Can Bitcoin Regulations Make Cryptocurrency Safer?

bespectacled woman working on calculator

eclipse_images/ Getty Images

Cryptocurrencies are a new and volatile asset class that hold the potential for high return on investment. However, they are not as well regulated as some of the more traditional investments such as stocks and bonds. Regulation of bitcoin and cryptocurrencies in the U.S. is complicated as there is no single federal authority for it.

Bitcoin is considered a commodity regulated by the Commodity Futures Trading Commission (CFTC), it is considered property for tax-purposes by the IRS and bitcoin futures exchange-traded funds come under the purview of the Securities and Exchange Commission (SEC.)

Key Takeaways

  • There's no single regulatory authority for cryptocurrencies and different regulators approach cryptocurrency regulation differently.
  • Regulations aim to add investor protection and make the cryptocurrency market less susceptible to manipulation.
  • With or without regulation, the cryptocurrency market will remain wildly speculative, and investors should carefully consider their investment goals and risk tolerance before entering a cryptocurrency position.

While these authorities have begun laying out some regulatory framework, there is a long way to go. Even though the actual buying and selling of cryptocurrency with blockchain technology are considered extremely secure, the SEC and CFTC have issued multiple warnings about scams pertaining to cryptocurrency investments.

Let’s take a look at what’s going on now what may happen in the future.

How Can Bitcoin Regulations Change the Market?

Main drivers of cryptocurrencies such as anonymity and decentralization, and therefore the lack of concentrated regulatory power are contradictory to the very idea of centralized regulation, according to some researchers.And those are exactly the reasons why cryptocurrencies may facilitate money laundering and other crimes and need to be regulated, believe other policy experts.

In the short term, regulations can have a knee-jerk reaction suppress the trading values of cryptocurrency. For example, China banning cryptocurrency transactions in Sept. 2021, saw cryptocurrency markets drop.

But over the long term, regulations if done properly, may have the potential to stabilize the market and reduce some amount of risk for cryptocurrency investors.

Will Bitcoin Regulation Make the Market Safer?

Bitcoin regulation has the potential to make the market much safer. It will still likely be a risky investment, but with protections for investors, it’s less likely that the market will be able to face as much outside manipulation.


Bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC) while investors' brokerage accounts may be protected by the Securities Investor Protection Corporation (SIPC.) But there is no such recourse available for cryptocurrency investors just yet.

For example, in 2022, FTX, one of the most popular cryptocurrency exchanges failed and filed for bankruptcy. Investor assets on FTX were frozen and neither trading nor withdrawals were not permitted. After this announcement, FTX was subject to a hack where millions of dollars worth of assets were suspiciously transferred away from the exchange.

Overall, regulation is a good thing for people who want to invest in cryptocurrency. Safer markets mean more public confidences, which often means prices go up over time.

Bitcoin and Cryptocurrency Regulation: What's Happening?

Cryptocurrencies are a new asset class and with that comes new challenges for regulators. In terms of regulation, it may be as simple as whether its something worth regulating.

Are Cryptocurrencies Securities?

While bitcoin was deemed a commodity to regulated by CFTC, the SEC is engaged in a legal battle with XRP to determine if XRP tokens are a security and whether Ripple Labs, the company behind XRP, conducted an unregistered securities offering by selling XRP.

Can ICOs Be Regulated by the SEC?

Just like initial public offerings (IPO) are ways for companies to debut shares on the stock market, one way cryptocurrency is sold to investors for the first time is through an initial coin offering (ICO). Like his predecessor Jay Clayton, current SEC Chair Gary Gensler believes that ICOs are unregistered securities offerings that fall within the the purview of securities laws. The SEC has brought a number of enforcement actions against ICOs it believed were unregistered securities offerings.

Stablecoin Regulation

In October 2021, the President's Working Group on Financial Markets unveiled a report on stablecoins calling for more legislation by the Congress to create a framework for regulators to act within. Stablecoins are cryptocurrencies that typically have their value pegged to a fiat currency such the U.S. Dollar.

In addition to noting the lack of uniform standards for stablecoins, the report also states that the increased use of stablecoins as a means of payment leads creates risks. Three major risk categories identified are–runs on the stablecoin, disruption of the payment system, and concentration of economic power. The Group also recommended more legislation to mitigate those risks, that include:

  1. Allowing only FDIC insured depository institutions such as banks to issue stablecoins. This would help protect investors in the event of a run on the stablecoin.
  2. Federal oversight for stablecoin issuers or exchanges that offer custodial wallet services to monitor risk-management systems. This would help restrict lending out of consumer stablecoins by such custodial wallets and help manage the risks of the payment system.
  3. Restriction on commercial affiliations of stablecoin issuers and custodial wallet providers. This would help limit concentration of economic power. Regulators have in the past frowned upon close ties between stablecoin issuers such as Tether and cryptocurrency exchange Bitfinex, and fined both entities for misleading investors.

Cryptocurrency Tax Regulation

With a parabolic increase in prices for some tokens, investment in cryptocurrencies could lead to big capital gains liabilities.


Starting 2019, the IRS added a line to the Form 1040 asking if a taxpayer had made money through virtual currency.

The tax regulator also published a detailed guide on tax implications for virtual currencies. You could be on the hook to pay taxes if you sold, sent or exchanged (for goods or services) cryptocurrencies. If you received cryptocurrency as remuneration, that would be included in your income as well.

So if you do make money using crypto you may want to declare those earnings before the IRS.

What Should Investors Know Before Investing in Cryptocurrency?

Investing in cryptocurrency can be very tempting. It is reminiscent of the early days of the Internet when everyone was putting money in without any real idea of what they’re doing. Because of the volatile nature of cryptocurrency, it’s important to understand your risk.


It’s a good idea to research well if investing in bitcoin or any other cryptocurrency is a good fit for you. Consider starting first with money you are okay with losing.

There are tons of upside potentials to cryptocurrency, but the reality is it can all be lost instantly through cybercrime or devaluation. The big thing to remember about crypto is that it is risky, as regulatory bodies come in to put in place consumer protection that may become less so, but right now it’s still very much a speculative venture.

Frequently Asked Questions (FAQs)

What is cryptocurrency?

Cryptocurrency is like regular money, but instead of being tangible, it's digital. You can own cryptocurrency like regular currency, but you can't spend it like regular cash. Rather than being in a bank or in your wallet, cryptocurrency is stored in your virtual wallet. To spend or transfer cryptocurrency, a blockchain is used. There are platforms for trading cryptocurrency, such as Coinbase.

What kinds of cryptocurrency is there?

Fundamentally speaking, there are two kinds of cryptocurrencies. There are coins, such as bitcoin or ether, that are native to a blockchain and required for the working of the blockchain. Then there are tokens, such as Tether or USDC, that are created using smart contracts on an existing blockchain. Stablecoins are the most popular kind of tokens. They are named so because their value is pegged to an existing assets, in most cases a currency that exists in the real world.

Will states also start regulating cryptocurrency?

Yes, and some have already started, including Indiana, California, Hawaii, Illinois, Kentucky, Mississippi, New York, Wyoming, and more. States such as Nevada and North Dakota don't have any legislative activities regarding cryptocurrency on their agendas for now.

Was this page helpful?
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Commodity Futures Trading Commission. "Investor Alert: Watch Out for Fraudulent Digital Asset and “Crypto” Trading Websites."

  2. Hossein Nabilou. “How to Regulate Bitcoin? Decentralized Regulation For a Decentralized Cryptocurrency,” International Journal of Law and Information Technology.

  3. Congressional Research Service. “Cryptocurrency: The Economics of Money and

    Selected Policy Issues.”

    Selected Policy Issues.”

    Selected Policy Issues.”

    Selected Policy Issues.”

    Selected Policy Issues.”

    Selected Policy Issues.”

    Selected Policy Issues.”

    Selected Policy Issues.”

    Selected Policy Issues.”

    Selected Policy Issues.”

    Selected Policy Issues.”

    Selected Policy Issues.”

    Selected Policy Issues.”

    Selected Policy Issues.”

    Selected Policy Issues.”

    Selected Policy Issues.” Accessed Nov. 2, 2021.

  4. People's Bank of China. "Notice on Further Preventing and Resolving the Risks of Virtual Currency Trading and Speculation."

  5. Kroll. "FTX Trading Limited."

  6. Twitter. ''@_Ryne_Miller1:17 PM · Nov 12, 2022''

  7. Twitter. ''@_Ryne_Miller. 2:07 AM · Nov 12, 2022''

  8. Justia Dockets  & Filings. "Securities and Exchange Commission v. Ripple Labs Inc. et al."

  9. U.S. Securities and Exchange Commission. "Remarks Before the Aspen Security Forum by Chair Gary Gensler."

  10. U.S. Department of Treasury. "President’s Working Group on Financial Markets Releases Report and Recommendations on Stablecoins."

  11. CFTC. "CFTC Orders Tether and Bitfinex to Pay Fines Totaling $42.5 Million."

  12. New York Attorney General. "Attorney General James Ends Virtual Currency Trading Platform Bitfinex's Illegal Activities in New York."

  13. Internal Revenue Service. "Form 1040 Additional Income and Adjustments to Income."

  14. IRS. "Frequently Asked Questions on Virtual Currency Transactions."

  15. Deloitte. “Classification of Cryptocurrency Holdings,” Page 2.

  16. National Conference of State Legislatures. "Cryptocurrency 2022 Legislation."

Related Articles