Today, almost 90% of Americans have heard of cryptocurrencies, regardless of age. In this crypto climate, with so much of the population tuned in, but with so few understanding it, crypto scams and illicit practices are all too common.
But as engagement with cryptocurrencies grows, so too does the need for regulation.
Articles about a new institution taking steps toward crypto are in the news every day. With its 100 million monthly users, Amazon’s Twitch has enabled crypto payments. The firm that raised over $590M in funding from old-world institutions like Goldman Sachs and JP Morgan, Square, now accepts crypto payments — empowering merchants to transact with cryptos nationwide. But we’re still having problems with wide-scale adoption, and it’s clear why:
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In order to combat this adoption lag and progress of the industry, we need investor protections.
The belief that regulation is against the founding mission of crypto is flawed. In many ways, regulation is transparency — and transparency is precisely the goal of distributed ledger technology. Though regulation can have negative connotations to crypto purists, it protects against bad actors, who give the digital assets sector a bad name.
The SEC was formed after the famous market crash of 1929, at a time when companies were operating with impunity at the expense of their investors. Today, we’re in need of oversight to protect investors in this brave new digital asset class. And we should look to the 1940s Investment Act as a model — whose purpose is “to mitigate and … eliminate the conditions … which adversely affect the national public interest and the interest of investors,” which is exactly what we need.
For example, with our current lack of oversight, crypto exchanges can engage in proprietary trading against their customers, while the above regulations prohibit the New York Stock Exchange from doing so. All the hype around cryptos is responsible for a “regulatory distraction,” and it’s only hurting us in the long term.
Here are five reasons why regulation is exactly what the crypto market needs to develop… and live up to its paradigm-shifting potential.
1. Regulation Can Lead To Innovation
Regulation sets up a framework in which people can innovate.
If the rules aren’t clearly stated, there’s no way to play the game. Many crypto firms are leaving the US for the fear of getting shut down because the regulations aren’t clear. Until regulations are standardized and codified, the consequences are too high for fledgling companies. You have to master the basics before innovating — just as Picasso had to master Realism before pioneering Cubism.
As defended in Harvard Fellow Timothy Massad’s Report: “Better regulation will benefit crypto investors, [and] further the development of new technologies….”
2. Regulation Will Spur Demand & Development
Investor protections will instill greater confidence in the technology itself.
Crypto attention and engagement is moving more mainstream, and we’ve come a long way from just anarchists using cryptocurrencies. Oversight will bring us the next wave of crypto users and crypto-friendly institutions, who will be more inclined to engage with cryptos.
Simply put, regulation will improve the reputation of digital assets. An improved reputation will lead to an increase in demand. And greater demand will progress development.
As this framework grows, so too, do the people who work on cryptocurrency and its applications. There will be an influx of professionals, as we’re already seeing with developers diving into Facebook’s Libra, and colleges have begun offering crypto courses to students.
The more mature the technology, the easier it will be to use. And the easier it is to use, the more people will engage with it. This will not only enhance the reputation [compounding point # 2] but will also bring more capital to the sector. After all, the more people (read: auditors) using the distributed ledger technology, the more reliable the technology becomes.
And it will create a virtuous cycle. But without it, projects are stifled and stalling.
3. Regulation Protects Legitimate Projects
Just last week the exchange Koinex closed due to, in the words of the founder, “multiple delays by government agencies in clarifying crypto regulation…” The stablecoin project Basis, which raised over $133 million in funding, was closed due to an unfavorable “regulatory environment.”
Until regulations on the space are defined, it’s too risky for even the most well-intentioned firms.
And our lack of regulation is weeding out early actors. These are the firms that want to shake up the status quo, small and agile companies inspired by gaps in the market — the fish swimming against the crypto current.
And we’re not giving these businesses a chance to grow and mature, opening up the environment for slower-moving, and frequently uninspired, whales.
4. The Whales Need To Be Regulated
Facebook’s Libra has been making waves since its announcement, but its own set of shortcomings becoming clearer and clearer. Yet the real problem with this is much simpler:
These social media leviathans aren’t in the market to bring consumers the best product.
After all, Facebook started primarily as a data-harvesting company, and we’ve seen what can happen when Facebook isn’t regulated. The fines on Facebook are still coming. They already own, and indiscriminately sell, so much of your data — why should they have access to your financial data as well?
The idea that Facebook is too big to regulate, or too big to fail, is simply not the case. Without regulation, we’re at the whims of incumbent digital giants, and bad actors.
5. Regulation Inhibits Illicit Use of Cryptocurrencies
Without regulatory oversight, it is increasingly easy to use cryptocurrencies toward nefarious ends.
Unfortunately, crypto’s founding mission of taking money out of the control of a centralized governing body makes it tempting for bad actors to take advantage. Purchases on the dark web will surpass $1 billion this year alone.
Regulation is exactly what cryptos need to correct their course and fulfill their potential.
An investigation of the recently-closed-down Bittrex platform reported transactions by “Donald Duck,” and other “clearly false names,” as reported in the NYDFS’ letter. While there’s a degree of humor in this, the implications of this are much more sinister.
The regulations we have in place can’t begin to cover the extent of the problem:
- The FATF has a Sisyphean struggle without additional regulation
- And the forthcoming report on compliance is just the tip of the iceberg
- The G20 has renewed its pledge to implement crypto regulations, but we have yet to see anything concrete
- The FinCEN doesn’t even consider cryptos a currency; the IRS considers cryptocurrencies as “property”
There’s just too much at stake without regulating the cryptocurrency industry.
It’s easy enough to see who’s facing regulatory issues on NASDAQ’s list. Why shouldn’t that be the case with crypto-assets?
There are many ways to move in the right direction. If we develop comprehensive regulations from the beginning [or ASAP], we can create the ecosystem we want to see.
Maybe once we get these systems up and running we can rely on the decentralized/ deregulated ledger to run without oversight, but we need to start on the right foot. Just like the crypto market, regulation itself will evolve and will help the industry develop.
The future of cryptocurrencies does not need to be limited by regulation. There’s no reason why we can’t turn “crypto’s greatest threat” into its saving grace.
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