Regulating the ‘Un-regular’?
Does Government Regulation Threaten the Crypto Market?
The task of regulating the crypto market is moving higher up the agenda with governments around the world, and therefore regulation is of interest to those who work or engage with crypto markets. It is easy to assume that greater regulation of crypto assets would perhaps make it more difficult to participate in the market but it is more complicated than that.
I’m sure most with an interest in crypto know why governments want to regulate it, but I will summarise two key points for those newer to the space. Firstly there is the issue that cryptocurrency was invented to be decentralised and unregulated. Secondly is the criminality that such a currency facilitates. Both are major issues for governments as the traditional financial system is the exact opposite, and can be controlled by laws the government passes.
Hence the issue of regulation for cryptocurrency. How do you regulate a cryptocurrency that was made to escape regulation and provide anonymity?
The Impact of Regulation
Crypto is a volatile, but lucrative, investment opportunity that lacks government regulation. However, this is set to change with President Biden introducing an Executive Order in March 2022 that directs federal agencies to begin to regulate digital assets. Furthermore, the bi-partisan infrastructure bill President Biden signed in November 2021 also held provision for crypto regulation.
The US is also not the only country looking to expand regulations upon cryptocurrency and digital assets. Many countries now require those making cryptocurrency exchanges to have a licence, in an attempt to regulate the transfer of crypto assets. But many feel this is only the beginning for government supervision of the crypto space.
As previously mentioned, crypto was invented on the principles of decentralisation and anonymity. It was meant to be a method to circumvent the traditional authority of banks and the government by simply cutting them out of financial transactions. The lack of regulation also makes it easier to raise funds for crypto startups and projects as the law has no precedent for it.
In an extreme example of governmental regulation of the crypto space, China completely banned cryptocurrency by September 2021, citing financial crime and stability as the main reasons. But this started a migration of crypto funds from Chinese accounts to other countries. This suggests that, whilst China is an extreme example, regulation causes cryptocurrency to migrate to more welcoming countries with less regulation.
Regulation as a positive
Although increased regulation looks inevitable, this does not mean it is a fundamentally bad thing. Regulation within crypto also makes it accessible to the wider market, to everyday people, as opposed to just the tech savvy. Regulation would bring in protection for those investing, making it a more palatable option. This spells bigger profits for those making crypto exchanges as well as increased stability in the market. As of 2021 it is estimated that less than 4% of the UK population hold crypto assets, despite the cryptocurrency market peaking in value at $2.9 trillion in November 2021.
The profits involved with crypto make it an enticing prospect for governments to try and attract. Ex-Chancellor of the Exchequer, Rishi Sunak, said “It’s my ambition to make the UK a global hub for cryptoasset technology… by regulating effectively we can give them (businesses) the confidence they need to think and invest long-term”. This clearly demonstrates the willingness of a major world economy to embrace cryptocurrency but also provide the stability investors need. By growing the crypto market, through regulation that attracts a wider range of investors, more jobs will be created.
Crypto and Crime
Part of the reason governments may want to regulate crypto is the usage of anonymous crypto exchanges for illegal purposes. Whilst it is true that an anonymous decentralised cryptocurrency does hold appeal for those looking to participate in illegal activity, such as drugs or weapons trafficking, it is not as tainted as first thought. The world’s most tainted currency is actually the USD, with many criminals preferring to use cash over crypto.
Bearing that in mind, it shows that all forms of financial exchange are open to misuse by criminals. Crypto did not create crime and has rather been utilised by criminals. Greater regulation could perhaps cut down on crime and tax evasion within crypto, but crime and tax evasion are still issues within trad-fi.
Just to give you an idea of how much financial crime there is even in trad-fi, here are a few quick facts. Globally, money laundering is estimated to total $800 billion- $2 trillion by the UN. In 2021 it is estimated that the UK lost £35 billion in tax evasion and in the same time period it is estimated that the US lost out on almost $1 trillion. In comparison it is estimated that only 1.1% of all cryptocurrency transactions are known to be involved with criminality.
What does this mean for Crypto?
Every new technology has to overcome the initial hostility from society and government, but crypto is already half-way to becoming part and parcel of everyday life. Soon online transactions through banks will become merged with crypto assets, as seen by Revolut’s offering of crypto services throughout Europe.
It would seem that governments in both lower and higher income countries are eager to interact with crypto, albeit for different reasons. Facilitating greater investment in the space through regulation pushes crypto into a permanent spot within financial markets. The original purpose of crypto was to be anonymous and decentralised. But arguably a regulated crypto space that gives a woman from West Africa control over her own finances and ability to buy a house is a better perception of Crypto than the Silk Road, trafficking and illegal activity.
Regulated crypto benefits all parties involved. It will create jobs, increase profits and still be differentiated from traditional banks and markets.
Written by Lauren Mason
📅 This Week in Crypto 📅
In May, the US Department of Justice (DOJ) announced the creation of a “Cryptocurrency Theft Task Force”, tasked with investigating and prosecuting cases of crypto theft. Close to $700 mln of stolen crypto has been recovered since January this year, according to data from StockApps.com.
The crypto industry has spread to all corners of the world and is expanding at breakneck speeds. While this is a good sign, it also makes it difficult for all stakeholders of the cryptosphere to stay on the same page with each other. This is where crypto events and conferences come in.
The leading athletic apparel company – Nike – has surpassed many prominent names with its NFT sales this year. According to the latest stats, Dolce & Gabbana, Tiffany, Gucci, and Adidas are reaping millions from NFTs, but it’s Nike that tops the chart.
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