One of the core features of cryptocurrencies, such as Bitcoin, bitcoin cash, Ethereum etc, is that they are beyond the control of governments. Bitcoin was developed with the primary aim of overcoming the shortcomings of fiat currencies, most of which are attributed to government regulation. However, there are growing signs that cryptocurrencies may not be beyond regulation. In fact, they may need regulation.
Regulation is a double-edged sword
Yes, there is a need to regulate the cryptocurrencies industry. However, regulation is expected to lead to some complications and compromises.
The cryptocurrency market is currently on a nosedive. The market has lost billions in less than ten months. Bitcoin, the leading cryptocurrency, has seen its prices fall from an all-time high of over USD 20,000 in December, 2017 to just a little over USD 3,500. Other cryptocurrencies have been completely wiped off the markets and some are stagnant with bleak hopes of revival. This absurd volatility has been partly blamed on the lack of regulation, and sitting idle may lead to irreversible disarray. However, cryptocurrencies will have to make considerable concessions to enjoy the benefits that come with regulation.
Benefits of regulation
The cryptocurrency industry has several benefits to reap from regulation:
The only certain thing about the crypto markets is that you can never be certain. Prices have been fluctuating wildly since the beginning. For instance, the current bear market was expected, but just not with such devastating effects. Worse still, no one knows where the digital currency markets are heading next, and whether or not they are coming back at all. Many analysts are optimistic that Bitcoin will hold on and survive the fall, but they are showing little enthusiasm for altcoins – the cryptocurrency markets will be much more smaller when the ongoing bear market run comes to an end.
One of the reasons why there is uncertainty is the lack of a regulator. Cryptocurrency traders can run free and do as they wish with their tokens, and this causes chaos in the markets. Such chaos is mitigated in the stock and other markets through set guidelines and regulations.
Having a regulatory body on cryptocurrency markets would lead to more certainty as investors would get confidence from the knowledge that a capable authority is at the helm. For now, however, cryptocurrencies are still a scam from most people’s perspective.
Volatility can be good or bad. For instance, early BTC investors have enjoyed profits thousands of times over what they invested. Late entrants, however, are counting their losses as Bitcoin prices have fallen by over two-thirds in less than one year. It would not be surprising to see prices rebound considerably too considering the markets’ history.
Certainty in the crypto markets would be followed by stability. Stability, on the other hand, would attract even more investors and make the digital currency markets even more lucrative.
One of the main fields of concern for the Securities and Exchange Commission are Initial Coin Offerings (ICOs). The amount raised via ICOs currently exceeds USD 6 billion. Interestingly, more than half of the startups funded through ICOs in the past year have already failed and many others are set to face a similar fate. This is alarming, but there is more to be concerned about. Unlike IPOs whereby investors get shares of the company, ICOs issue out tokens that are not backed by anything. To this end, investors are liable for the company’s success or failure.
Cryptocurrency regulation would help weed out the numerous scammers crowding the ICOs space and make ICOs markets safer and more lucrative for investors. Weeding out bad cryptocurrencies at the ICOs stage would also minimize the number of scammers making it to be legitimate cryptocurrency market.
Analysts have diverging opinions about the future of the cryptocurrency market now that it is edging towards collapse. Some say that this is normal in any market while others have pronounced cryptocurrencies dead – at the very least, altcoins are dead. This debate would not take place if cryptocurrencies were regulated as regulators and governments would be obligated to ensure that they not only stay afloat but also perform well – besides, such a nosedive would not happen in the first place as there would be stability and certainty.
Shortcomings of cryptocurrency regulation
Regulation on the digital currency markets is a compromise between risk and innovation. It is because a great innovation such as the Blockchain technology would have to be dropped. Regulation would limit what different players in the market can do as they seek to comply with the law or face the consequences. Some of the risky ideas that have been proposed and actually worked would be suppressed such as blockchain. Consequently, regulation would also stifle the crypto market’s growth in the short term.
Some analysts are also concerned that the government’s move to regulate the crypto markets at this time would result in irreversible damages – it is necessary to give cryptocurrencies some time to get their footing and chart their own course to ensure that the policies made are friendly and suitable to the markets’ unique needs.
What if regulation comes anyway?
Regulation may be necessary for the survival of the digital currency markets, but at this time it would essentially strangle them to death, leaving them as clones of their former selves.
One of the concerns of most people in the cryptocurrency industry is that governments and central banks will take control of the production and supply of cryptocurrencies, as is the case with fiat currencies. This would make them open to the same vulnerabilities that Satoshi Nakamoto sought to avoid. To this end, cryptocurrencies would be nothing more than just virtual versions of fiat currencies.
Where do markets stand on regulation?
Several countries have banned cryptocurrencies such as china altogether owing to the complexity involved in regulation. Others, such as Iran and Venezuela, are using cryptocurrencies to bypass international sanctions. The U.S., however, seems to be contemplating adopting cryptocurrencies, with particular emphasis on Bitcoin and Ethereum.
The Securities and Exchange Commission has classified several cryptocurrencies such as Bitcoin and the DAO as securities. This means that they are subject to the commission’s laws and regulations. The commission is also contemplating classifying more cryptocurrencies appropriately. This has been seen as the beginning of much more comprehensive regulation measures. It should also be noted that all cryptocurrency exchanges operating in the U.S. are bound by existing laws and regulations.
The SEC has also been cracking down on cryptocurrencies that it deems are fraudulent. In recent times, the commission fined several celebrities for promoting cryptocurrencies and ICOs that turned out to be fraudulent. It is also working in conjunction with its counterpart Canadian regulator to smoke out Canadian scammers targeting American citizens. The commission is also calling for international cooperation on a larger scale. The IRS, on the other hand, has been tracking down American citizens who have used cryptocurrencies in evading taxes and money laundering. Anyone who has been found acting against the anti-money laundering laws has been arrested.
For now, however, the SEC plans to take things slow as it endeavors to learn more about the strengths and weaknesses of the cryptocurrency markets before undertaking regulatory measures. Its ultimate goal is to come up with effective yet friendly policies that will allow the U.S. to leverage the potential of this new class of assets. European agencies are also exploring ways of reining in rogue cryptocurrencies while getting on top of the affairs of genuine, promising cryptocurrencies.
Interestingly, the SEC’s move to crack down on fraudulent cryptocurrencies is deterring legitimate cryptocurrencies too. To this end, more and more cryptos are exiting the American markets and migrating to friendly countries such as Singapore and Switzerland. However, these cryptocurrency havens may also align with tougher stances as regulating cryptocurrencies would only make sense from a global perspective – cryptocurrencies can be utilized and transacted all over the world, so different countries’ regulations should align. To this end, it wouldn’t be a surprise to find international agencies adopt crypto regulation policies as well.