fluctuations of the market. Let’s see what they are:
Community Support
At the end of the day, cryptocurrencies are just zeros and ones stored on blockchain that have no monetary value in the real world. However, it is the community support and people’s investments that make cryptocurrencies valuable.
Conventionally, the most valuable cryptocurrencies, have a huge community behind them to support it. If the confidence of the members of the community drops, the price of that particular cryptocurrency.
Demand
Demand automatically increases when it is hard to obtain a cryptocurrency. Historically, the cryptocurrency’s price increases when the supply is limited and vice versa. This is why Bitcoin’s price increases when a halving (the process where the supply of new cryptocurrency reduces to 50%).
Fear & Greed
The press, social media influencers, and government ordinances can have an impact on the mindset of participants in the cryptocurrency market. They can create fear or greed, which is indicated by the fear and greed index by cryptocurrency market analysts. If the market is more greedy, “Buy” orders increase, and demands rise.
External Factors
Cryptocurrency is an isolated global market that doesn’t have immediate association with other conventional markets. However, a big dip in other markets can have an impact on cryptocurrency investments. For example, in the event of an economic recession, investors may become more cautious and limit their investments, the same in the event of a natural calamity.
Can a Government Ban Cryptocurrencies?
In theory, yes the government could ban the use and transaction of cryptocurrencies in their country. However, cryptocurrencies are decentralized and they can be easily accessed by using a VPN and oversees crypto wallet.
Which has happened in China after the nationwide ban. Chinese citizens are still using Bitcoin and other cryptocurrency as an investment option and converting them to foreign currencies easily. If another country tries to do the same, the results will be likely the same. However, coordinated worldwide efforts can shut down cryptocurrency altogether, but this would likely never happen.
Future of Cryptocurrency
With proper government regulations that improve the confidence of investors, cryptocurrency will likely be here for a while. The advancements in technologies concerning scalability, speed, and transaction fees can also contribute to a better future for cryptocurrencies.
That being said it is more than important to note that nothing is ever guaranteed on a crypto market. The price can vary at any time and the market participants need to do ample research to determine the right entry and exit points.
Conclusion
Even though cryptocurrency regulations limit the decentralized nature of cryptocurrency and strip down anonymity, they are crucial for limiting illegal activities and preserving the dominance of local fiat currency.
The positive regulations can result in an uptrend in the crypto market and vice versa. In this article, we have explored how regulations can affect crypto prices and also familiarized ourselves with the important crypto regulations around the world.
