Does Cryptocurrency Need Better Regulation?
Some are in love with the decentralised nature of crypto, but it could be the market’s ultimate downfall.
If you follow the massive cryptocurrency culture that has descended over Twitter in the last few year — affectionately or dispassionately referred to as “crypto twitter” depending on your outlook… — then you’ve almost certainly encountered the anti-bank sentiment prevalent in the community. With proponents waving the Bitcoin flag as a paragon of financial freedom and decentralised currency, many consider cryptocurrencies as a way to take financial power away from a predatory Wall Street, as well as avoiding government intervention. Along with this has continued a rather anarchic atmosphere, with cryptocurrencies becoming the medium of exchange for criminals from small time scammers to massive money laundering operations. This has given the whole technology a bad reputation at times, but the lack of regulation poses real concern that shouldn’t be ignored.
The first issues with regulation are the obvious. Banks, investment managers, and lenders all require a lot of regulation when typical currency is involved. The industry is full of highly trained professionals who’s entire job revolves around providing oversight, ensuring consumers are protected from financial wrongdoing and promoting transparency about company behaviour. No such thing exists in cryptocurrency. While some crypto exchanges have sought regulatory approval in various countries, the monitoring of their practices is still very much in its infancy. These issue have been highlighted in incidents such as QuadrigaCX losing access to £145 million of cryptocurrency, after the only individual with access to them passed away unexpectedly.
Bitconnect stands as one of the most well known cryptocurrency investment scams, but it is far from alone in this venture, with hundreds (if not thousands) of individuals and companies leveraging the low-regulation environment of cryptocurrency to avoid fraud charges. The FCA (Financial Conduct Authority) is responsible for regulating financial advisors and anyone involved in giving investment guidance. While this includes investment advice around cryptocurrency, little appears to have been done to stem the flow of opportunistic thieves, as well as failing to give a seal of approval to those with straight-shooting business ideas.
With Bitconnect eventually turning out to be a ponzi scheme, something the majority of financially literate people were able to see from a mile away, the “pump and dump” is a similarly popular technique, usually observed in the equities market, specifically penny stocks. Essentially, public figures with a strong following in the investment — or in this case cryptocurrency — community buy big into a small unpopular instrument. They then make it their sole focus to drive up popularity, and thus price, of this instrument. This particularly targets penny stocks or low price cryptocurrencies because higher percentage returns can be achieved with smaller price changes. Once popularity is truly set in and price has skyrocketed, the original investor cashes out with a return on investment usually in the thousands of percent, and disappears.
Less obvious regulation issues stand in the way of Bitcoin’s viability as a fiat currency replacement: The lack of a central bank. While this is precisely why it’s perfect in some early adopter’s eyes, economists are well aware of the obstruction this poses to financial stability. You only have to look at the Greek debt crisis to understand the trouble you encounter when you have no facilities to increase or decrease the money supply.
The world of banking and finance is a snail-paced one, taking years or even decades to catch up with modern trends, something being exploited by new online-only banks taking the UK particularly by storm. But it won’t be long before regulatory authorities and mainstream banks catch on to the cryptocurrency market and lock it down in red tape and legalese. While it may be decentralised, so long as you live in a nation state, that state will still be able to regulate your access to it to some degree.
Those involved in cryptocurrency businesses should keep a keen eye on the storm brewing in the industry, because when Wall Street comes knocking looking to profit, it’s the small-time scammers and innovative analysts alike that will be swept way by the tidal wave of chartered financial advisors and hedge fund managers should they fail to stay ahead of the slowly but inevitably advancing bureaucracy.
