It has become painfully obvious that government regulation of cryptocurrency is now at the doorstep. Over the last 12 to 18 months governments in a number of countries have made it clear that cryptocurrency regulations are unavoidable. Many have already begun the process of regulating. And yet, such government actions create a quandary that has yet to be solved.

What is that quandary? It is finding a way to maintain complete and total decentralization while still giving government regulators some control over how cryptocurrencies are acquired, traded, and used as payment systems. It is a quandary that goes well beyond investing in an ICO or depositing bitcoins at a casino to play Mega Moolah.

Two recent news stories published on the Coin Telegraph website perfectly illustrate the difficulty of reconciling government regulation with cryptocurrency decentralization. The two stories come from South America. The first is from Venezuela and the second from Chile.

New fees and limits in Venezuela

Much of the cryptocurrency news from Venezuela centers around the country's state-backed coin that was ostensibly released in 2018. Known as the Petro (PET), it is a digital coin backed by Venezuela's oil industry. It is also coin that remains in relative obscurity. No one knows what it is worth, and only a small handful of people know how to actually get their hands on it.

While all that is going on, the Venezuelan government has been slowly but surely increasing its regulation of mainstream cryptocurrencies like Bitcoin and Litecoin. Regulators have acquiesced to the fact that they are not going to stop mainstream cryptocurrencies from infiltrating the economy. As such, they want to take advantage of them as best they can.

Venezuela's National Superintendency of Crypto Assets and Related Activities (SUNACRIP), the government agency tasked with regulating all things crypto, was recently given the authority to tax crypto transactions in Venezuela. A new consent decree issued by the Venezuelan government will allow SUNACRIP to levy taxes on all digital coins being sent from Venezuela and received inside the country. They can tax both individual users and legal organizations.

In addition to taxation, SUNACRIP has been given the authority to limit transaction volumes and the fees associated with each transaction. For example, the consent decree caps the fee for a crypto transaction at 15%. The minimum fee is now set at the equivalent of U.S. $0.28.

In terms of limits, individuals and legal entities will not be allowed to exceed the equivalent of 10 Petro per month in digital currency transactions. Based on the Venezuelan government's assessment of the Petro's value, that amounts to a monthly limit equal to about USD $600.

What it means to Venezuelans

If any other country were doing what Venezuela is with cryptocurrency, the world would probably shrug it off as being inconsequential for the most part. But that is not the case here. Remember that the value and output of Venezuela's oil industry made the country's economy one of the strongest economies in South America at one time. All that changed when the government took possession of the oil industry and turned it into a state money-making machine.

In the years since, Venezuela's economy has completely collapsed. The bolivar is all but useless both domestically and abroad, and average citizens lack for basic necessities. Subsequent hyperinflation has partially driven the use of Bitcoin as a means of buying and selling. Bitcoin trading gives people an opportunity to bypass the economic damage done by the government in order to better control their own economics.

Knowing this, it would appear as though government action in Venezuela is designed to curb trading of mainstream cryptocurrencies without cutting them off altogether. But what would be the point of that? To encourage citizens to move away from Bitcoin and others in favor of Petro. The newly placed limits on monthly transactions is pretty clear evidence to that effect.

If you are a merchant running a business that accepts bitcoins as payment, the volume of crypto you can now accept every month is capped at $600. Anyone else wishing to pay with crypto after that limit has been reached is out of luck. They either have to pay with fiat or PET.

The idea of taxing cryptocurrencies also seems to be aimed at getting people to use PET rather than BTC, LTC, etc. If switching to PET for transactions within Venezuela is the only way to avoid crypto taxation, you can bet a lot of users will go that route.

No substitute for fiat in Chile

Moving south to Chile, regulators there are in the early stages of defining their own rules for cryptocurrency investments and transactions. The Central Bank of Chile (BCC) has weighed in on the matter, letting it be known that they don't think cryptocurrencies are, or ever will be, a substitute for fiat currency.

A fiat currency is a currency recognized by a controlling government entity as legal tender. Moreover, legal tender is an instrument recognized by government as being legally acceptable for settling debts. Such legal recognition is that which gives a government minted coin value. Take the Chilean peso, for example. It only has value because Chile's government recognizes it as legal tender. Without such recognition, it is nothing more than a piece of metal with engraving on it.

The importance of this goes way beyond the philosophical. It is actually quite practical. You have the BCC all but saying they have no plans to recognize something like Bitcoin or Ethereum as a substitute for fiat. Being that the BCC is Chile's central bank, it is reasonable to assume government regulators will take the same position as their BCC counterparts.

Such a position will obviously affect whatever regulations the government eventually comes up with. This will likely mean that cryptocurrencies will be allowed as legal forms of payment but not legal tender. Indeed, rumors suggest that government regulators are already moving in that direction.

According to Coin Telegraph, a recently released report from the BCC suggests that future regulations will treat cryptocurrencies as intangible assets with a digital representation of value. That value would only exist in the ability to convert crypto assets into property.

Here's what that means in simple English: Chilean regulators may recognize cryptocurrencies as intangible assets on the same level as credit. We can use a credit card as an example.

A credit card itself has no inherent value. Its value lies only in its representation of a user's ability and willingness to pay for something. That credit card can be used to obtain goods and services, thereby converting the instrument of credit into something tangible. This is apparently how Chilean regulators view cryptocurrency.

What it means to Chileans

If regulators do indeed take such a view of cryptocurrency in the future, that would be good news to Chileans. First of all, it is very difficult to tax intangible assets. So if Bitcoin and Litecoin are put on the same plane as consumer credit, the taxation issue would be settled. Consumers could obtain cryptocurrencies the same they would credit instruments, using them as a representation of their ability to buy goods and services and pay for them later with fiat.

The question is, will regulators stop there? Maybe, but maybe not. There is a very real possibility that Chilean regulators will go the same way as their counterparts in Venezuela to tax crypto transactions. Or they could follow the example of U.S. regulators who view crypto assets as similar to securities, thereby taxing capital gains.

The net effect

After reading the details of these two stories, do you better understand the quandary of regulation and decentralization? Unfortunately, the net effect of government regulation is that it mitigates the benefits of decentralization. A completely decentralized cryptocurrency is outside of government control because it is neither created nor backed by government entities. But decentralization in its purest form only exists as long as government refuses to regulate.

There is an old saying that says the power to tax is the power to control. That is absolutely true. Governments have used tax policies for thousands of years as a way of controlling citizens. Well, the same principle holds true for cryptocurrencies. The minute the government begins regulating crypto assets, it assumes control over those assets. They are no longer decentralized.

The blockchain on which crypto assets are built may exist as a decentralized ledger floating around in cyberspace, but that's about it. Decentralization is lost from a practical standpoint the minute a government decides it has the power to regulate who can trade Bitcoin, how much can be traded every month, what the fees associated with trading will be, and how much tax will be paid on those trades.

The unfortunate reality is that cryptocurrency regulation is now at the doorstep. Expect more countries to adopt regulations in the very near future. Some countries will keep their regulations at a minimum; others will maximize every opportunity to control. Let us hope none this interferes with our ability to do what we want with our crypto assets, even if that means playing Mega Moolah with bitcoins.