Will regulations help or hurt cryptocurrency valuations in 2018?

If 2017 was the year of the ICO, 2018 will most likely become the year of cryptocurrency regulations. The first moves for a framework that will incorporate cryptocurrencies were made last year after financial regulators worldwide published statements on how they will treat initial coin offerings going forward.

However, lawmakers in the U.K., the U.S. and Europe have made it clear that regulation designed to curb the role cryptocurrencies may play in money laundering is coming.

This has sparked fears of overzealous regulation hindering market growth and has contributed to the downward spiral of crypto prices so far this year. Nonetheless, the new ‘global cryptocurrency regulatory framework’ set to be discussed at the upcoming G20 meeting, may not turn out so bad for investors after all.

What have politicians been saying about crypto regulations?

U.K. Prime Minister Theresa May has stated that she will look “very seriously” at cryptocurrencies in an interview with Bloomberg. In line with effectively all bitcoin-negative lawmakers, she cites the potential use of cryptocurrencies for criminal activities as the primary reason why they need to be adequately regulated.

In February, the U.K. Treasury launched an inquiry into cryptocurrencies and blockchain technology, looking into the potential impact of digital currencies and distributed ledger technology on consumers, businesses,and financial institutions. In addition, the inquiry will scrutinize regulatory responses from the Bank of England, the FCA, and the government to gauge how to balance regulation for adequate consumer without stifling technological innovation.

Alison McGovern MP, Member of the Treasury Committee, said: "This inquiry comes at the right time, as regulators and Governments wrestle with recent events in cryptocurrency markets. New technology offers the economy potential gains, but as recently demonstrated, it may also bring substantial risks. It is time that [lawmakers] understood cryptocurrency better, and thought more clearly about the policy environment for blockchain technology."

In the U.S. a Senate hearing in early February heard testimony from CFTC Chairman Christopher Giancarlo, and SEC Chairman Jay Clayton on the potential and risk of cryptocurrencies as investments.

The sentiment of the hearing was overall positive, with U.S regulators primarily concerned about fraudulent ICOs rather than any potential threat posed by cryptocurrencies to the established financial system.

“We owe it to this new generation to respect their enthusiasm for virtual currencies, with a thoughtful and balanced response, and not a dismissive one,” Giancarlo said.

Furthermore, both France and Germany have announced that they want to see clear regulations covering cryptocurrencies.

“We will have a joint Franco-German analysis of the risks linked to bitcoin, regulation proposals and these will be submitted as a joint proposal to our G20 counterparts at the G20 summit in Argentina in March,” French Finance Minister Bruno Le Maire stated.

Interestingly, the German tax authority recently announced that it will not tax purchases made with cryptocurrencies differently to those made with fiat currency.

"Virtual currencies (cryptocurrencies, e.g., Bitcoin) become the equivalent to legal means of payment, insofar as these so-called virtual currencies of those involved in the transaction as an alternative contractual and immediate means of payment have been accepted," the Bundesministerium der Finanzen stated – thereby approving digital currencies as an accepted payment method in Europe’s largest economy.

How will a global cryptocurrency framework affect valuations?

When it comes to cryptocurrencies, lawmakers are primarily concerned about their potential criminal use, especially in financing terrorism and tax evasion by wealthy crypto investors. In contrast, however, politicians are most concerned about gaining and keeping favour with their voters.

It is no secret that cryptocurrencies have established themselves as the go-to payment methods on the dark web and the number of investors who have declared their crypto capital gains in their tax returns has been very low. However, cryptocurrencies have gained substantial popularity among millennials, an age group that constitutes a large part of the voting population. Moreover, the blockchain startup sector has become a major source of jobs. That means it is highly unlikely that economies will go as far as to ban the use of cryptocurrencies and the blockchain.

Instead, the likely result of a global regulatory framework will be that digital currency exchanges will be required to conduct extensive customer KYC checks and that tax authorities will introduce cryptocurrency-specific capital gains tax rules. This is similar to the actions taken by South Korea and Japan.

While cryptocurrency valuations may drop in the coming months as new legislation is introduced, due to the initial uncertainty it may bring, in the medium to long-term, a global regulatory framework for cryptocurrencies should prove to be price positive for digital assets.

Commonsense regulations will mean that digital assets have been accepted into the real world of recognized financial investments, which will in turn encourage everyday investors to enter the space. With bitcoin already being considered a viable alternative investment, a regulatory framework for all cryptocurrencies could end up giving this new digital asset class the final push it needs to become mainstream.