Since crypto’s increase in popularity and its many cycles of boom and bust, the need for proper regulation of Bitcoin and other cryptocurrencies has become increasingly clear. However, for many reasons, trying to produce sensible regulation has been an arduous task for government agencies across the world.
The technologically complex nature of cryptocurrency makes things difficult. To formulate effective and robust regulation on an asset class, you need to know it inside out. Both the complicated nature of blockchain technology and the fact that cryptocurrency only really came into popular consciousness towards the end of the 2010s means there are few people with the requisite experience, expertise, and technical know-how to fully understand the industry.
On top of that, cryptocurrency is a rapidly evolving asset class. Attempts at regulation – which takes months, if not years, to write – are often blighted by the industry’s fast-moving nature. By the time the regulation has been drafted, the crypto has fundamentally changed in a way that makes these rules obsolete. The rapid rise in popularity of non-fungible tokens, or NFTs – a very new blockchain product – exemplifies why regulators have found it a Sisyphean struggle to keep apace with crypto.
Contrast this with sports betting, one of the most heavily regulated industries – as serial entrepreneur Roman Semiokhin can attest. Whilst it has evolved in recent years – most notably with the domination of online betting over in-shop bookies – sports betting is straightforward for regulators to understand. There have been years of studies done about the potential opportunities and drawbacks of an unregulated sector. With crypto, it seems hard to even anticipate what the risks will be, let alone how to mitigate them.
Recent industry developments have put the spotlight on the need for strong, sensible regulation, including the indictment of Binance for breaking US financial laws and – most notably – the spectacular demise of FTX. The Sam Bankman-Fried saga made it abundantly clear that consumers need to be protected and demonstrated the perils of a cowboy, unregulated crypto industry.
An increasingly prominent view is that because of the addictive, get-rich-quick side of crypto, the currency should be regulated in a similar way to gambling. Proponents of this view cite the similarities between the problems faced by those who are addicted to gambling and those who are addicted to investing money in cryptocurrency.
Some proponents of this idea have gone further. Members of the UK Parliament justified calls to regulate crypto in the same way as gambling by stating that in both circumstances, people were trading assets with ‘no intrinsic value’ and ‘no discernible social good’. These MPs also said that handing over-regulation of crypto to traditional financial conduct authorities would give the impression that crypto is ‘safer than it is’.
There are some parallels in the way that you can regulate crypto and sports betting. Clearly, users should be able to ascertain which are legitimate sites, and vulnerable users should be protected from advertising in both areas. Self-exclusion technology – bought in to protect gamblers – could also be offered by crypto trading apps.
For both cryptocurrency and gambling, education is key. Users should be made aware that whilst both activities have the potential for the user to ‘get rich quick’, they should be willing to lose whatever they gamble or invest. Clearly, don’t put your house on the line either.
However, as expert Kahlil Philander from Washington State University says, crypto is ‘clearly a commodity or a security’. Whilst the temptation to use existing gambling legislation may prove tempting, these regulations would likely be clumsy and ill-advised. Although crypto is more volatile than most other financial assets, regulation should still be under the remit of financial services. After all, Bitcoin is not the only asset with price fluctuations.
Whilst avoiding the dangers of crypto companies marking their own homework, regulators should try to work with them to draft regulation that works for consumers and companies. The FTX saga was deeply damaging to the reputation of the industry, so all those employed in it will understand the paramount importance of regulation. Regulators should listen to their advice.
Crafting good legislation concerning the sector will be a fluid process with significant teething issues, but it must recognize the positives as well as mitigate the risks of the crypto industry.
For more information about this topic, visit Roman Semiokhin’s website: https://romansemiokhin.com