In the past 12 months, it’s no longer news that cryptocurrency and blockchain technology have suddenly became a global phenomenon. While its prowess has been unprecedentedly acknowledged by some government leaders, industry giants and so on, have it in mind that the quantum leap experienced in the crypto world is of utmost concern to governments and regulatory bodies, and they are grappling with ways to control crypto trading.
The reason for concern by governments may not be far-fetched since they virtually have no control over the operations of cryptocurrencies and are also handicapped by the fact that the virtual or digital currencies are extremely risky and volatile. Global regulators are divided on how to keep up with the rise in the demand for cryptocurrencies. This is also not helped by the fact that most digital currencies are not backed by any central government and therefore, each country has different standards.
Governments all over the world have always enjoyed the regulatory roles they played over the traditional financial systems and are at their wit ends on how to handle the direct opposition encountered by cryptocurrency that was developed through the backbone of the blockchain. It also does not help matters that the cryptocurrency has strongly departed from its once association with sales in the underbelly of the internet.
The anonymity of these transactions and investments may be considered a plus but it also means that investors in the cryptocurrency and those participating in Initial Coin Offerings (ICOs), are prone to danger any time their digital wallets are compromised. The major role of any government is to protect the fortunes of the citizens and it’s therefore expected that no government will want to allow any transactions that run into billions of dollars without regulations being put in place.
Inasmuch as the standards vary from one country to another as regards the crypto market, the following are the 7 basic differences between the Chinese and the U.S. crypto markets.
- Policy on exchanges
The monetary policy of any country is the way the Central Bank controls the money supply. The policy is usually regulated by modifying interest rates, adjusting the mandatory bank reserves, and buying or selling government bonds. The policy affects the quantity of money being exchanged for cryptocurrencies and it can easily affect the rate of circulation of money.
In the U.S., the exchange policy is legal but can vary from state to state. At the current level of adoption, cryptocurrencies have no significant impact on the Federal Reserve’s ability to conduct monetary policy. The government of the United States has not exercised its constitutional power to regulate blockchain technology and cryptocurrencies to the exclusion of states. The state of Arizona, for instance, passed the Arizona House Bill 2417, regulating blockchain and smart contracts on March 29, 2017.
At the federal level, the Uniform Regulation of Virtual-Currency Business Act (URVCBA), has been drafted by the Uniform Law Commission (ULC) on October 9, 2017. The URCVBA does not regulate cryptocurrencies as such but rather virtual currency business activity. The draft tends to oversee:
- The transfer from one customer to another person of virtual currencies.
- The exchange of virtual currencies for cash, bank deposits, or other virtual currencies.
- Certain custodial or fiduciary services in which the property or assets under the custodians’ control or under management include property or assets recognized as a virtual currency.
To further make a case for the accordance of legitimate status to cryptocurrency exchanges in the United States, Forbes also reports that the U.S. Commodity Futures Trading Commission (CFTC), in 2017 permitted two U.S. exchanges to list Bitcoin futures contracts.
The Chinese government, on the other hand, declared cryptocurrency exchanges illegal in the country. The South China Morning Post reports that the People’s Bank of China ordered financial institutions to stop providing banking or funding to any activity related to cryptocurrency. This further tightened the noose, since its shutdown of crypto exchanges in September 2017, that sent digital currency enthusiasts fleeing overseas.
- Initial coin Offerings (ICOs)
Initial coin offerings (ICOs) is a new way of raising funds for blockchain related projects. Forbes reports that over $8.8 billion has been invested via ICOs since the beginning of 2016 and this has caused entrepreneurs and companies around the world to look for how they can get involved in the new fundraising phenomenon.
The Chinese government will, however, have none of this and in September 2017, banned ICOs altogether. This came in the way of a statement that was issued by the China Central Bank, criticizing ICOs for disrupting the country’s financial order. The ICOs were described as a form of unapproved illegal public financing that raises suspicions of fraud and criminal activity.
In the U.S., however, the policy on ICOs has been cautious and strict, but still open. The U.S. seems to have adopted the approach regarding ICO token classification which is broken down into Security Tokens and Utility Tokens. The Security Token status is based on it being an investment of money, an expectation of profits from the investment, that the investment of money was in common enterprise, and that any profit was to come from the efforts of a promoter or third party.
On July 25, 2017, the U.S. Securities and Exchange Commission (SEC), issued a report of investigation under section 21(a) of the Securities Exchange Act of 1934 describing an SEC investigation of the DAO, a virtual organization and its use of distributed ledger or blockchain technology to facilitate the offer and sale of DAO Tokens to raise capital.
The Commission applied existing U.S. federal securities laws to this new paradigm, determining that DAO tokens were securities. The Commission stressed that those who offer and sell securities in the U.S. are required to comply with federal securities laws, regardless of whether these securities are purchased with virtual currencies or distributed blockchain technology.
One other thing SEC has done apart from the regulations is to alert people of the dangers inherent in ICOs, with the warning that prospective investors should be very careful, ask questions and demand clear answers.
- Ease of trade
The clampdown on cryptocurrencies and the eventual shutting down of exchanges in China has greatly impacted the crypto market in the country. Investors have resorted to trading Bitcoin and other cryptocurrencies over-the-counter. This process is more time consuming and not immediate. China’s many bitcoin investors are suffering as a result of this action.
This scenario is in direct opposition to what obtains in the U.S. The U.S. is home to most of the world’s largest Bitcoin companies, it is very easy to buy and exchange bitcoins using any payment method such as cash, credit card, or bank transfer.
Since cryptocurrencies are treated like real estate or gold in most cases in the U.S. and due to the influx of the dislodged exchanges from China, the short and long-term capital gains tax accrue to the government. From the official IRS guidance from 2014,
- Trading cryptocurrencies to a fiat currency like the dollar is a taxable event.
- Trading cryptocurrency to cryptocurrency is a taxable event.
- Giving cryptocurrency as a gift is not a taxable event.
- A wallet-to-wallet transfer is not a taxable event.
- Buying cryptocurrency with the USD is not a taxable event. You don’t realize gains until you trade, use, or sell your crypto. If you hold longer than a year you can realize long-term capital gains.
- Trading volume
In terms of trading volumes by national currencies, there are major differences between the U.S. Dollar (USD) and the Chinese Renminbi (CNY). The USD is the most widely supported national currency on exchanges, with 65 percent of exchanges supporting the national currency.
Between 2014 and 2016, the CNY appeared to represent an often significant majority of global bitcoin trading volumes ranging from 50 percent to 90 percent. The Bitcoin trading denominated in CNY has, however, plummeted in 2017 to 14 percent after the tightening of regulations by the People’s Bank of China.
- Wallet providers
Wallet providers are required to facilitate the storage of cryptocurrencies and make wallets easier to use. A wallet generally is a software program that is used to securely store, send, and receive cryptocurrencies through the management of private and public keys. Wallets also provide a user interface to track the balance of cryptocurrency and automate certain functions such as estimating what fee to pay to achieve a desired transaction confirmation time.
Each cryptocurrency has a reference implementation that includes basic wallet functionality (e.g Bitcoin core for Bitcoin and Mist browser for Ethereum). However, for a variety of reasons, the reference implementation wallet is simply not practical for many users. As a result, a multitude of wallet providers has emerged to enhance the storage of cryptocurrencies as well as make the wallets easier to use.
The storage of cryptocurrencies is very vital to the success of the crypto world and the cryptocurrency market in particular. A research carried out on the distribution of cryptocurrency wallet providers reports that in the year 2016, the crypto market was serviced by 34 percent of U.S. based wallet providers while it was facilitated by only 18 percent Chinese based wallet providers. Also, where 61 percent of wallet users were domiciled in North America with the bulk in the U.S. only 20 percent users were from Asia-Pacific which included China, Japan, and South Korea.
- Payment service providers
All cryptocurrency systems have an integrated payment network to process transactions denominated in the native token. While the promise of these systems is that users can independently transact on these networks, there are a variety of reasons why users prefer using service providers. It is interesting to note that while 15 percent of payment companies are domiciled in the United States, only 4 percent are domiciled in China.
The use of cryptocurrencies by payment service providers can be grouped into two main categories.
- Payment rail: use of cryptocurrencies as a channel for fast and cost-effective transfer of national currency (mainly cross-border/international payments, but also intra-country payments).
- Cryptocurrency payments: provide services to facilitate the use of cryptocurrencies.
It may not be always easy to differentiate between these two categories since the division can be blurred as some general-purpose cryptocurrency platforms also enable all payments being denominated in national currencies, and some B2B payment service providers also enable payments being denominated in cryptocurrencies.
With the total number of people employed by the cryptocurrency payment service providers globally amounting to 1,057, it translates to the fact that the U.S. has about 159 employees in that sector while China has only about 42 employees.
Another important factor to note in the payment service providers sector is that the payment companies based in the U.S. serve a more diverse market since over half of the customers from payment service providers based in the U.S. are not domiciled in the country. In the case of China, 90 percent of customers from the payment service providers are based in the country.
- Crypto mining
To mine a cryptocurrency like the Bitcoin, miners use special software to solve math problems and are issued a certain number of bitcoins in exchange. Bitcoin mining is a decentralized computational process that confirms transactions in a trustful manner when enough computational power is devoted to the block and creates new bitcoin in each block.
The processes involved in the of mining a bitcoin are to verify if transactions are valid, bundle transactions in a block, select the header of the most recent block and insert it into the new block as a hash, solve the proof of work problem and when the solution is found, the new block is added to the local blockchain and propagated to the network.
Cryptocurrency mining consumes a lot of electricity and a study by Crescent Electric Supply Company (CESCO) reveals that in Louisiana, electricity costs 9.87 cents per watt and this puts the average cost of mining one Bitcoin at $3,224. China before the ban placed on bitcoin mining, was about the cheapest country to carry out the mining of cryptocurrency. The reason was due to the state-subsidized electricity for mining purposes.
The other states in the U.S. with low cost of mining bitcoin are Idaho ($3,289 per token), Washington ($3,309), Tennessee ($3,433), and Arkansas ($3,505). Alaska at $7,059 per token and Connecticut at $6,951 per token are the states with the highest cost of electricity.
It’s not all that rosy for cryptocurrency mining in Plattsburgh, New York, as it has become the first city in the United States to ban cryptocurrency mining in the city for the next 18 months. The city council unanimously voted to impose the ban at a council meeting. The mayor’s office states that the purpose of the law is to consider “regulations before commercial cryptocurrency mining operations result in an irreversible change to the character and direction of the city.”
Once mayor Colin Read approves the law and files it with the New York secretary of state, the law will take effect. This came up because there is a limited amount of tokens and as more is mined, the mathematical problems become more difficult and more sophisticated computers are needed which means more energy is needed to power them.
There is still, however, a ray of hope for cryptocurrency miners in Plattsburgh, since officials of the council intend to work with residents and local cryptocurrency miners over the next 18 months on ways to resolve the power issues.