Can The Government Freeze Crypto Assets?

Even though digital currencies are still a relatively new idea, they have managed to create significant impacts in the financial industry. Central banks throughout the world are still adjusting to the implications and consequences of the new technological advancements. The subject of how the government can regulate Bitcoin and its equivalents has become more popular with both radical cryptocurrency proponents and mainstream investors alike in recent months.

Both governments and regulators across the globe have emphasized the importance of bitcoin and other cryptocurrencies to criminals and the potential danger they pose. According to the Wall Street Journal, Treasury Secretary Steven Mnuchin has expressed concern about cryptocurrency falling into the hands of “bad people” in the past. It is predicted that their emphasis would be focused on making cryptocurrencies transparent so that consumers and investors are protected from the risks.

However, the issue arises as to whether governments can freeze crypto assets that are being exchanged in their markets, and if so, what regulations have been implemented by them. Let us take a closer look at each of them in further depth.

Freezing Crypto Assets:

The first thing that comes to mind when hearing about crypto assets being frozen is a resounding “NOT POSSIBLE”. Because they are built on decentralized technology, no one can control them. However, blockchain technology is complicated, and government authorities may indeed freeze and seize cryptocurrency on specific blockchains on the national law of the country.

The rule for bitcoin and all other cryptocurrencies is simple: possession of the private key determines control of the related money. As a result, if you provide or someone steals your private key, you will most likely lose access to your crypto money.

Similarly, whether you store your cryptocurrency with a custodian or on an exchange, they have control over your capacity to withdraw or transfer these monies since they hold the private key. If you fall victim to an exit scam, the exchange is accessed, the regulators or law enforcement demand the exchanges to freeze the assets to maintain regulations and to provide a safe environment. In the same way, if the government feel some kind of threat or harm from the crypto asset they will just enforce the exchange to freeze those specific assets. Assuming you have ownership of the private key, there are still methods for your cryptocurrency to be blocked or taken.

Government Regulations for crypto:

A risky speculative bubble could hurt the country, according to several suggested rules throughout the globe. The government could tax any fiat money used to cash out a virtual token. Notably, this would only apply to specific tokens, so a cryptocurrency owner might simply switch to another coin and cash out. Beyond this, many early adopters & hardliners prefer cryptocurrencies to regular fiat currency for basic goods and services.

Currently, cryptocurrencies are regulated by the SEC for investment, the CTFC for crimes involving interstate commerce, as well as the IRS for income and capital gains taxes. The SEC has approved two Bitcoin futures exchange-traded funds (ETFs), one for the CBOE and one for the CME. At this moment, no further futures ETFs have been issued, despite the large number of applications that have been received.

The SEC now has the most regulatory power in the crypto industry, which pertains to initial coin offerings (ICOs). It recently suspended its initial coin offering (ICO) after it was discovered to be engaging in fraudulent activities.

Additionally, the CTFC recently subpoenaed major cryptocurrency exchanges Bitfinex and Tether after the latter failed to authenticate the existence of over $2.3 billion in reserves. Bitcoin prices fell by 10% for a brief period as a result of this.

Some recent regulation events:

Recently the two most noticeable events include the following.

Truck Drivers Protest: It started around the end of January in response to the Canadian government’s foreign travel restrictions, which demand all visitors to be immunized against COVID-19. Truckers in several Canadian provinces blocked international bridges & border crossings. Working with the Financial Transactions & Reports Analysis Centre of Canada (FINTRAC), federal police examined cryptocurrency contributions made in support of the weeks-long protest against Canada’s vaccination mandate.

As per the order, the list contains 29 Bitcoin addresses, one Eth address, one Cardano address, one Ethereum Classic address, one Litecoin address, and one Monero address. Earlier on Wednesday, a copy of the injunction was circulating on Twitter. CoinDesk validated the news legitimacy. Donors have sent over 20 BTC to the addresses, totaling more than $870,000 (CA$1.1 million). After the GoFundMe account, which had previously garnered more than $9 million, was suspended, the contributors moved to bitcoins.

The Emergencies Act was intended to target protester funds. Speaking with Trudeau, Deputy Prime Minister Chrystia Freeland said that banks may quickly block or suspend truckers’ bank accounts without a court order or fear of legal responsibility.

Russia Ukraine War: Since Russia invaded Ukraine, crypto has been scrutinized for its potential as a route for sanctioned Russians to store assets. After Russia invaded Ukraine, a worldwide drive to isolate Moscow(capital of Russia) from the global financial system emerged.

The US blocked Russia’s central bank from trading in dollars and restricted access to $630 billion in foreign reserves. Switzerland has blocked Russian assets and is going to shut off seven Russian banks from SWIFT, the global interbank messaging network.

Creating a broad set of consequences is one thing, but enforcing them is another. As Moscow’s financial system crumbles, suspicion grows that Russians may use cryptocurrency to circumvent sanctions, with pressure rising on cryptocurrency exchanges to comply. Following Russia’s invasion of Ukraine, it was slammed with economic sanctions designed to isolate it from the global financial system.

The US has sanctioned key Russian officials and financial organizations, thereby barring American corporations from doing business with them. This has sparked a discussion over whether cryptocurrencies, particularly bitcoin, may be used to circumvent sanctions. The sanctions have weakened the ruble.

Decentralized digital currencies like Bitcoin are neither issued nor managed by a central authority such as the Federal Reserve. Sending bitcoin to other users bypasses the regular financial infrastructure.

Why do cryptocurrencies need regulation?

Cryptocurrency regulation is essential for investors. The appropriate laws can make the bitcoin industry a safer place for investors. Some of the reasons why these regulations are needed are discussed below,

Protecting investors from market manipulation: Market manipulation, as well as price fluctuation, are common occurrences in the cryptocurrency industry. To give you an example, Bitcoin, the world’s oldest and also most prominent cryptocurrency, saw a meteoric rise to all-time highs since the start of 2021 before falling and losing a significant portion of its value. Consequently, given the absence of authorized information about these digital assets and the technical difficulties involved with them, rules must be put in place to protect investors’ interests.

Understanding the hazards of technology: Technology is progressing at a dizzying rate at the moment. Because such developments can make technology, including blockchain, out of date in the future, there is a considerable risk that this may occur. An information infrastructure, as well as professional financial advisors who are knowledgeable about cryptocurrency, are required because of the rapid rate of technological change. Investors will be better able to grasp the technical risks associated with cryptocurrencies and make educated choices as a result.

Money laundering: It is possible in every uncontrolled system, and it has the potential to fuel illegal activity. Consequently, a customer due diligence procedure similar to that of a financial institution is necessary. When purchasing or selling bitcoins, this may assist in keeping track of investors’ true identities and validating their geographical locations. Every violation of such standards should be dealt with harsh penalties.

Allow just a few coins: There are thousands of cryptocurrencies in circulation around the globe. The mass of investors, on the other hand, are only familiar with a few of them, including Bitcoin, Ether, Ripple, and Dogecoin, among others. They have little knowledge of the thousands of other virtual assets available to them. As a result, to safeguard clients, a regulatory body clearing cryptocurrencies is necessary, which will be able to publish all information on the performance of digital assets, as well as their dangers and possibilities.

Risks of online fraud & cyber security: Investing in cryptocurrency introduces a new risk: internet fraud. Hacking is a big issue all across the globe, and cyber-attacks are becoming more regular. Investors who have placed their funds in cryptocurrency may suffer losses as a consequence of a single cyber-attack. Authorities may use rules to put safeguards in place to assist bitcoin investors to secure their money. In addition, investors may resolve problems or retrieve assets if they lose them.

Impact of government regulations:

Government interference can have several effects on crypto prices. First governments could influence the price of assets, such as fiat currencies, by acquiring and selling in international markets.

Second, by attaching laws to an asset class, they could constrict extraordinary enthusiasm for it. Specifically, those that raise the expense of doing business. One significant example of this strategy is the discussion of Bitcoin regulation by several states in the United States. Most states need surety guarantees for cryptocurrency exchanges operating inside their borders. Alternatively, a monetary equivalent in fiat money.

Furthermore, governments could make the asset scarce by imposing regulations. Consider the case of gold as an example. Several governments ban the import of this valuable metal. Each of these activities might fail with Bitcoin and cryptocurrencies. Cryptocurrencies feature decentralized ledgers that span numerous nations. Their regulation requires a coordinated effort from multiple economies, which may be challenging. Especially considering the varying degrees of interest in cryptocurrencies and their impact on national economies globally.

Centralized Exchanges and Organizations:

Cryptocurrency is any kind of digital or virtual money that employs cryptography to secure transactions. In simple words, cryptos are digital currencies that are safeguarded by cryptography and maintained by a decentralized network of computers since they do not have a central issuing or regulatory body. Legislators’ responsibility, therefore, is to examine this technology in light of the legal frameworks that came before it.

The difficulty in regulating Bitcoin and other cryptocurrencies stems from the fact that they are conducted through a peer-to-peer network. While governments have been successful in policing online marketplaces such as The Pirate Bay and Silk Road, there are a plethora of cryptocurrencies to contend with. The primary distinction between cryptocurrencies and traditional currencies is that transactions may be carried out either via exchanges or directly through your coin wallet. Anyone who has a digital wallet can access their crypto from anywhere or anytime in the world without even asking permission for the transaction.

Centralized cryptocurrency exchanges (CCEs) are for-profit businesses that enable the trade of cryptocurrencies amongst one another. In the transaction between buyers and sellers, a centralized exchange acts as a third party. Users place their faith in these organizations to assist them in conducting transactions and managing their digital assets.

Knowing your customer (KYC) methods are essential for bigger centralized exchanges like Binance and Coinbase for law enforcement organisations to trace down assets linked with a single user. Smaller decentralized exchanges, on the other hand, could be utilised to transfer assets without revealing any personal information.

While penalizing nations are unable to determine who the owner of the address transmitting the bitcoin is, they can monitor the amount of crypto that is being sent. Once a suspect address has been identified, the money associated with that address may be tracked down.KYC rules are intended to protect financial institutions from fraud, corruption, money laundering, and terrorist funding. KYC entails numerous procedures, including establishing client identification, understanding the nature of customers’ actions, and determining the legitimacy of the source of money.

It is where the government regulations again enter the picture and can gain benefit in this aspect as these centralized exchange working are bounded by the law of the country they are answerable to the state as well as responsible to provide the information about any transaction that is associated with any illegal activity.

Conclusion:

Because of its decentralized form, cryptocurrency is not subject to the laws of any country, while centralised exchanges and individuals are. No matter how popular cryptocurrency becomes, it has the potential to destabilize global monetary policy. With hundreds of new tokens appearing every month, it seems that regulating cryptocurrencies will always be a cat and mouse game. But there is room for regulatory innovation if the government and the private sector work together to make this place safe for everybody. Unlike conventional finance, where authorities cannot access transaction data without a direct request from financial firms, blockchain technology provides unparalleled openness. This allows regulatory supervisors to readily evaluate transactions, altering regulatory compliance & monitoring. Regulatory evaluation will maintain the security of the transaction.