Regulation a likely win for future of cryptocurrency

By Shane Stevenson, CEO, Cointree

Despite a market correction earlier this year, cryptocurrency has displayed resilience as an asset class and continues to attract the attention of thousands of investors. But as we enter the 2022 financial year it is clear uncertainty remains about cryptocurrency and how it interacts with Australia’s tax regime.

Many investors view a lack of regulatory intervention into this asset class as a positive, and some investors think that digital currencies can operate without the intervention of banks, financial institutions, and governments.

No amount of wishful thinking will impede any growing investment opportunity from facing regulation, particularly when that opportunity can generate the growth that we have seen across cryptocurrencies in the past year alone. Governments are simply not that benign.

But it is more than that. In Cointree’s opinion, increased regulation of this asset class may reap long-term benefits for investors.

Legitimising the industry and our assets

Although a low-regulatory environment may give investors more agility when taking advantage of investment opportunities, regulation is often a sign that a government is sanctioning a new concept, technology, or asset, and recognising its potential in a broader economic or industrial system.

We see this as the likely outcome with blockchain technology and cryptocurrencies – that regulation is inevitable. When this happens, the asset becomes more acceptable to more investors, especially institutions such as banks and superannuation funds. With a regulatory green light this asset enters the investment mainstream, and, consequently, grows the value of the cryptocurrency sector.

Replacing volatility with stable growth

Since the introduction of this asset class in 2009, both Cointree and the wider industry have focused on educating investors on the volatility of cryptocurrency markets and understanding the importance of having a rigid investment strategy. We do this through our online Learning Hub.

With increased regulation, we may see short-term traders and speculative investors leave the market, and an increase in investors that employ the principles we encourage, who sensibly seek advice on developing their investment strategy and carefully consider the role of cryptocurrency and its underlying assets in their portfolio.

This will hopefully reduce some of the buy-and-sell swings we see in the market as “punters” with a get-rich-quick mentality exit the market, allowing cryptocurrency and blockchain assets to grow more predictably and serve as a tool for long-term wealth generation. This is a role that Cointree supports and believes in.

Tax frameworks are just the beginning

Regardless of what investors think, the ATO has asserted its position on how cryptocurrency works in taxation law, warning new investors and traders to remember that, just like the gains from any traditional asset, cryptocurrency capital gains and income need to be lodged.

ATO assistant commissioner, Tim Loh, stated that, “the ATO views cryptocurrency as an asset rather than a currency, so it is taxable when bought, sold or swapped”, and implied that the regulator is concerned many cryptocurrency traders do not have the tax implications on their radar when beginning their trading journey.

For each cryptocurrency transaction you make, it may help to keep the following for tax purposes:

• The date of each transaction;
• The value of the cryptocurrency in Australian dollars at the time of the transaction;
• The purpose of the transaction;
• The details of the other parties involved.

Keeping these records is a good starting point, and while lodging a tax return with crypto assets included does not have to be difficult, confirming exactly what state your portfolio is in and whether you need to pay capital gains or income tax is pivotal to ensuring you are not one of the estimated 100,000 traders that will be receiving a call from the ATO this year.

We believe it is important for any investor to be educated on the regulatory framework for the businesses and assets they own, rather than hastily reacting to changes.

In the long-term, regulation is inevitable and likely to benefit investors. If you’re looking to invest in this growing asset class, it may be prudent to factor the impact of new regulation into your investment strategy.