By Ana Gonzalez | June 13, 2016
The Legislative Move
Bitcoin has officially broken through the $700 barrier for the first time since February 2014, and the forces behind this historic rally are as much political as they are technological. On June 13, 2016, the price of a single bitcoin surged past $700 after jumping 21% over the weekend, driven primarily by Chinese investors seeking refuge from a weakening yuan and tightening capital controls. The rally has reignited conversations among regulators worldwide about how to classify, monitor, and potentially restrict the growing cryptocurrency market.
While no specific new legislation was introduced on this date, the price surge has accelerated ongoing regulatory discussions across multiple jurisdictions. In China, where the majority of bitcoin trading volume currently originates, authorities have been grappling with how to balance the cryptocurrency’s growing popularity with their mandate to control capital outflows. In the United States, the Commodity Futures Trading Commission’s 2015 designation of bitcoin as a commodity continues to shape the regulatory framework, while the Securities and Exchange Commission closely monitors developments in the Initial Coin Offering space.
Jurisdiction Context
The regulatory landscape for cryptocurrencies in mid-2016 is a patchwork of differing approaches across the globe. China represents the largest and most complex jurisdiction for bitcoin regulation. The People’s Bank of China has not banned cryptocurrency trading outright, but it has issued warnings about the risks and has been investigating major exchanges for compliance with anti-money laundering regulations. The sheer volume of yuan-denominated bitcoin trading — which accounts for the majority of global volume — means that any regulatory action from Beijing could have outsized effects on the global market.
In the United States, the regulatory environment remains fragmented. The CFTC treats bitcoin as a commodity, the IRS classifies it as property for tax purposes, and the Financial Crimes Enforcement Network requires exchanges to register as money services businesses. This patchwork creates compliance challenges for businesses operating across state lines and has slowed the development of institutional-grade cryptocurrency infrastructure.
The European Union is taking a more measured approach, with the European Parliament having recently discussed proposals for a comprehensive digital currency regulatory framework. Meanwhile, Japan has been moving toward recognizing bitcoin as a legal payment method, a significant shift that could set a precedent for other Asian economies.
Industry Reaction
The cryptocurrency industry’s response to the $700 rally has been cautiously optimistic. Major exchanges in China, including OKCoin and Huobi, have reported record trading volumes, with many attributing the surge to retail investors diversifying away from the yuan. The yuan has depreciated approximately 5% against the dollar since the beginning of 2016, and anxieties about unsustainable levels of Chinese corporate debt have intensified the search for alternative stores of value.
Western exchanges like Coinbase and BitStamp have also seen increased activity, though the dynamic is different. In the United States and Europe, much of the interest appears driven by the approaching bitcoin halving — the protocol-level event expected around July 9, 2016, that will reduce the mining reward from 25 BTC to 12.5 BTC per block. This supply shock has historically been associated with significant price increases, and many investors are positioning themselves ahead of the event.
Bitcoin mining companies and hardware manufacturers are also watching closely. The halving will directly impact their revenue models, and the current price surge provides a cushion against the impending reduction in mining rewards. Some mining operations with higher electricity costs may become unprofitable after the halving if the price does not sustain its current levels.
Compliance Hurdles
The rapid price appreciation creates new challenges for compliance departments at exchanges and financial institutions. Know-your-customer and anti-money laundering procedures become more critical — and more difficult — as trading volumes surge and new users enter the market. The 21% weekend price jump is the kind of volatility that attracts both legitimate investors and bad actors, forcing compliance teams to be more vigilant.
Cross-border capital flow regulations present another significant hurdle. Chinese citizens are technically limited to converting $50,000 per year in foreign currency, but bitcoin offers a potential bypass. Each time bitcoin rallies sharply on Chinese volume, regulators are reminded of this loophole, and pressure builds for new restrictions. The tension between capital controls and cryptocurrency freedom is becoming one of the defining regulatory battles of 2016.
Tax compliance also remains a grey area in many jurisdictions. The IRS classification of bitcoin as property means that every transaction potentially creates a taxable event, but enforcement is minimal and many users are unaware of their obligations. As bitcoin’s price and mainstream acceptance grow, tax authorities are likely to increase scrutiny.
What’s Next
The regulatory picture for cryptocurrencies will likely become more defined in the second half of 2016. The bitcoin halving in July will test whether the network can maintain its security and stability with reduced miner incentives. Any disruption could accelerate regulatory action aimed at protecting consumers. In China, the ongoing yuan devaluation and capital control regime will continue to drive bitcoin demand, and the government’s response — whether through exchange restrictions, licensing requirements, or other measures — will shape the global market.
The DAO phenomenon on Ethereum also raises regulatory questions that extend beyond bitcoin. The SEC has been monitoring the ICO space, and The DAO’s $168 million crowdfunding raise blurs the line between crowdfunding and securities offering. A regulatory crackdown on token sales could affect the entire cryptocurrency ecosystem, including bitcoin.
For now, the $700 bitcoin price represents a milestone that validates the cryptocurrency’s resilience since the Mt. Gox collapse of early 2014. But with that validation comes increased scrutiny from the very regulators who have the power to either facilitate or hinder the next phase of growth. The intersection of capital controls, monetary policy, and decentralized digital currency is uncharted territory, and the path forward will be shaped as much in government offices as on trading floors.
Disclaimer
This article is for informational purposes only and does not constitute financial or legal advice. Cryptocurrency regulations vary by jurisdiction and are subject to change. Always consult a qualified professional for advice specific to your circumstances.