Why cryptocurrencies must be regulated? There are a few countries that do not have any regulatory control over cryptocurrencies while there are a few that have imposed some regulations on the use and sale of these digital currencies.
And, a few countries have gone even a step ahead and banned cryptocurrencies altogether.
Well, a complete ban on cryptocurrencies may exterminate the chances of all future innovations and developments in the crypto space, which is not desired.
However, experts think that there is a need for some regulatory measure imposed on these virtual currencies and its framework in order to protect the interests of the users and crypto investors.
Feeling this need, governments of several countries are now planning to take a calibrated position on these virtual currencies so that there is a window for making experiments in this space.
From the standpoint of the crypto critics, regulations on cryptocurrencies are very important because they feel that these regulations will make it a much safer atmosphere for the crypto investors.
However, as a crypto investor or trader you may wonder what the regulatory framework would be really like and whether or not there is really any need for all this.
Well, in this article you will find all your answers and have all your doubts cleared.
Why Cryptocurrencies Must be Regulated?
The most significant reason to impose some regulation on cryptocurrencies is that these currencies usually do not have any intrinsic value.
Since the entire thing is driven by speculation, it may lead to a frenzy which may harm the investors at large.
Hence, there are a few specific areas of this currency as well as the market space that needs to be regulated.
Governments, crypto experts and industry experts all believe that these regulations will protect the investors as well as the market on the whole.
This is a very important point of concern because the value of the virtual currencies may change dramatically due to its price volatility and market manipulations.
There may be wide price swings which may result in panic selling of crypto assets if the awareness is very low among the investors.
Therefore, this calls for the need for a regulation for disclosure of principal assets, their adoption, performance, the future potential, and the inherent risks commonly associated with virtual assets.
Also, experts feel that the knowledge among the crypto users and investors today are pretty low.
Though there are thousands of different types of crypto coins available in the market as of now for trading globally, most people know only about Bitcoin, Ether or Ripple and look for these coins only while trading or investing.
Therefore, there is an immediate need for a regulatory authority that will clear the doubts and raise awareness.
The crypto market and its operations largely depend on blockchain technology.
But, just as it is with all other technologies, there are also some risks in this technology which the crypto users and enthusiasts should understand.
Technological changes are bound to happen which may make the blockchain technology obsolete in the future as well.
However, it is extremely important that the value of digital currencies remains relevant for the long term given the fact that people wish to buy digital as a long term investment.
The pace at which things are changing and long term demands are causing disruption, it is required to create an information infrastructure comprising a group of certified financial advisors who are trained and qualified in crypto assets.
This will also reduce the cyber security risks and the chances of any online fraud even if the investment or wealth of people is stored virtually online.
Hacking is a major threat to the crypto industry which may result in the loss of money of the investors who have put all of their savings in cryptocurrencies.
Another important area of concern is money laundering and terror financing using cryptocurrencies.
Governments all over the world are worried about it and therefore if such an unregulated industry is allowed to operate at free will, it will surely facilitate several of such illegal funding and activities.
Therefore, there is a need to invest largely in technologies that will spot any suspicious transactions.
Also, a strict KYC or Know Your Customer regulation will allow the companies and governments to verify identity and location of the investors and anyone violating the KYC guidelines would be penalized heavily.
Also, cryptocurrencies come with multiple risks and one significant and unique risk is that these currencies are not backed by other securities or by any tangible assets.
These currencies also do not have any intrinsic value, as you may know. All these result in weakened price discovery.
Therefore, if there is any lack of analogous information on the currencies along with its intrinsic technological intricacies, it may also enhance the chances of market manipulation.
All these warrant for proper regulatory attention to protect the consumers and ensure that there is sufficient disclosure and transparency as required.
Understanding the Excitement
The exuberance regarding cryptocurrency all over the word is known and felt by all.
Reacting to it, the crypto market is also growing rapidly with several trading platforms coming up every day which are mostly app-based.
These platforms are alluring the crypto investors by offering unusually high returns.
This comes at a time when traditional investment options such as bank deposits and stock investments are providing significantly low yields.
With millions of investors engaged across a plethora of such trading platforms, it certainly points at the world moving towards a new frontier via the copious VASPs or Virtual Asset Service Providers dealing with cryptocurrencies.
The most plausible reason for such an exuberance regarding cryptocurrencies could be the fact that it is primarily treated as a speculative asset.
And, with the limited supply of crypto coins of different types, no cash flows from it, and its notable turnover, the only future cash flow is in the appreciation or capital gain in the value of the assets.
All these result in an increase in demand for crypto assets.
It is quite understandable that during the time when other investments are producing low yields, the money of the major players and leaders will flow towards such speculative assets.
It is their participation and active involvement that creates such a buzz in the crypto market.
Their followers and average people will therefore join the bandwagon in FOMO or the Fear of Missing Out.
This, once again, raises the demand for these virtual assets along with its value because as more money flows in, the prices are bound to rise.
However, there is a catch here, if not a point of concern. In such situations when people are going after profit booking, there is a high chance of an illusion which the followers recognize wrongly as FOMO.
When people come out of this delusion, they exit and prices crash.
However, this again lets the leaders enter the market but this time at much lower price levels. This way the cycle of bubbles carries on.
The picture is completely different in those markets, such as in the US market, which are more or less saturated.
Here, people are less likely to become followers again once they suffer a loss.
Hence, the market shifts towards other areas in order to find young and aspiring populace who have a fairly high savings rate as well as a propensity towards adoption of technology.
This once again sets a new frontier for crypto trading.
However, this does not automatically translate that the risks inherent in investing in crypto assets are comforted and the anonymous and highly volatile virtual currency will serve all the purposes at both micro and macro levels.
Therefore, it needs some regulation so that this new-found populace is not exploited and suffers losses.
Experts suggest there is a need to make these people understand a few facts about crypto currency and it can be best done if some regulations are imposed on cryptocurrency trading and investment.
Strong Arguments for
There are also some other reasons for the need of the crypto market to be regulated. There are some of the strong arguments for it as given by the experts.
Regulations in the crypto market will prevent manipulations by the crypto whales which is a common event in this particular space.
Every investor will have authorized information on the crypto assets as well as the technological complexities related to them.
These regulations will thereby safeguard the average investors.
Regulations will also help in reducing the chances of online fraud and enhance cyber security.
Cyber attacks are very common in the crypto industry but with the regulations in place, the competent and relevant authorities can put into practice proper measures to protect the assets of the investors.
And, the investors can also address their concerns to the relevant authorities and even reclaim their investments in an event of loss.
Most importantly, any unregulated money will result in money laundering and it is only these regulations that will prevent funding criminal acts via money laundering.
This will ensure that the clients do their due diligence similar to that of the traditional banks.
This will help in locating a user, tracking the buying and selling transactions, and verifying their identities.
Any infringement of any kind of these norms can then be met with strict consequences.
These regulations will also allow the investors and traders to be aware of some of the important facts as mentioned below.
They will understand that cryptocurrencies are not an alternative to fiat money or other traditional currencies.
These are certainly not any proper units of accounts and it also does not have a consistent store of value because the rate of conversion of these virtual currencies into traditional currencies is quite high and volatile.
According to a recent research report, it is found that the volatility of Bitcoin, which is a coin with the largest market cap, is 10 times more than the standard rates in major exchanges in the US in terms of Dollar against Euro or Yen.
Also, they must understand that crypto assets are relatively illiquid when the higher cost of transaction is considered.
Add to that, the slow speed of processing of transactions proves the inefficiency of the distributed ledger system.
For example, a blockchain network can process about 600,000 transactions per day but VISA can process nearly two billion transactions.
This makes it pretty unsuitable to be used as a mode of exchange since the slow speed will not only increase the quantum of transactions on hold but also the spread of the fees related with such transactions.
It is also important to understand that investing in and trading with cryptocurrencies involves quite a fair amount of risks and there is no guarantee of profits since the crypto prices and market are both extremely volatile.
Moreover, as said earlier, cryptocurrencies do not have any intrinsic value like all other real or financial assets have.
Then, cryptocurrencies can also be a social evil due to their usage for criminal activities and on the dark web.
It can be used to trade illegal products such as drugs and fund illegal activities including terrorism.
Finally, cryptocurrencies can endorse inequality due to the speculative mania among the people at the time of extreme and unnecessary monetary liquidity.
The savvy crypto investors will be typically wealthier and more connected to be the leaders and the average users will be the followers being poorer and less connected.
All these will lead to unwanted situations simply due to the information asymmetry.
That is why regulations in the crypto industry are required so that the smarter investors cannot make monetary profit at the expense of inexperienced investors.
It will remove any disparity in understanding and financial literacy among the investors of all types.
It will also allow easier access to the digital assets which will eventually result in a financial explosion instead of financial exploitation.
It will democratize the financial and monetary market with enhanced trust on an anonymous group of creators of cryptocurrencies.
They will not be exploitative but more accountable at the end of the day in keeping with the principle of democracy.
All these are good reasons and areas that the governments should look into regulating the use and sale of crypto coins.
Weak Arguments Against
The regulations on cryptocurrencies can be expected very soon because the arguments against it are pretty weak.
Few crypto enthusiasts say that these regulations will affect the self-regulatory code of conduct that the crypto exchanges are committed to as of now.
However, there is a very basic issue with the self-regulatory code of conduct.
It does not seem to work when a particular exchange puts out a disingenuous ad such as providing much higher returns than any other forms of investments, the rival exchanges do not have any other option but to put out a similar ad that matches the claims.
Therefore, proper regulation is required.
There is another common argument made by several crypto enthusiasts which is that the cryptocurrencies cannot be regulated.
This, however, is more like the strategy followed by the big tobacco companies in the West decades back.
They put a doubt in people’s minds saying that tobacco can have negative effects and cashed on it.
Similarly, by saying that the cryptocurrencies cannot be regulated, the crypto enthusiasts are simply creating doubt in the minds of the investors. This needs to be regulated.
Also, the crypto enthusiasts and investors believed that the cryptocurrencies will emerge as a strong competitor of fiat money, which really did not happen till now.
Instead, crypto is considered to be a good and productive alternative avenue of investment, and, just like any other forms of investments, this also needs to be regulated.
Another argument that is made by the crypto enthusiasts is that there is no compulsion on the crypto investors to invest in digital currencies through the crypto platforms only.
They can easily move to the P2P exchanges as well that may be located outside their place of domicile.
This can result in money laundering through different informal systems and people may even engage in barter.
Therefore, a strong regulation is required in crypto otherwise there would be less clarity which will deter wider use and adoption of cryptocurrencies.
It is true that no regulation can be perfect but not having any at all saying that it is not perfect can hardly be considered as a strong excuse.
Moreover, the claim of the crypto enthusiasts that people can easily get around these regulations does not necessarily mean that the multiple-millions of investors across all crypto exchanges will be doing it.
Those who will take this route will be doing with full knowledge of what they are doing and what could be the consequences of it.
Of course, people believe that there should be some ease in the regulations but regulations are extremely necessary to protect the millions who have invested in crypto worth tens of millions of dollars together.
Different countries may follow different approaches for it such as a few may follow what China did to control crypto – ban it completely.
Or, countries may also adopt passive intolerance where crypto will not be banned completely but its use by the financial institutions will be discouraged and the legal status will not be made clear, like South Korea has.
There is also a third approach and perhaps the most practical one which may involve not limiting crypto investors from investing in crypto and creating a framework at the same time that would regulate them as well as any financial products associated with them.
Here are some ways in which the governments may start regulating the crypto space and the use of digital currencies.
- First, the governments can make it mandatory for the crypto exchanges to deduct a specific amount of tax while selling crypto coins and making capital gains. This will help in checking whether or not the right amount of tax was paid by maintaining a proper accounting trail.
- Second, the government may also specify the amount of tax the investors need to pay on capital gains very clearly and precisely.
- Third, the governments may outlaw the use of the term ‘currency’ when people talk about crypto because it is quite misleading for people, especially the beginners, because currency and government are two words that are intricately entwined.
- Fourth, the government may convey the message to one and all very clearly that cryptocurrencies are not legal tender.
By following one or all of these approaches, the governments would surely help both the crypto industry as well as the people taking part in this exciting space.
The Need is Apparent
There is no doubt that there is an immediate need to regulate cryptocurrencies. Though it should have been done by now, but, as they say, better late than never.
With proper regulation, international remittances using cryptocurrencies will be much safer and it will even reduce the cost of transactions while using a reliable payment service.
In addition to that, proper regulations will fill the breach in security and at the same time will remove the uncertainties people commonly have regarding cryptocurrencies.
Along with that it will also mitigate the inherent risks of cryptocurrencies.
Crypto experts also believe that with proper regulation the perils of externalities and probable market failures would not drastically impact on the financial stability.
Also, it will remove the asymmetries that may be in terms of information provided to the investors.
It will enhance their negotiation power which will eventually protect the investors and consumers from abuse.
This will also ensure a better and more productive cooperative functioning of the jurisdictional and sectoral regulators.
This will eventually put off regulatory arbitrage.
Since anonymity and layering underlined in crypto transactions may intensify the risks of funding illegal activities and money laundering, regulations imposed on un-hosted wallets and non-intermediated transactions will circumvent money laundering chances.
If there is no regulatory protection such as a liquidity facility or deposit insurance from the central banks, it will also result in huge losses for the investors due to the non-unique crypto risks such as risk of hacking during operation, counterparty risks, and more.
It will also prevent fire-sales of cryptocurrencies which may have significant systemic implications such as bankruptcy faced by the crypto service providers when the crypto tokens and coins of their clients are combined with their other assets.
If there is a proper regulatory framework it will ensure that resolution of insolvency is more complex which will, in turn, broaden the implications regarding financial stability.
Also, as of now, the crypto issuers and service providers are engaging with conventional financial institutions more and more and are also modifying the competitive space.
This may result in prudential risks that may lead to contagion risks.
Proper regulations will only be able to monitor such developments and analyze the potential risks so that the significant vulnerabilities can be identified.
There are lots of different ways and types in which such regulations can be imposed on cryptocurrencies to harness the potential of this emerging and evolving technology. Some of them are:
- Experimenting with the growth of crypto in a controlled environment to increase the confidence of the market stakeholders
- Building supervisory and regulatory capacity to permit empirical evidence on potential risks
- Setting up innovation hub to encourage and promote the use of blockchain related products by the financial institutions
- Regulating public discussion and engaging major industry players for generating better crypto awareness
- Conducting a regulatory impact evaluation to enhance its quality and efficacy and give crypto better legitimacy at the same time and
- Mining the potential of Regulatory Technology or ‘regtech.’
However, the regulation or restraint must be exercised with caution and with a lot of responsibility and based on the proportionality aspect.
It should be backed by sufficient empirical evidence so that it does not become a repressing innovation but instead fosters the development of the crypto industry on the whole.
In short, the regulations should not hold back the investors to make the best of the huge potential of the crypto currencies.
From all the points noted above it is evident that there is an immediate need for the government to take a proactive approach regarding cryptocurrencies and impose some regulations on it so that all above concerns are properly addressed.