It is convenient to use and secure and can make payments across borders fast.
No doubt, with all these benefits offered, cryptocurrencies have gained a lot of traction in the past few years and become popular.
However, with the growing prevalence of crypto it also increases the challenges for the regulators who face a lot of questions regarding the stability of the current financial system.
It also raises concerns regarding money laundering and funding of terrorism, two things that crypto has eased a lot.
In order to reduce crypto crimes and also the chances of unfair practices in this unregulated crypto market, the regulators need to work along with the tech experts in order to be forward-thinking and design laws that will suit the purpose.
Cryptocurrencies have been around for over a decade now but still the regulatory system that governs it seems to be ineffective, fragmented, and, in many countries, non-existent.
This causes illegal activities to thrive such as fraudulent and scam companies disappearing with your money and more.
Moreover, to become mainstream and to be widely adopted by the masses, it needs some new tools and rules that will raise the trust that is lacking at present among the general people, merchants, organizations, and governments.
Why Does Crypto Need New Tools and Rules?
Digital currencies seem to be the inevitable future but it has got some significant legal loopholes that help crypto crimes to flourish.
Therefore, there is an immediate need for each country to take necessary actions and steps to evade them along with international coordination that will further facilitate the process.
The financial experts and regulators from all over the world have already taken notice of it and are now discussing the threats these digital assets pose in terms of money laundering and terrorism funding.
If you follow the news related to crypto very closely you will see that the Financial Action Task Force or FATF in association with Global Futures Council of World Economic Forum or WEF have raised their concerns already.
They told what they intend to do in a webinar hosted by Absa.
Therefore, new rules and tools to govern crypto are in the pipeline for sure and will soon come to the fore.
However, it will not be very easy for the regulators at all. In fact, there are lots of challenges that they will face and need to overcome them in the process.
The first, and perhaps the most significant, challenge of the regulators from all over the world seems to find the right kind of regulatory instruments that will address the risks stemming from the larger adoption of crypto.
There are lots of limitations in the existing regulatory instruments that are unable to deal with the risks of money laundering and consumer and financial crimes.
This has shown that crypto needs some immediate, increased, and very strict regulatory scrutiny.
The regulators, the lawmakers in Washington as well as senior figures such as Treasury Secretary Janet Yellen and Security and Exchange Commission Chair Gary Gensler all believe that more oversight is essential in the sprawling crypto industry.
With that said, the regulators also have to keep in mind the effects that such regulations might have on the economy, in consumer behavior, and on the long-standing crypto enthusiasts.
Some of the side effects that may suffocate the industry include and are not limited to the following.
- It might go against the ethos of crypto – Since decentralization is the primary objective of crypto, imposing regulations may hurt its ethos. The main culture of crypto is to eliminate the needs of intermediaries like governments and big banks while making any financial transactions. Imposing rules and other regulatory tools will mean somebody watching over the shoulders and putting all the power into the hands of the big banks and businesses.
- It may damage innovation – The most significant reason for the crypto industry to thrive is the innovative blockchain technology which forms the backbone of it. The features and functionalities of this technology guarantee to disrupt a variety of industries, particularly the finance industry. Strict regulations may damage its innovation and its main idea.
- It may increase initiation costs – One most significant effect of regulations on crypto will be felt by the startups because they will need to invest a lot of money in building the right infrastructure for a centralized network in the first place. This will increase their initial costs significantly.
- It may affect flexibility – One of the most significant reasons that the crypto industry is doing so well is its flexibility, especially when its fundraising models are considered. The crypto companies can raise money as and when required quickly through ICOs or Initial Coin Offerings without having to abide by complex security laws and other regulations that are commonly imposed on IPOs or Initial Public Offerings made in the stock markets. Retail investors can also put in their money into projects that they could not have been able to access otherwise. Regulations will change it all.
- It may result in an exodus – Too many regulations may push the entire industry into other crypto-friendly countries. Regulators in the US should fear the global nature of crypto which may result in missing out the economic benefits offered by this industry, create shortage of jobs, and lower investor protection.
- It will affect the crypto prices – The prices of crypto currencies will be driven down by these regulations, especially in the short term mainly because people will be more scared of it.
Therefore, the regulators need to be very cautious while imposing any new rules on crypto and designing new tools to regulate the flourishing crypto industry.
In the end, what matters most is the nature of these new regulations.
Any heavy-handed regulation will massively hamper and damage the activities and prospects of the legit projects.
Typically, it should be sensible and be able to weed out the malicious actors within the industry to eventually create an environment that is suitable for all to thrive.
The powers that be have got an indication long time back that there needs to be a significant shift in the regulatory concept and implementation with regards to the crypto industry.
And, the people too got the signal that regulations on the crypto industry are coming.
For example, the 63 monetary authorities and central bank members of all over the world of the BIS or the Bank of International Settlements have already said that they do not consider cryptocurrencies as money.
Instead, they believe that it is a speculative asset that can be utilized for unfair practices such as ransomware attacks, money laundering, and several other cyber and financial crimes.
However, not all central banks think in the same way.
In fact, the announcement of the BIS has come after more than sixty central banks, since 2014, have started their own digital currency projects.
This indicates that there are lots of governments in this world that believe that the digital coins have a lot of potential.
It can pave the path for a mass adoption and help a lot in preserving the integrity of the current financial system in the future.
And then there is the characteristic and well known volatility of crypto, especially the latest volatility of Bitcoin in particular, that has also raised some vital questions about the viability of crypto coins in the long term as an asset class.
However, there is no doubt in the fact that the crypto industry itself has shown a lot of signals that it needs new rules and tools for regulations.
And, this growing concern about the need for regulations is not only among the regulators and governments.
One thing is very clear about this new form of currencies – it presents both opportunities and risks galore.
It also offers a lot of significant challenges to the existing, traditional financial system, the policy makers as well as to the consumers.
Therefore, to overcome the risks and challenges offered by crypto, there is a need to implement more effective rules and tools that will allow the authorities to control its operations.
However, to know the reasons for such implementations, it is important that you first understand the opportunities and risks that the digital currencies offer.
As for the opportunities provided by the digital currencies, some of them are:
- It can make cross border payments more efficient, secure, faster, and convenient
- It can remove the issues related to movement of money across regions and borders and
- It can improve the economic efficiency overall.
As for the downsides of it, the most significant ones are financial instability money laundering, and funding terrorism, as said earlier.
Now, when it comes to dealing with these crimes, newer and better tools and rules are required.
Technology experts and policy makers should collaborate to design more effective laws and tools that will help the industry at large to keep up with the fast pace of changes associated with this specific market.
They should be looking into the future while designing these laws so that it is useful for both the industry and the economy and not implement simply because it is needed to prevent the inevitable.
These rules and tools will be much more effective, experts think, when these are implemented in collaboration with the law enforcement as well as those technology service providers who can keep track of the fast developments within the industry.
The FATF introduced new guidelines in 2019 that needed the countries to review and alleviate the risks connected with the activities and services provided in relation with the crypto assets.
The new FATF guidelines empowered all competent national authorities to supervise all crypto asset service providers that are required to be registered.
However, sadly, only one-quarter of the countries have implemented their guideline, according to a FATF report.
There is another good reason to formulate and implement new rules and tools to regulate crypto.
It is true that a few countries and jurisdictions have enforced AML or Anti-Money Laundering frameworks and have sanctioned crypto traders who do not obey the rules.
However, this has not been successful in preventing the malicious actors from moving quickly and easily to more crypto-friendly and unregulated countries.
This is primarily due to the absence of worldwide uniformity.
This can be significantly resolved by implementing the travel rule. This new rule will do away with jurisdictional arbitrage more efficiently.
Apart from that, this rule will also prove to be very useful and important to remove the anonymity in making crypto asset transactions and collect all the relevant and necessary data related to it.
Another need to implement new rules and tools in crypto is to collect global data and information and share them between different countries.
This will significantly prevent the bad actors from transferring money across borders easily.
The FATF has already introduced specific guidelines to ensure it.
In fact, the reason to implement these new rules and tools is not to stifle innovation but for several good reasons such as:
- To make the industry stronger
- To create a better trading and investing environment and
- To ensure more economic growth.
Most importantly, these rules will protect the hopeful consumers and investors from losing their money simply because some malicious actors are able to exploit the vulnerabilities in the system.
It is not surprising that a large section of crypto investors, traders, and market experts are in favor of implementation of new rules.
And, they are not supporting it because they do not have anything else to do but to follow the government rules.
Rather, they have quite a few good reasons for believing that these new rules will surely improve the environment of the crypto market as follows.
- Market manipulation – Crypto market is considered as Wild West which is rife with scams and a lot of opportunities to manipulate the market. These rules will eliminate insider trading and other manipulative practices.
- Hidden risks – There are lots of hidden risks in crypto investing which people often do not bother to care for. A few of these risks are cash protection of an interest-earning account on a crypto exchange, hacks, and chances of the company going bankrupt. Proper regulations will address these risks effectively.
- Tax evasion – Just as the new rules will reduce the chances of money laundering, it will also prevent the bad actors from laundering their gains made from unfair means.
- Stablecoins – The stablecoins will have a wider impact on the economy in the near future being tied to the US dollar and therefore more stable. Ideally, these should be backed 1:1 by the assets held in reserve but seldom companies have that adequate amount of money in reserve. Most of these companies back their tokens through commercial paper which is a type of short term debt. These new rules will ensure that the reserve is adequate enough to compensate the users when such situations arise.
Finally, without more and proper regulation the crypto industry will never be able to attain its full potential.
Though mainstream adoption has increased significantly in the last couple of years, the industry still has a long way to go to attain full potential.
When the new rules and tools come out which will protect the retail investors, it will encourage more people to step into this exciting world of finance.
The new rules will surely raise the confidence of the institutional investors as well.
The stricter compliance rules will help them manage the risks and also have to be wary of the fact that should they or their product be found to be connected to any sort of unlawful activities, it could find themselves enmeshed in criminal investigation.
Typically, if the crypto investors and traders do not feel that they are in the safe waters, it will be a huge impediment to the sustenance and growth of crypto in the future.
It is only the carefully designed new rules and tools that can ensure them a safe haven.
Know Your Client Protocol
It is believed that one significant tool or rule that can control the operations of the crypto market, and, most importantly, curb the tendency of utilizing the digital assets for wrongful purposes by the consumers in particular is the KYC or Know Your Client protocol.
A lot of crypto trading platforms have already implemented this protocol into their system as the financial institutions but still, it is still not a general practice.
New rules are required to ensure that all crypto exchanges and platforms abide by it and do not allow any and every person to sign up with them to invest in or trade with crypto.
This tool will ensure that the vulnerabilities in the system are not exploited and will prevent the syndicates that buy and trade crypto assets primarily to launder money and fund terrorist activities are unsuccessful in their attempts.
A strict KYC protocol will ensure that these groups cannot get around the exchange control and security measures of it and mask unlawful financial flows.
This can only be possible when there is an intergovernmental collaboration.
This will help in creating a more agile and effective regulatory framework to support the crypto industry to thrive sans such possibilities of financial crimes.
Typically, considering the current scenario of the crypto industry which has taken the entire financial world by storm, it is only unified responses that can help in developing trends and enforcing them.
These countries have also created a dedicated inter-departmental working group with the sole responsibility of investigating any type of financial fraud.
Few of these working groups also work closely with the police and law enforcement to trace the source and destination of suspicious money flow.
The South African Revenue Services, for example, also has plans to include all of the crypto asset service providers to expand their intelligence centre.
Challenges with Central Bank Digital Currencies
The innovative blockchain technology has forced the world to think about money and monetary ideas in a different way.
Along with that, it has also created the need to use innovative tools and better rules to control, if not preserve, the current financial markets along with that of crypto.
It is believed that once the issues regarding scalability with blockchain are resolved, the technological solution will reduce, if not eliminate, the risks of fraud, theft, and unfair practices.
It will then deliver a much better positive user experience across the globe.
Not only the traditional crypto coins that are worrying the regulators of the world but it is also the rise of the Central Bank Digital Currencies or CBDCs that are causing a lot of concern.
According to a report, after the ban on cryptocurrencies by China in September 2021, there are more than twenty such CBDCs developed or are in the process of development with the PBOC or the People’s Bank of China.
It is in pursuance of their intention to replace crypto and cash with their own digital currency backed by the government known as the Digital Yuan or e-RMB.
These CBDCs are convenient to use and are quite efficient and secure.
It is believed that the CBDCs will boost international trade and may soon become an international currency due to their security aspect.
However, no matter how promising and beneficial as it may seem, the CBDCs do not come without challenges.
One of the most significant challenges is to figure out the exact ways in which these CBDCs can be made to interact with each other.
As a result, the International Monetary Fund or the IMF is exploring the use of digital currencies across borders as a universal currency.
In the process, they have come across a lot of significant challenges that these currencies could face when put to use.
This has raised a lot of questions regarding its use and rules and tools that would govern its operation.
One significant concern of such currency substitution is the impact these currencies will possibly have on the foreign system if it is used simultaneously with the domestic currency.
Another point of concern is whether such substitution will weaken the domestic currency itself in the first place and in the process will have an effect on the exchange management.
The main reason behind it is, just as it is shown by the previous financial crises, that the financial systems all over the world in particular are interconnected.
It is the lightning speed at which the digital currencies move that makes it very difficult for the authorities to observe, prevent or repeal transactions given the vast expanse of the crypto network.
This makes cross-border dialogue so imperative especially between different technology agencies and government departments in order to keep a close watch over the situation.
Therefore, the reality is the governments and the regulators should have responded to this decade old crypto industry a long time back.
But, now that it has started eventually, their response should be faster.
However, tackling specific issues related with crypto and digital currencies specifically in terms of anonymity that lets crypto crime to prosper can only be addressed with new rules and tools.
This is because the current system and regulations are simply not enough for it.
It is needed to design and implement these new rules and tools nicely and properly so that such rules do last for a long time and do not affect the crypto industry adversely in the long term.
It might need a slower but a steady and more cautious approach to ensure that the new rules and tools do fit the purpose in the best possible way.
There is no doubt that the crypto industry has grown notably over the years.
Yet, it is this fast growth that has raised a lot of fear regarding its security and effects on the economy that calls for new rules and tools to regulate it, as pointed out in this article.