Cryptocurrency, Regulation, and Record Inflation
Cryptocurrency Regulations and Record Inflation
Cryptocurrencies have gained the attention of the world recently. The crypto market at the time of writing this article is around $1.8 TRILLION with just a little OVER 9,000 projects tracked on popular websites like CryptoListings.io. As you can see, there is a place for crypto and blockchain technology in our economy. Thus, its not hard to imagine why regulators worldwide have their crosshairs on it.
In the United States, many policymakers and Federal agencies have expressed the pros and cons of adopting the technology in future US infrastructure plans. That said, the US still lacks a clear regulatory framework for cryptocurrencies. It is however a stark contrast to China’s all-out ban on Bitcoin mining back in May of 2021 to Russia’s now proposed ban of crypto.
Additionally, Bitcoin is believed to guard against inflation, further increasing cryptocurrency recognition. The fact that Bitcoin’s supply is limited asserts that belief even more. Therefore, like gold, cryptocurrencies are wildly regarded as an inflation hedge, despite having few opportunities to test such claims.
More on Regulations
As mentioned previously, the US lacks a clear regulatory framework for cryptocurrencies. For example, The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission see cryptocurrencies as securities and commodities. On the other hand, cryptocurrencies are regarded as property for federal income tax purposes by the International Revenue Service (IRS).
The Bank Secrecy Act (BSA) covers the regulatory scope that cryptocurrency exchanges in the US must follow. Furthermore, these exchanges must register with the Financial Crimes Enforcement Network (FinCEN), along with meeting anti-money laundering (AML) compliances and meeting obligations to combating the financing of terrorism (CFT).
Nonetheless, cryptocurrencies have been affected by several US state governments passing or proposing laws. Some states have adopted a more progressive mindset, promoting the technology through favorable regulations. These regulations pertain to cryptocurrency exemptions from state securities, laws, and money transmission statutes. These regulations stem from strong hopes to investments in technology to invigorate local economies and public services. For instance, Wyoming has been regarded as the most crypto-friendly state. The state seeks to make a broader impact on its economy through cryptocurrencies. Thus, legislation was passed to allow a new bank or unique depository institution that is crypto-focused and enable businesses to hold their digital assets safely. Furthermore, they can act in both a custodial and fiduciary capacity.
In Colorado, cryptocurrencies are now exempted from state securities regulations thanks to a bipartisan bill. Whereas in Ohio, cryptocurrencies are accepted as a mean to pay taxes, i.e., it became the first state in the US to do so. Moreover, in Oklahoma a bill has been passed accepting cryptocurrencies to be used, offered, sold, and exchanged within its governmental agencies.
Other states have not been as friendly towards cryptocurrencies. In Iowa for instance, the state and its political subdivisions are prohibited from accepting payments in the form of cryptocurrencies. In another ten states, like Maryland and Hawaii, authorities have warned people about investing in cryptocurrencies all together. Even New York had restrictive laws concerning their use. However, they have eased such restrictions now, mainly in hopes of bringing back the crypto companies that left their market.
The Impact of Inflation on Cryptocurrencies
Since the supply of cryptocurrencies is limited, they have been thought of as a guard against inflation. Like gold, people expect cryptocurrencies to hold their value as inflation rises. In contrast, traditional currencies lose their value when inflation increases. This devaluation is attributed to central banks that can issue an unlimited money supply. Despite such expectations, there have not been many opportunities to test if cryptocurrencies are a good hedge against inflation.
In the last 12 years that cryptocurrencies have existed, inflation has been dormant. However, specific analyses have been made concerning Bitcoin's performance. For instance, inflation was relatively low when Bitcoin's price underwent a constant increase from late 2016 to January 2018. In the year 2017, we saw a 1,318% gain in Bitcoin's price. During that time, inflation advanced by 2.1%, according to the Consumer Price Index in the US. That said, this advancement in inflation was the highest since 2012. Hence wht the Federal Reserve raised the interest rates three times. In this case, cryptocurrency met its expectations. However, in 2018 Bitcoin's price fell while on the other hand, inflation was increasing and eventually reached a 2.4% annual rate. The Federal Reserve raised interest rates by an entire percentage point this time.
In 2019, Bitcoin's price saw an excellent return of 87%. Inflation this time fell, and the Federal Reserve subsided interest rates. Again in 2020, interest rates fell even more. Then because of the pandemic, they eventually hit zero. In comparison, Bitcoin's price had quadrupled in November, starkly differentiating from its March price of the same year.
In 2021, inflation increased sharply while Bitcoin's price fell. Consequently, interest rates were not raised this time to support economic expansion. This seemed like an ideal climate to test if Bitcoin would hold its value in response to inflation. However, as mentioned earlier, Bitcoin did not meet such expectations. At of the time of writing Bitcoin’s price is around $40,000.00, when in February last year its price reached over $65,000.
In the US, cryptocurrencies have been met with different regulative responses. Some states recognize the potential being offered and have passed favorable bills. In contrast, others like Hawaii and Maryland have adopted a more restrictive approach.
Furthermore, cryptocurrencies are thought by many to be a guard against inflation. However, as shown in the US, there have not been many opportunities to prove such claims, especially in more recent times. Despite that, it is still too early to say if cryptocurrencies do or do not guard against inflation. So, the evidence supporting that claim must be explored further.
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