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Will the U.S. Crack Down on Crypto in 2021?

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Jun. 2 2021, Published 5:06 a.m. ET

Most people in the U.S. think crypto is here to stay. After all, despite years of controversy and skepticism from the mainstream financial community, cryptocurrencies remain as legal as ever. However, surprise announcements that China, India, and Turkey are cracking down on crypto have worried investors about American regulators taking similar action.

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While a complete ban isn't likely to happen at this stage, it’s possible that the SEC will tighten crypto laws. Here's why.

Why are regulators anti-crypto?

In the past, cryptocurrency bans have occurred for a few reasons. The first is that crypto prices tend to be volatile and can quickly dissolve investors' money. Second, and perhaps more important, is the issue of control. Since governments don’t issue cryptocurrencies, digital currencies aren’t subject to the same monetary control that fiat currencies are. Third, cryptocurrencies have enabled money laundering, another issue that governments want to crack down on.

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Whereas America doesn’t plan to ban crypto outright, it does hope to address tax evasion and money laundering. The Biden administration hopes to crack down on these issues before they get worse.

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These officials think crypto should be regulated even more

One official who thinks crypto needs to be reined in is Michael Hsu, the acting comptroller of the currency. The market reminds him of the 2008 housing crash, and he expects officials will coordinate a “regulatory perimeter” for cryptocurrencies.

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The new SEC chair, Gary Gensler, shares this opinion. Although crypto advocates have welcomed Gensler's appointment, as they see him as more pro-crypto than his predecessor (the SEC is expected to approve at least one Bitcoin ETF later this year), Gensler alluded to crypto regulation in a recent statement.

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Speaking at a House Committee meeting last week, Gensler said that there were “gaps in our current system” and that crypto exchanges needed tighter regulations. If exchanges aren't regulated, he thinks the current crypto market could morph into something of a secondary financial system outside the government's control.

What does this mean for investors?

It’s impossible to monitor every single blockchain transaction, but it is possible to regulate cryptocurrency exchanges, where crypto and fiat currency is transferred. The U.S. has already put into place know-your-customer (KYC) protocols to ensure real people are signing up on crypto exchanges. However, despite these efforts, money laundering continues to be a problem. According to CipherTrace, over $1.9 billion was laundered through cryptocurrencies in 2020.

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ciphertrace laundering
Source: Ciphertrace

Retail investors need not worry too much about regulation, though. If anything, it might become harder to set up an account with exchanges like Coinbase, but cryptocurrency trading should continue as it is.

It's hard to see the U.S. banning crypto outright like Turkey and China. That move would be unpopular politically and could end up costing the government massively. As cryptocurrency transactions can be taxed, they offer an important revenue stream for the government as it looks to spend trillions on new infrastructure and healthcare initiatives.

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