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Why Cryptocurrencies Dropped Today

What happened

The week is drawing to a close, and cryptocurrencies are once again trading lower. Here's how prices look for the three biggest names in cryptocurrency as of 9:50 a.m.:

  • Bitcoin (CRYPTO: BTC) is down 2.3% over the last 24 hours, according to data from Coindesk.
  • Dogecoin (CRYPTO: DOGE) is off even more -- 3.5%.
  • And Ethereum (CRYPTO: ETH) has fallen most of all, down 5%.
Artist's rendering of a Bitcoin overlaid on a falling stock chart

Image source: Getty Images.

So what

Once again, it seems government regulation is to blame. Coindesk's lead article this morning discusses a new report from the European Securities and Markets Authority (the European counterpart to the SEC) in which the ESMA criticizes the "soaring" environmental costs of mining cryptocurrencies, as well as the dangers posed by "highly volatile" cryptocurrency prices, and the "prolonged period of risk to institutional and retail investors" that result from this.

According to Coindesk, the European Union is working on a slew of "all-encompassing cryptocurrency regulations, new anti-money laundering (AML) rules and tax reporting requirements for virtual asset service providers and investors." While the legislation reserves its "harsh[est] restrictions" for stablecoins (which are pegged to the value of another currency such as the U.S. dollar), Coindesk says that the legislation, once passed, will be "sweeping" in scope and regulate cryptocurrency markets across all 27 member states of the EU.

Now what

Nor is regulation coming just to the EU. In a separate note today, Cointelegraph.com reports that "Russia is moving to regulate cryptocurrency mining." But in what I believe may be a continuing theme in crypto in the weeks and months ahead, this isn't entirely bad news.

Cryptocurrency mining "is a type of entrepreneurial activity," says Russian State Duma Committee on Financial Markets Chairman Anatoly Aksakov, and "it is obviously necessary to include it into the state register, to regulate it as a type of entrepreneurship under an appropriate code, and impose relevant taxation." In so doing, Aksakov echoed the sentiment expressed by Russia's neighbor to the west, where Ukrainian Minister of Digital Transformation Mykhailo Fedorov was quoted yesterday expressing the hope that Ukraine's regulation of cryptocurrencies will cause "entrepreneurs [to] pay taxes to the budget, but will be protected by the state."

And this, in a nutshell, is how I see cryptocurrency regulation playing out over time. Governments will regulate the cryptocurrency industry, yes. They'll tax it too. But as they do so, they'll become dependent on the tax revenue that cryptocurrency generates, and therefore work to institutionalize cryptocurrency so as to not lose that revenue stream.

While cryptocurrency investors may not love the idea of government regulation, ultimately I think this trend will work to their good.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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