Regulation has been a hot topic in the cryptocurrency sector since day one. Governments and financial bodies have talked tough about the need to lay down strict legal guidelines and frameworks around how crypto is traded.
However, despite efforts by individual governments, the global industry remains largely unregulated.
Strengths and Weaknesses
Many cryptocurrency enthusiasts see the unregulated nature of the industry as one of its greatest strengths and vital to how crypto operates. They say that more red tape will stifle innovation and give governments and central banks too much power.
Also, they fear these institutions may even use regulation to deliberately undermine the cryptocurrency market because they see it as a threat to their financial dominance.
But for those outside the industry, the cryptocurrency market is seen as the “wild west” where money laundering and scams are rife. While this perception may be exaggerated, it puts many people off investing in crypto.
Regulation would go a long way to dispelling these fears, encouraging confidence among legitimate investors while driving out bad actors and those using crypto to fund illicit activities.
Self-regulation
As it stands, the cryptocurrency sector is not so much unregulated as self-regulating. Most major platforms voluntarily impose security measures and codes of conduct to protect investors, and anyone concerned about the risks can find out how to buy crypto safely.
Nevertheless, unregulated sites exist where those who wish to trade anonymously with no questions asked can do so, and those who fall victim to scams have little chance of getting their money back.
Legitimate crypto exchanges commonly require personal information and photo identification to open an account and comply with the know your customer (KYC) policy. These platforms often follow the same strict measures against cybercrime as other financial exchanges and will be transparent about how they operate and store information.
The right kind of regulation would formalize such arrangements, providing clear guidelines for customers and brokers alike.
Increased Stability and Protection
The ultimate purpose of any new regulation should be to protect investors, which can only be a good thing. By bringing more stability to a volatile market, regulation will encourage more investment and help the cryptocurrency sector achieve its full potential.
At present, less than 15% of US citizens own cryptocurrency. Thus, regulation will see crypto “going mainstream” and reaching a much larger market share.
Bigger institutions are also much more likely to come on board if crypto is adequately regulated, bringing an influx of corporate investment into the sector. These institutions need to follow their own strict rules around risk management and compliance and cannot be connected to shady or illegal activities.
Regulation will provide assurance that they aren’t unwittingly supporting money laundering or putting shareholders’ money at unnecessary risk.
The Cost of Uncertainty
Governments worldwide have continued to stall on the issue of cryptocurrency regulation, and the resulting uncertainty is arguably worse for the market than a clear and sensible legal framework would be. On his first day in office, President Biden froze crypto regulations pending further studies, and other countries have seen only half-hearted steps towards proper regulation so far.
Nevertheless, some form of regulation is inevitable, and the crypto community would be better advised to work towards making sure this is appropriate and beneficial instead of opposing all moves by governments to interfere.
Currently, the industry is metaphorically on one foot, waiting to see what form regulation will take if, or more likely when it is introduced. Potential investors are similarly waiting to see which way governments will jump and what impact it will have.
Will Crypto Investors Move Offshore?
A common argument against government regulation in the US is that it will drive crypto investors offshore. They will simply move their money to other, less tightly regulated markets.
However, this proposition isn’t supported by the evidence, as those states that have introduced regulation haven’t seen the expected drop in trading volume.
There will be some initial drop in volume following any legislation to curb money laundering and fraud. Still, it will be the bad actors, scam artists, and illegitimate traders that move elsewhere. Studies show that their loss is soon more than compensated for by a significant increase in legitimate investors buying into crypto with confidence and a sense of security.
The right kind of regulation will protect investors, prevent fraud, and give clear guidelines for companies and customers alike. While there is always the danger of regulatory overreach, sensible precautions and a proper legal framework are the only way for cryptocurrency to respectably enter the financial mainstream as a fully mature and viable payment and investment option.
