About a year ago, I was hearing a lot about cryptocurrency on social media, so I decided to give it shot. I invested a couple of hundred dollars in Bitcoin and Ethereum, the two most popular cryptocurrencies. I had no idea what I was doing, and I was amazed by how easy it was to enter this digital currency landscape. For the next couple of months, I was glued to my screen, stress and anxiety rising and falling with the growth and crashes of the cryptocurrency market. In the end, I decided the market was too volatile for my liking so I sold my stocks and made about fifty dollars in profit. During those few months, I learned a lot about investing in cryptocurrency but ended up with more questions than when I started.
Among these were questions about regulation. How can governments regulate a market that is so decentralized? Are there any examples of governments regulating cryptocurrencies? And, of course, should cryptocurrency even be regulated?
There are already many examples of countries regulating the cryptocurrency market. China, for example, has gone the furthest in crypto regulation by banning bitcoin mining in May 2021. Mining refers to the process by which new units of cryptocurrency enter into circulation, similar to the printing of money by a central bank. China has also banned cryptocurrency transactions. These regulations have made the operation of cryptocurrency in China impossible.
On the other side of the coin are countries such as Singapore, which is considered a cryptocurrency haven. The country gets this reputation partly due to its loose classification of the status of cryptocurrency. Namely, cryptocurrencies are not viewed as legal property in Singapore, and in most cases, they are not subject to taxation.
The magic of cryptocurrency is its decentralized nature, but this carries wide-reaching economic consequences. The most worrying consequence is an unregulated cryptocurrency market contributing to an increase in wealth inequality.
Rising wealth inequality is a dire issue in the 21 century. In the US for example, the top 10% of households hold 70% of the country’s wealth, while the bottom 50% hold 2%. Furthermore, the top 1% of Americans control about 30% of the wealth or around 16 times more than the bottom 50%. Rising wealth inequality within countries is happening around the world and is acting as a catalyst for a whole range of other health and social issues such as increased poverty and by extension, decreasing education outcomes.
I believe that a completely unregulated cryptocurrency market will greatly exacerbate this issue.
As the famed economist Thomas Piketty wrote in his book Capital in the 21st Century, rising wealth inequality is explained, by one simple equation, r > g. This equation implies that the rate of return on capital (r) is greater than the overall growth of the economy (g). In a completely unregulated cryptocurrency market, gains made from investing in cryptocurrency would be untaxed, resulting in individuals – who can invest large sums of capital in the first place – receiving massive returns without actually contributing anything to the growth of a national economy.
To visualize this phenomenon, imagine a pie. The size of the pie itself represents the size of a national economy. Let’s say the top 10% of a population owns 70% of that pie while the bottom 90% owns 30%. By receiving untaxed returns on investments in cryptocurrency, the top 10% would be increasing their share of the pie without actually making the pie bigger in and of itself. If returns on cryptocurrency are taxed, this tax revenue is injected into a national economy, thus increasing the overall size of the pie. Following this trend, if taxes are not levied on cryptocurrency returns, eventually the pie would become increasingly owned by the richest in society without the size of the pie growing. As a result, the wealth of the bottom majority would increasingly shrink it becomes almost negligible.
This is simple economic theory, and due to cryptocurrencies’ volatile yet high rate of returns, an unregulated cryptocurrency market runs the risk of greatly contributing to the already worrying issue of rising wealth inequality.
Of course, this does not mean regulations need to be as strict as China’s. A simple capital gains tax of 20 – 30%, which is standard for traditional investments, has been proven to help alleviate wealth inequality. Also, taxing cryptocurrency is not unprecedented. Countries such as Australia and Britain have already classified returns on cryptocurrency investments as taxable capital.
Regulation on cryptocurrency should not be a worrying sign of encroaching government intervention in a space that is designed for decentralization. Simple regulation will only prevent the worse consequences of a complete “wild west” cryptocurrency market. Moreover, casual investors in cryptocurrency, like I was last year, do not have to worry about this regulation since usually, returns on investments are only taxed if they exceed a certain amount.
Simply put, standard regulation in the cryptocurrency market should be welcomed, not feared.
