With its borderless ideals and reputation for being the currency of the underworld, cryptocurrency has traditionally been both difficult to regulate and hard to trust.
But as it becomes more mainstream, regulators have a huge opportunity to break the mold and make it safer while still allowing its benefits to flourish. Regulators also have the opportunity to protect young traders, who may not realize that crypto is not yet regulated.
Up until now, regulatory frameworks have generally focused on a paper-based world and country borders — something that crypto is specifically designed to eliminate.
Plus, since crypto is still a very young ecosystem, it’s not easy to completely understand how it works and the associated risks — which makes creating regulations tricky as it’s hard to know what the framework should encompass.
New regulatory attempts around the world
From the extreme to the insufficient, the regulatory approach has primarily been to protect the current financial system (as opposed to actual cryptocurrency investors). This has meant total bans on the crypto market in some nations, such as China, Algeria, Ecuador, Nepal, Nigeria and Bolivia.
In South Africa, they’ve prohibited transfers across borders, meaning cryptocurrency exchange in the region can only be done by registered South African companies so that the regulators can keep an eye on everything that goes through. But isn’t that precisely what crypto was built to avoid?
There’s no doubt that some level of regulation is necessary for cryptocurrency to become a mainstream exchange. Investors need to be protected, volatility should be brought down, and scams curbed. But is there not a better way to do it? One that doesn’t stifle innovation or flexibility.
In a recent survey, almost 30% of investors indicated they believed regulating cryptocurrency would increase its value — but it’s about finding the best way to do it that doesn’t also destroy all of the currency’s inherent benefits.
So, where could that opportunity begin? Blockchain, the technology that underpins crypto, is a great place to start for regulators.
Just as we didn’t build motorways and set up floating traffic lights in the sky when we invented commercial air travel, we shouldn’t apply the same rules and framework we use for national currencies to crypto.
There is also the question of sustainability.
Bitcoin in particular is energy-hungry, currently using 16-times more power compared to 2017 levels. That’s the annual energy usage of 15 million people — more than some small countries. And left unregulated, it could have enormous impacts on the planet’s future.
In 2021, Tesla banned Bitcoin payment due to the impact its currency mining is having on the environment. But banning crypto altogether is not the answer. The European Union is leading the way with a new draft of rules to focus on crypto sustainability, collaborating with experts to ensure it can move forward in a kinder way for the planet. One such rule the E.U. hopes to implement is a limitation on proof-of-work mining in favor of the more environmentally friendly proof of stake.
What needs to change
Crypto regulation varies around the world, and a lack of global coordination is one of the challenges. The OECD recently surveyed 43 countries — 13 had no guidance whatsoever on the classification of crypto assets.
In the United Kingdom, the government is expected to release its plans to regulate the crypto market and the U.S. government has produced an almost 70-page bill in response to Terra’s UST/LUNA collapse that devastated the crypto industry, wiping US$60 billion off the market. These progressive attempts at regulating crypto by the U.K. and the U.S. show that attitudes towards crypto are changing — no longer can we ignore the space.
These regulatory moves are also in sharp contrast to countries such as India, which controversially has announced regulations on crypto, including a capital gains tax of 30% on crypto transactions plus a 1% transaction tax. This has, unsurprisingly, not gone down well. These actions can look like opportunistic efforts to boost national tax income but at the expense of growth and innovation in the sector.
Trust is among the most significant barriers to adoption. In the U.K., 71% of consumers have no intention of buying cryptocurrency; 31% say it’s too risky. So how do you increase trust in cryptocurrency? You police it through robust regulations. Here are the three steps we see as being critical to cryptocurrency’s mainstreaming and adoption:
- Global regulatory coordination: As with traditional finance, the rules need to be broadly consistent. Local variations are okay, but the guide rails need to be the same.
- Robust rules (with real teeth): We need fines for abuse of regulations. For example, if a cryptocurrency or exchange encourages or turns a blind eye to fraudulent activity, then dollar fines are needed.
- Education: Right now, even crypto enthusiasts are often misinformed. The industry needs to help educate newcomers and broaden the market.
Crypto is a different beast compared to traditional financial products and mechanisms. Regulators would be well-advised to take a “move fast and break things” approach to help kickstart the mainstream. Speed is the key to making the most of the crypto opportunity: the chance to unlock an entire industry and help retail investors reap considerable financial rewards.