While investing in digital currency may have seemed ludicrous just a decade ago, having a certain percentage of your portfolio in cryptocurrencies like Bitcoin, Ethereum and even stablecoins is pretty normal by now. After all, cryptocurrency has seen massive growth in both popularity and utility over the last decade. Plus, consumers tend to like the decentralized nature of crypto, especially since the federal government is always looking for new ways to track regular consumer transactions that take place in USD.
Not surprisingly though, the Biden administration is currently on the hunt for innovative ways to keep track of transactions that occur within private crypto wallets. In fact, some sources say President Biden could soon issue an executive order designed to direct government agencies as they seek to regulate digital assets.
While you may be concerned about the government taking a closer look at your crypto transactions, most investors don't have anything to worry about — at least not yet. If you're wondering why the government cares how much crypto you have or how you use it, read on to learn more.
Why The Government Tracks Crypto
Shaun Heng, who serves as VP of Growth & Ops at CoinMarketCap says it's important to point out that the government may see private crypto wallets as a potential alternative to traditional bank accounts. However, he also makes the distinction that a physical cryptocurrency wallet does not actually hold or store any digital assets. "Rather, a crypto wallet simply holds the private keys needed to access assets stored on the blockchain," he says.
Because all digital assets are stored on the blockchain, which is basically a ledger or record of all crypto transactions, that means the transactions made with digital assets are always public and traceable by nature.
"This transparency is one of the key components of blockchain technology," says Heng.
However, the government still has a vested interest in keeping track of where currency is moving, even if it is decentralized. More importantly though, the government is always interested in curbing crimes like money laundering, human trafficking, and fraud.
According to Cabital CEO Raymond Hsu, government entities are rightfully nervous about cryptocurrency exchanges that do not have robust anti-money laundering controls in place.
"These exchanges would be highly appealing to financial criminals, terrorist financiers and sanctions evaders, which in turn erode the reputation of the countries where they are based," he says.
HiCollectors CEO Scott Steward adds that the government is worried people will be able to move large sums of money through private crypto wallets without taxation or regulation.
"The purpose of private wallets is to keep the transactions private, however, the lack of regulation can create a dangerous situation for the economy," he says. "If people are able to move large amounts of money with little to no regulation, it could lead to risky investments and other undesirable behaviors.:
That's why the federal government is making a large push to make crypto safe, he says.
That said, some experts do believe that the government has some nefarious goals when it comes to tracking crypto transactions. For example, Modulus CEO Richard Gardner says he believes the Fed "wants complete control over monetary policy in order for the federal government to have complete control over our privacy, as well as to maintain the ability to shutter, or, alternatively, tax alternative payment mechanisms out of existence, should they deem it necessary."
As a result, he says crypto advocates and the general public should be extremely concerned by these developments.
Crypto expert Ozzy Dot, who goes by @OzzyDotClips on TikTok, recently talked about this type of scenario in one of his videos. As he shared, a Canadian Superior Court of Justice recently requested that a crypto company called 'Nunchuk' freeze the assets of users who participated in a protest against vaccine mandates. In a response to the Canadian government, the company said with the following:
“We do not collect any user identification information beyond email addresses. We also do not hold any keys,” they said. “Therefore: We cannot ‘freeze’ our users’ assets; We cannot ‘prevent’ them from being moved; We do not have knowledge of ‘the existence, nature, value and location’ of our users’ assets. This is by design.”
“Please look up how self custody and private keys work,” the letter stated. “When the Canadian dollar becomes worthless, we will be here to serve you, too.”
Ozzy Dot says this is precisely why governments are worried about private crypto wallets. They cannot be frozen or seized compared to traditional centralized banking, so the powers that be do not have the power and control they strive to maintain.
Should Crypto Investors Worry About Increased Regulation?
For the most part, everyday crypto investors don't have to do anything to remain compliant with their accounts other than pay taxes on eligible transactions. Financial advisor Julian B. Morris of Concierge Wealth Management says that consumers should already be tracking their cryptocurrency transactions and reporting gains and losses. If not, then increased regulation could force some crypto investors to finally get on board.
For those who invest in crypto who aren't keeping track of their transactions yet, Morris suggests creating a spreadsheet of dates and prices of transactions so you have documentation that will match with the blockchain and make it easier to report for tax purposes. He also adds that there are services already that can generate these reports for you if you connect your wallet.
In the meantime, crypto investors and everyday consumers shouldn't panic just yet. Any measures put in place to track crypto transactions will be designed to find illegal movements of currency that include fraud and money laundering. If you're investing in crypto like a normal person without trying to hide money, evade taxes, or break the law, you have nothing to worry about.
