We need to talk about cryptocurrency regulation…

To many, regulation goes against the spirit and intention of decentralised finance. However, it is increasingly apparent that the widespread adoption of cryptocurrency will only happen with an acceptance of regulation.

The growth of cryptocurrency cannot be ignored, and every week we see reports of another jurisdiction examining regulation.

This week, the European Parliament’s European Parliament Economic and Monetary Affairs Committee recommended to all member states the adoption of EU-wide regulatory measures to ‘protect consumers’. Earlier in the month, US President Joe Biden outlined crypt regulation plans in an Executive Order.

One to Watch

The crypto environment is constantly changing, and so is legislation worldwide.

China, for example, has taken a strident position by shutting down exchanges in its nation and escorting miners out through land-use regulation. Interestingly, this had little impact on cryptocurrency prices or the speculative bubble.

An issue with regulating cryptocurrencies like Bitcoin is that they operate on peer-to-peer networks. The absence of an intermediary in a cryptocurrency transaction makes crypto harder to regulate than, for example, payments handled through banks.

But that doesn’t mean governments are impotent. Many have successfully passed legislation and regulation aimed at greater accountability and transparency, and there will be more.

While international governments have managed to ban some rogue sites, there remains a massive and growing number of cryptocurrencies with which to deal.

Critics of more government ‘interference’ in DeFi warn of the detrimental impact on cryptocurrency prices. But others argue there are benefits to regulation.

For the Best?

Here are some key reasons why experts believe additional regulation might benefit long-term cryptocurrency investment:

• Increased Market Stability – Regulating cryptocurrencies could be a good thing for the market, at least in terms of average investors. If effectively targeted, increased regulatory advice could help curb crypto-asset speculation. Less speculation could generate greater investor trust. That could attract more long-term investors who have previously shunned the crypto market due to its highly speculative and volatile nature.
• Increased Investor Safety and Confidence – Lack of a legal structure to offer asset protection means crypto investors have little to no protection in the market. In the world of cryptocurrency, market manipulation and price volatility are commonplace. Consider Bitcoin, the world’s oldest and most prominent cryptocurrency, which reached all-time highs in early 2021 before losing a significant portion of its value. Some see it as critical to enact rules to protect investors from a lack of official information on digital assets and the technical complexity involved . In the US, several high-volume exchanges attempt to comply with federal and state financial regulations. Still, they are not, yet, regulated in the same way as public stock exchanges and alternative trading systems, so do not give all investors the same level of confidence.
• Money Laundering – Any mechanism that is not controlled has the potential to fuel illicit activity. As a result, a customer due diligence process is required, similar to a bank. When purchasing or selling crypto assets, this might help keep track of investors’ genuine identities and verify their whereabouts.

It’s the Future

My view is that regulation is something the cryptoverse will have to accept. In part, this is because stricter rules are inevitable if we are to see greater adoption and use of cryptocurrencies. However, increasing consumer confidence and safety in crypt trading is also for the long-term benefit of the industry and the consumers.