21 Feb 2022

Can a Government Regulate Bitcoin?

While some governments maintain implicit and outright bans on crypto, some countries recognize Bitcoin as a legitimate payment method and asset. However, even countries where cryptocurrencies, like Bitcoin, are illegal have raised concerns about regulating the crypto industry. Some governments argue that controlling Bitcoin would protect investors and market manipulation. 

Others also claim that imposing regulations would help their governments fight cybercrimes such as money laundering, hacking, and fraud. Nevertheless, there exist no universal laws regarding Bitcoin usage. So, can a government regulate Bitcoin? The following article explores how a government can influence Bitcoin. 

How a Government Can Regulate Bitcoin 

Many individuals wonder if it is even possible for the government to regulate Bitcoin since it is a decentralized currency. Unlike fiat money, no central authority controls Bitcoin's supply. Its' underlying blockchain technology records and validates all transactions on a public ledger without any third parties. That is one of the reasons why it is not easy for a government to regulate Bitcoin. 

Bitcoin transactions occur on a peer-to-peer network. Users can transact directly through their Bitcoin wallets or crypto exchanges such as the bitiq trading bot. The absence of intermediaries makes it extremely difficult for government regulators to monitor crypto transactions. However, that does not mean the government is utterly helpless against regulating crypto. 

Here are the main ways a government can regulate Bitcoin. 

Targeting Centralized Exchanges 

The government can impose regulations by targeting CEXs (centralized crypto exchanges). Several governments are debating legislation to regulate crypto exchanges, with some already in place. Cryptocurrency exchange platforms did not require much approval or input from government regulators in the early days but, that has changed today. For instance, the United States' SEC and the Financial Crimes Enforcement Network now require all crypto exchanges operating within the U.S to comply with KYC rules and anti-money laundering policies.   

Such regulations make it imperative for crypto exchanges to fall in line. The majority of crypto users rely on crypto exchanges to send and receive payments in Bitcoin. Thus, they will automatically adhere to the exchange-imposed regulations. While the government may not shut down Bitcoin's operations, it could significantly hamper the user experience, limiting its adoption. 

For instance, the CTFC recently subpoenaed significant crypto exchanges like Bitfinex because they could not verify their $2.3 billion worth of crypto reserves. That caused Bitcoin prices to plummet by almost 10%. Such tactics may not halt Bitcoin operations but would significantly impact uncertainties in the market, hindering the growth and usage of cryptocurrencies. 

Targeting Bitcoin Users 

Although most people believe Bitcoin transactions are anonymous, its blockchain generates a public ledger of all trades, making it possible to track users' activities. However, it takes a lot of effort to determine the users' real identities since Bitcoin does not keep such records. Users mainly identify themselves through public addresses that could even be aliases. 

A government will need to work with crypto exchanges to track Bitcoin users' activities and reveal the companies or individuals' real identities. Some crypto exchanges have already begun cooperating with law enforcement to track illicit cryptocurrency activities and apprehend criminals. 

The government could also target crypto users by taxing any fiat currency that you use to cash out on Bitcoin. The main setback of such a regulation is that it would only apply to a specific virtual token and, users may switch to other cryptocurrencies to cash out. That could harm Bitcoin, pushing investors to other virtual tokens. 

Yes, a government can regulate Bitcoin and, some of those regulations are already taking shape in some countries. However, it would take time to implement any effective universal Bitcoin regulation since many governments have not yet reached a consensus.


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