Can the regulators save crypto from failing as money? It seems that doubts and questions surrounding crypto will not leave it ever.
When it first came into existence in the form of Bitcoin, there was a lot of doubt regarding the creator of the coin, Satoshi Nakamoto.
Few people thought that this anonymous creator is a person while some other people believed that it refers to a group of people.
As Bitcoin grew in popularity and utility, a lot of other crypto coins came up – in fact multiples of thousands are available in the market right now.
And the doubts in the minds of the people seem to increase. These doubts are also quite diverse in nature.
A lot of people, including the regulators and the governments believe that rise of crypto has resulted in the rise of money laundering and has also made funding terrorism activities much easier than before.
Some people think that crypto is just a bubble which will surely burst one day, sooner or later, while some say that it has a very bright future and may even replace the traditional cash payment system one day.
Now, whether or not crypto will fail is not the subject of this article.
This article is all about whether or not regulations imposed on crypto can save it from failing, if at all it does.
Whether or not crypto will replace fiat money is a subject of debate but one thing is true and very clear – if it is supervised in the right way and allowed to do the good things that it is already doing, crypto can be a lot more useful for the people, the economy, and the world on the whole.
Can the Regulators Save Crypto from Failing as Money?
So far, cryptocurrencies have failed to wipe away fiat currency, the money issued and backed by the government.
Apart from that, it has also failed to live up to the expectation of the most ardent fans and advocates who believed that this new digital currency will bring about a broader revolution in the financial sector.
Therefore, it is clear that crypto has failed to materialize what the creators envisaged, and it may be quite natural to think that it is really failing to prove itself from becoming a useful alternative payment system.
Well, it needs a closer look at different aspects of it in order to get a clear picture.
If the failure of crypto is a possibility then something can be and should be done to save it from failing.
How about harnessing the underlying technology of crypto to change the conventional fiat currencies?
Will it be more feasible to make them cheaper and much easier to access so that they can be used by people all over the world?
A lot of such different questions may arise in the minds of people, including you.
Well, just like you, the regulators are also worried about both the prospects and the future of crypto.
They too are thinking on the same lines to control its operation and at the same time make it more useful for the economy, if it cannot be beaten.
Well, this goal is surely not unattainable and with a little help from the government and the relevant authorities crypto can definitely be prevented from being pushed to the sideline.
Usually, the problem with traditional money is that it leaves a lot to the desires, and a lot of it is definitely desired from it. People find new ways to make more money and use it in different ways.
Though most of the people keep their money safe in their accounts with the large commercial banks, it may also be used by some people in a completely different way such as making an interest bearing investment.
And then, there are the bad actors who outright fraud to gain, and if this is done by the merchants it becomes taxing for the customers.
Traditional money, whether for the above mentioned reasons or not, has proved itself to be extremely fragile during the times of crises time and again.
While dealing with traditional money and at times when it is required to move across regions or borders, it might take several days for a transaction to be completed.
It might take even a much longer time than that if it is particularly required to send the money through a very old and potentially hackable network of the particular bank that handles such international money transfers.
And, for those people who do not have a bank account – yes, there are millions of American citizens out there without one just as the disproportionately Latino and Black – things can be even worse.
They will have to use ATM services, check cashers, money transmitting businesses and card issuers in the case of need, and all of these costs a lot in terms of high commissions and fees.
Therefore, upgrading the current financial system is very much required which surely can stand and do have a few areas for improvement.
Use of crypto may solve all these issues right away. It is easy to carry and fast to transfer across borders.
It is as safe and secure as fiat money, if not more and, most importantly, everything in crypto is done in the most transparent manner.
With all these benefits offered by crypto, it should be taken care of so that it can accomplish its goal easily and continue to provide the consumers with its inherent benefits.
And, with the surging innovation in this field it has resulted in a healthy competition in the market and among the companies, both private and public.
However, the regulators and government officials such as the US Treasury Secretary Janet Yellen are worried about the inherent risks of crypto more than the benefits offered by it.
One of the most significant risks of crypto is being an active and favored means to launder money and fund terrorism activities.
Therefore, they strongly think that there is an immediate need for imposing stringent regulatory measures on crypto to mitigate the ever mounting risks.
However, they are not keen on banning crypto altogether right away just as China sought to do in September last year.
Therefore, the question is can the regulators, or the regulations on crypto to be more precise, prevent it from failing to prove to be a useful medium of exchange.
Their well-planned moves will surely benefit people all over the world and at the same time save crypto from failing.
But, for all that to happen, it is required that the regulators do not fall any further behind in protecting the users from the dangers that crypto comes with.
A bit of further analysis of crypto, Bitcoin in particular, and other considerations will help you to understand it in a much better way.
As you already know, Bitcoin is the original crypto created by Satoshi Nakamoto and was designed to bypass the intricacies and complexities of the traditional financial system while transferring money across.
In its initial days of survival, anyone with a computer and a strong and stable internet connection could set up a pseudonymous account and control it with a private key that is safely stored by the user.
These digital currencies can be sent by anyone, anywhere, and any time to anyone anywhere easily and quickly via the blockchain network, an innovative and transparent Distributed Ledger technology.
The process involved using a network of computers that work voluntarily to record each and every transaction after proper verification and validation before it is added to the blockchain as a new block.
High power cryptography and the decentralized nature of the underlying technology of crypto keep the funds safe and protect them from malfunction, hacking or any other types of abuse.
It is this innovative technology on which crypto operates that has inspired hope for a more impartial kind of finance system and along with it has also offered the assurance of a much greater stability.
This is because the payments could be made even if one or more major global banks failed because it does not need their intervention to complete a transaction.
Therefore, Bitcoin and all other types of crypto coins along with it have initiated a whole new and safe environment to use money.
However, it is true that it has changed the whole concept of using money today but it has also failed to prove itself as money.
There are lots of reasons behind such failure of crypto such as:
- It is extremely volatile in nature that affects its stability but which is absolutely essential for money
- It is used mainly as a speculation asset as of now and has proved to be worthy in this aspect only
- It facilitates making illegal trades and transfer of funds to finance the activists in oppressive regimes due to the anonymity factor
- Its slow and expensive computing power which makes it impossible to make smaller transactions
- The damages caused to the environment and excessive use of natural resources which are as such depleting fast while mining new coins
- The fear of the users losing their private key and thereby losing their money forever with no recourse and
- The vulnerabilities in the system that allows the bad actors to hack it and direct the money to their desired wallet addresses.
Also, most of the crypto users still use similar types of platforms to transfer or receive crypto such as crypto exchanges, specialized ATMs, PayPal and other obscure trust companies.
All these are nothing but ‘intermediaries.’ In fact, the technology underlying crypto was intended to replace such ‘intermediaries’ in the first place.
Moreover, most of these businesses are comparatively more expensive and less safe to use in comparison to the traditional banks.
Over the years, there has been a significant rise in the number of such intermediaries which invariably results in greater financial instability.
Therefore, while the regulators can improve the safety and security aspect of crypto with their regulations, the operators too will need to improve the ways they operate to make it cheaper, easier to access, and ‘trustless’ in the true sense.
It is only such a collaborative effort that can save crypto from failing as money in the near or distant future.
With all that said about Bitcoin and crypto, all hopes are certainly not lost.
In spite of everything that is bad in crypto, there are lots of innovations going on in this landscape to make it a much better payment system than it is now.
Take the stablecoins for example. These particular types of crypto coins have their values tied with dollar or fiat currencies that make them somewhat less volatile and stable.
These coins therefore are supposed to have recognized the most significant defect in pure cryptocurrencies more implicitly and have been able to address it to a great extent.
Another good attribute of the stablecoins is that these can operate on those particular blockchain networks that work more capably than Bitcoin. Add to that, these operations seem to have a much smaller carbon footprint.
As of now, the primary use of these stable coins is restricted to the crypto speculators.
They use it typically to put in their money and decide what the next thing to bet on is.
They also use it to earn interest from the lending pools that are typically unregulated.
However, the stablecoins should not be confused with electronic cash.
These particular coins also have the potential to simplify fund transfers, provide instant access to it as well as offer a cheaper alternative.
For example, the Diem Association initiated by Facebook allows it to be used to make payments via mobile apps such as WhatsApp and Facebook Messenger.
What is more promising about it is the fact that it has the necessary infrastructure that would allow it to be used even as the digital currencies issued by the governments.
There is one more initiative that is worth taking note at this point. It is called the Lightning Network.
This particular network intends to address the issues with the output and energy consumption of Bitcoin.
This actually sets up side channels which can be used to make multiple payments. Only the final balance will be recorded on the blockchain.
The most significant feature of this network is that Bitcoin can be used extensively as a utility for remittance.
Depending on the application, users in one country can enter dollars which will also emerge as dollars in another country where it is sent.
Therefore, there is practically no need or time to spend in volatile crypto.
Risk of Exits and Runs
Cryptocurrencies, including stablecoins, are no doubt very innovative and useful, but with it comes a lot of risks that may affect its growth.
It is these risk factors that the regulators should look into and try to mitigate in order to save it from failing as money.
The most significant risk of crypto is that it can trigger exits and runs.
Therefore, the regulators should ensure that the redeemable nature of stablecoins for fiat currencies is properly backed with adequate reserves and there should be a fixed rate for it.
However, sadly, that is not always the case. This lack of clarity and adequate reserve funds may one day dupe the holders resulting in a crash when everyone would rush for exits.
Just as this specific risk may result in crypto failing as money there are also a few other specific factors that may cause the same effect.
Crypto coins and stable coins can also undermine the traditional banks which is also a significant risk and a major hindrance for the banks to ensure a smooth operation.
If more and more people store their money in stablecoins safely then they will not deposit them in the traditional banks any longer.
This will deprive the banks of the money required to make loans and as a result it would contract credit and might even affect the economy badly.
Therefore, questions regarding the reliability of crypto as money can be raised.
Another significant risk of the crypto coins is that the market can crash easily as well as its prices.
It is also possible to get hacked. All these make crypto very unstable to be considered as safe as money.
Ideally, if a social media channel goes dark for a day it will not affect the people and the economy in the way if a particular company that runs the global payment system goes dark.
The newer protocols are not quite proven to be robust just as the vulnerabilities in the Lightning Network and the latest outage of the Solana blockchain has established it.
Finally, the fact that crypto can abet crime makes it quite an insecure asset to be considered as money.
The crypto platforms can identify a user normally through the alphanumeric address only.
This specific aspect of it has allowed the developers of malicious software, ransomware, as well as the tax swindlers and other types of criminals to make the best use of these platforms to launder their money and undercut international sanctions.
All these operational concerns can be easily dealt with by the regulators who are the major players to ensure that crypto does not fail as money.
Role of Regulators
Finally, it is time to take a look at the role of the regulators to make sure that crypto continues to provide the benefits it has on offer.
Firstly, the regulators should be firm on backing the coins preferably in the form of fiat currency but if that is not possible then at least with some high-quality, valuable, and stable assets.
In the United States this can be easily achieved by making sure that the stablecoin issuers and payment apps invest only in those specific bank deposits that are, in turn, safely stored at the Federal Reserve.
This will add to the stability aspect of it.
Moreover, it can also be achieved by creating a well defined banking license that will allow them to open multiple reserve accounts with the Fed directly.
However, these measures are not accepted very well or appreciated by the other nations.
They opine that this will affect the adoption of this new form of digital money since people will be more apprehensive and likely to be slow in adopting it.
While this may slow down the adoption process, the regulators may also make a mistake being too cautious.
They may either forbid the payment apps and stablecoins completely from paying interest or reduce the interest they get on their deposits with the Fed.
However, these restrictions can surely be relaxed or taken away completely later on once it is felt by the officials that it is easy to identify and eliminate the threats, if any, to credit and banking.
It is also required by the regulators to make sure that there is enough equity capital.
This will act as a shock absorber when there are some unexpected losses.
Add to that, the regulators must also set proper and strict standards for governance and security with respect to the trading platforms.
A few good methods to ensure it are:
- Testing resilience of the platform and
- Testing their ability to identify emergency situations and who will be in charge to handle such situations.
If any company fails to prove that it has the ability to act quickly and most responsibly during any type of emergency situations, it should be summarily disallowed to run a payment system.
It is also required to make sure that the whole system is interoperable.
This will ensure that a dollar in one platform can be converted into a dollar in another platform easily and it does not lose value during the process due to technical or man-made reasons.
However, this is a rarity because in most cases all transactions and their details are visible to all on the public ledger.
This offers a lot of help to both the law enforcement as well as the crypto community when there is a need to track down a specific transaction and the user to recover ill-gotten profits.
Still, chances of lapses remain and the regulators should look into these chances and try to eliminate them by imposing proper regulatory measures.
It is also required by the regulators to make sure that all payment apps and crypto platforms demand proper, valid, and verifiable identification from the users especially when there is a need to enforce the law depending on the situation.
For example, the regulators may need this when the transaction amount and balances exceed the set thresholds.
This will ensure that all crypto platforms and crypto-enabled payment systems are largely accessible and at the same time are more transparent in their operation and approach in comparison to the existing banking system.
Overall, and most importantly, it will save crypto from failing as money, but, as said earlier, it is a collaborative effort.
There is a lot of speculation on crypto all over the world and a lot of people believe that it might fall in the end.
No matter how these speculations end, if you too thought that way, now you know whether you are right or wrong, reading this article.