The Pros of Cryptocurrency Regulation
Despite the steep drop in cryptocurrency values since last December’s highs, the crypto market is still worth billions. Digital currencies might be volatile, but — as the coming 10th anniversary of bitcoin makes clear — they’re not likely to be going away anytime soon.
Around the world, financial regulators are recognising that fact. And they’re increasingly looking for smart, effective ways to regulate cryptocurrencies. If these new forms of money aren’t going away, the logic goes, it’s probably smart to establish some rules to encourage good uses for the technology and discourage bad ones.
Regulators aren’t the only ones thinking this way. Many crypto entrepreneurs are right there with them. They too want to see good uses encouraged and bad ones discouraged.
Why? Because, whether you’re a regulator or a consumer, a cryptocurrency entrepreneur or a venture capital investor, good rules — clear, well designed and consistent regulations — are good for business.
“Regulators do not appear to want to stifle innovation; many acknowledge already the important role DLT [distributed ledger technology] will play in the future and recognise the need to create a safe space to experiment with the technology,” states a January 2018 research report on blockchain from Credit Suisse.
Done right, regulations can help reduce risk and uncertainty for businesses, investors and other market participants alike. They can provide clarity, consistency and predictability for planning and investment purposes. And they can reduce the risk of fraud and other illegal activities that are bad for business.
Charting an innovation-friendly path for cryptocurrencies will require regulators to decide whether to treat them more like fiat currencies or more like securities.
“Subjecting them to extensive disclosures and registration, as required by securities laws, would not only be inappropriate but also would hamper the growth of blockchain technology,” Cato Institute policy analyst Diego Zuluaga wrote in a June 2018 briefing paper. “Conversely, some ICOs may qualify as securities under certain circumstances. Clarifying what those circumstances are would have a number of benefits, including reducing price volatility induced by the lack of a stable regulatory framework for cryptocurrencies.”
Effective financial regulations can also encourage investment and innovation by providing long-term clarity for market participants.
“Given their novel risk profiles, these technologies call for enhanced capabilities of regulators and supervisory agencies,” the Credit Suisse report stated. “In some cases, such as the execution of large-value, high-volume payments, the regulatory perimeter may need to expand to include entities using new technologies, to avoid the build-up of systemic risks.”
Finally, effective regulations can enable a more equitable, level playing field for legitimate innovators, investors and enterprises by reducing the opportunities for bad actors to defraud customers, finance illegal activities and otherwise damage the industry and society as a whole.
“Given the size and unwieldiness of distributed ledgers, as well as high transaction costs, most users access their cryptocurrency holdings via third parties such as ‘crypto wallet’ providers or ‘crypto exchanges’,” Credit Suisse said. “Ironically — and much in contrast to the original promise of Bitcoin and other cryptocurrencies — many users who turned to cryptocurrencies out of distrust in banks and governments have thus wound up relying on unregulated intermediaries. Some of these (such as Mt Gox or Bitfinex) have proved to be fraudulent or have themselves fallen victim to hacking attacks.”
A July 2018 European Parliament study noted that equitable regulation would benefit law-abiding participants while discouraging bad actors, stating, “The virtual currency industry itself appeared to be generally favourable to legislation for two reasons: it would give them more legitimacy and it would help to differentiate between bona-fide users and criminals.”
