Cryptocurrency Regulation: Why Regulating Cryptocurrencies divides opinions
It seems impossible nowadays to avoid reading or hearing about cryptocurrencies. From Bitcoin’s initial release in 2009 to the subsequent hype from celebrity endorsements to the reactions of investors after recent sharp drops – the highs and lows of a digital payment system, designed to not rely on banks to verify its transactions, are well documented.
As cryptocurrency transforms from speculative investment to a balanced and credible portfolio option, opinion remains divided on how to regulate these potentially risky transactions. As of July 2022, there were 20,268 cryptocurrencies in existence around the world (investors.com) and with the number increasing local Governments still remain divided on how to regulate this emerging asset class.
Crypto is a high-risk, volatile investment, often fluctuating by huge amounts within a short period.
Cryptocurrencies have the potential to redefine the financial world as we currently know it and to question the very existence of traditional financial infrastructure. With no regulation for cryptocurrency in the United Kingdom, and with no compensation currently in place, consumers are at risk of losing their digital assets. But when discussing regulating cryptocurrencies what would global regulation mean for the industry, and why has it taken so long to be put in place?
The clarity for cryptocurrency regulations has been slow to develop. The industry is global, complex and above all else, has developed at an alarming speed – making it near impossible for regulators to keep on top of it.
Why the reluctance to regulate cryptocurrency?
One reason could be that every time a government has attempted to address the regulating cryptocurrencies question and implement an approach, the rise of cryptocurrency has stalled. Many initial investors were attracted to cryptocurrency because of the lack of regulations, believing that they could change the rules of global finance. To them, a regulated marketplace would hinder development and goes against the spirit of cryptocurrency, presenting the biggest threat to crypto.
Whilst creating legislation that encourages the adoption of new financial infrastructure could help with economic competitiveness, too much freedom might put the country’s paper money at significant risk. Creating the right balance is key – with countries ranging from hesitation to fear, to genuine acceptance.
How would regulating cryptocurrencies help investors?
Regulating cryptocurrencies has the potential to protect long-term investors, by preventing fraud within the cryptosystem and providing clear guidance for more innovation. Regulation means more stability in a notoriously volatile crypto market.
The global use of crypto assets without regulation could see a major drive in financial instability, market manipulation and financial crime. As transactions are largely anonymous, cryptocurrencies are widely used for criminal activities, regulation would help reduce this risk.
“Although originally also mooted as a means of payment the volatility of their values makes unbacked crypto assets generally unsuitable for making payments – except for criminal purposes” – Sir John Cuncliffe, Deputy Governor Financial Stability, Bank of England
Most investors are only familiar with the more well-known crypto assets such as Bitcoin, Ripple and Dogecoin. With hardly any knowledge about the other virtual assets, investors are at increased risk unless a regulatory authority discloses all the information about the asset’s performance, risks and potential.
Cybercriminals can hack into cryptocurrency trading platforms and steal funds
Investing in a cryptocurrency comes with another risk – online fraud. With hacking a worldwide threat, and cyber-attacks a common occurrence, cryptocurrency investors can face major financial losses if they are exposed to such an event. In 2021, scammers took $14 billion of crypto, a huge increase from the $7.8 billion taken in 2020. Regulation would help investors reclaim any losses if they experienced a cyber-attack.
“, you kind of have three possibilities: no regulation, bad regulation, good regulation,” Aaron Klein, senior fellow in Economic Studies, Brookings Institution
Whilst the prospect of new or increased regulation has the potential to bring more stability to the crypto market, it’s worth remembering it is still a highly volatile and speculative investment. The majority of financial experts advise most investors to keep crypto holdings to under 5% of their portfolios, and never to invest in crypto at the expense of saving for emergencies or paying off high-interest debt.
With analysts forecasting that the global cryptocurrency market will more than triple by 2030, investors, businesses and governments alike can’t ignore the rising tide of crypto for long, regulated or not.
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