Cryptocurrency regulation can be a controversial topic, but plenty of experts say crypto investors should welcome it. For starters, more regulation could mean more stability in a notoriously volatile crypto market.
Tally Greenberg, head of business development at Allnodes, a platform that provides hosting, monitoring, and staking services, said, “Regulations will come up and they have to come up at some point, which would stabilize the market even further. These regulations protect investors, so it’s a good thing. It is not a bad thing.”
Still, many cryptocurrency enthusiasts fervently oppose new regulations. They say it would hinder innovation and goes against the spirit of cryptocurrency, which emphasizes decentralization at its core.
For these anti-regulation crypto enthusiasts, the decentralized nature of digital currencies like Bitcoin — which, unlike traditional currencies, aren’t backed by any institution or government authority — is a big draw. So in this view, any new regulation would pose a threat to the decentralization that is a feature, rather than a bug.
Aaron Klein, a senior fellow in economic studies at the Brookings Institution, focused on financial technology and regulation. The new regulation also has the potential to protect long-term investors, prevent fraudulent activity within the crypto ecosystem, and provide clear guidance to allow companies to innovate in the crypto economy. But forthcoming regulation will need to strike the right balance. Aaron Klein said, “In reality, you kind of has three possibilities: no regulation, bad regulation, good regulation.”
What’s next in crypto regulation?
While a rise in mainstream adoption of crypto in 2021 led to a running debate on the role of the government in this largely unregulated sector, clear rules are still in development. This has left the industry guessing while thousands of tokens and digital currencies are introduced, and new companies and platforms emerge to help store and trade them.
Tally Greenberg said, “Policies haven’t been devised yet, because there’s no precedent to blockchain and crypto, so it’s a hell of a task. I understand why people are stalling on it, but something needs to happen soon.”
Recent conversations on Capitol Hill suggest it’s not a matter of if further regulation is coming, but when. President Biden signed off on new crypto legislation related to taxes in the US 1.2 trillion bipartisan infrastructure bill late last year. And the Federal Reserve is toying with the idea of issuing a US digital currency.
The Fed released a long-awaited report in January 2022 exploring the costs and benefits of a government-issued digital currency. The report ultimately deferred a final decision on whether to move forward, and the Fed is giving the public and other stakeholders to share their input before taking further action. Stablecoins are also a hot-button topic, and many experts anticipate it will be the first type of cryptocurrency to be regulated.
While new regulation has the potential to bring more stability to the crypto market, it’s still a highly volatile and speculative investment. That’s why financial experts advise most investors to keep crypto holdings to under 5% of their portfolios, and never to invest in crypto at the expense of saving for emergencies or paying off high-interest debt.
Why would crypto regulations be good for investors?
Many experts gave their take on the changing crypto regulatory landscape. Here’s why they say more regulation would be a good thing for long-term crypto investors.
More stability in the market
Regulating cryptocurrencies could be a healthy development for the industry, at least where everyday investors are concerned. Greater regulatory guidance, if well-targeted, could help reduce speculation among crypto assets. Less speculation can lead to higher investor confidence, which could draw in more long-term investors who have so far said no thanks to a highly speculative, volatile crypto market.
Aaron Klein said, “Even if it doesn’t bring more people in, it may change people’s current behaviour. Enthusiasts claim there are a lot of benefits cryptocurrency has over fiat currency and other asset classes, but those benefits can only come to full fruition if an appropriate regulatory framework is put into place,” according to Aaron Klein.
It’s hard to predict how the price-sensitive asset class will react to regulation over the long term since it’ll depend on whether the US government takes a more lenient or stringent approach. In the short term, any new regulation could inspire knee-jerk investor reactions to the markets, suppressing the trading values of cryptocurrency. For example, when China banned cryptocurrency transactions in September 2021, cryptocurrency markets dropped. But over the long term, regulation may have the potential to stabilize the market and reduce some risk for cryptocurrency investors, Tally Greenberg said.
To be clear, new regulations could slow the roll of those trying to get rich quickly by predicting the next coin that goes to the moon, she says. But that’s a good thing for long-term investors.
“Slowly but surely, we are not only being massively adopted as an industry, but we’re also stabilizing more or less. Regulation will stabilize the market even further,” Tally Greenberg added.
Increase in investor protection and confidence
Crypto investors currently have little to no protection in the market, as there is no regulatory framework in place to ensure the protection of assets. Some exchanges maintain compliance with evolving federal and state regulators in the United States. This includes many established, high-volume US-based exchanges, like Coinbase and Gemini, but they’re not regulated similarly to public stock exchanges or alternative trading systems. That can be problematic, according to Timothy Massad, former chairman of the Commodity Futures Trading Commission and a senior fellow at the Kennedy School of Government at Harvard University.
“Most of the trading that goes on in the crypto world today is not regulated by any federal authority, and that’s a big gap. That means that investor protection is much, much weaker on these big exchanges than it is in our securities markets or our futures market,” Timothy Massad said.
That’s why regulation is needed to make the market safer, says Aaron Klein. Crypto will still likely be a risky investment, like individual stocks, but investor protections could make the market less vulnerable to outside manipulation. Safer markets can lead to more investor confidence, which often means greater value over time.
“Regulation is important for investor confidence. It’s important for basic fairness, and ultimately it’s important for the industry to grow,” Aaron Klein added.
Safer crypto ecosystem
Crypto has been described as the “Wild West” by SEC chair Gary Gensler due to the lack of regulation in the industry. The lack of laws and policies in this burgeoning area has created an opening for widespread fraud, scams, rug pulls, and market manipulation.
Timothy Massad said, “Crypto isn’t subject to requirements to prevent fraud manipulation. It’s not subject to standards on conflicts of interest. My point is simply that we don’t have the same kind of standards that we have in other markets. Today, that means buyer beware, essentially.”
Crypto crime has grown tremendously over the last two years. Scammers took USD 14 billion worth of crypto last year, a record compared to the USD 7.8 billion taken by scammers in 2020, according to a report by blockchain data firm Chainalysis. And there are more than 17,000 altcoins, which are typically even more volatile and speculative than Bitcoin, and come with a higher risk of crypto scams and frauds. Even the most advanced and enthusiastic cryptocurrency experts understand there are many new and evolving risks in the world of crypto right now.
But there are several ways to protect your crypto. For starters, watch out for some common red flags that are similar to classic money-wiring scams and credit card fraud, like obvious misspellings in emails or social media posts, promises to make you rich, or even large-scale social media crypto schemes known as rug pulls.
To protect your digital wallets from hackers, practice good digital security habits such as using a hot or cold wallet for extra safety or keeping your crypto in exchange with robust security. It’s also extremely important to keep track of your wallet key and not show it to anyone. Losing your key or having it stolen could mean losing your crypto altogether.
Kiana Danial, the author of “Cryptocurrency Investing for Dummies, said, “As much as I like the decentralization and the lack of government involvement, I am glad that they are paying attention, because unfortunately with cryptocurrency, there are a lot of scams.”
Experts’ argument on crypto’s anti-regulation
As some experts are keen to regulate crypto but there are some experts who are against the move. Here are some common anti-regulation arguments.
It goes against the spirit of cryptocurrency
The core of the cryptocurrency culture is the decentralization concept, which eliminates middlemen like large banks and governments from financial transactions. It deprives the banks and companies of their authority and gives people the freedom to manage their finances independently. Simply said, regulation runs counter to this notion.
It will damage innovation
Blockchain technology’s potential to upend numerous industries, particularly finance, has contributed to the cryptocurrency industry’s recent success. Due to the absence of centralized networks and infrastructure, these enterprises’ start-up costs are frequently significantly lower.
However, the sector is also prospering as a result of the adaptable fundraising strategies. Companies that use cryptocurrencies have been able to raise money fast without being constrained by onerous security regulations. Additionally, small-scale investors have had access to projects that they otherwise would not have been able to access.
It will push the crypto industry into other countries
There is concern that stronger US regulation would merely drive the company into more crypto-friendly jurisdictions because the bitcoin industry is a global one. This would have two significant effects: First that the economic advantages of this new business might be lost to the United States. Locations like Miami and California are already making an effort to draw in the money and jobs that may result from becoming cryptocurrency centres. And second, it would be more difficult to provide any type of investor protection if the industry moved outside of American borders. Keep everyone inside the tent; it’s usually for the best.
It will drive down crypto prices
It does not appear realistic that the United States will attempt to follow China and outright outlaw cryptocurrencies. But because so many people are afraid of it, tougher regulation would almost surely have a short-term negative impact on prices. In the world of cryptocurrencies, regulation itself has taken on a certain specter. As a result, cryptocurrency values decline despite reports of significant governmental action.
It’s important to note that some experts contend regulation would, over time, have a favourable effect on prices. For instance, money from significant institutional investors may eventually more than outweigh any short-term loss of illicit funds. And regulation that builds trust and adds a level of investor protection would help the industry to grow even further.
What matters most, in the end, is how any new cryptocurrency legislation is structured. Regulators should exercise restraint to avoid severely impeding the operations of genuine initiatives. However, sensible regulation that eliminates bad actors might foster an environment where sincere ventures can succeed.
Who should regulate cryptocurrency?
The federal government’s reticence to identify precisely what a cryptocurrency is makes it difficult to determine which federal agency ought to be responsible. No government or Congress has yet to express an opinion. The necessary outcome has been a turf war between the financial authorities, which has resulted in the regulatory control that does exist. This does not imply that the choice is simple: The Federal Reserve and Treasury are concerned about the currency features of cryptocurrencies, the CFTC is concerned about the commodities parts, and the SEC is concerned about the security aspects. Depending on the cryptocurrency issuer, several organizations, such as the Fed, the Office of the Comptroller of the Currency, and even the Small Business Administration might be the accountable regulator.
Depending on the appropriate federal agency, the tenor, burden, and characteristics of the regulatory reaction will vary greatly (or worse, multiple agencies). Whichever federal agency or agencies is ultimately made responsible will then face a number of operational challenges, as this new brief will require staff, time, and expertise to address, even as the new ordinary course of business, let alone the time it will take to meet the needs of regulating cryptocurrencies. Given these increased responsibilities, the relevant body may even need to evaluate the application of its charter.
Even if the correct agency can be identified and has an abundance of regulatory resources, it also remains true that cryptocurrency is inherently quite a tricky beast in and of itself to regulate. The extreme volatility of cryptocurrencies is a major factor in this (technically a measure of dispersion around the mean value of a security, but more generally rapid or significant fluctuations in value as defined by the market).
Should the US government back cryptocurrency?
All of these concerns have thus far been raised in relation to cryptocurrencies as represented by the private sector. The US Congress may later take into account the idea of a central bank digital currency or cryptocurrency that is backed by the federal government (CBDC). The speed and transparency that cryptocurrencies give to users are cited by proponents of the technology, who in certain cases predict that not only the traditional banking industry but also eventually the US currency is in jeopardy.
Since the 1944 Bretton Woods Agreement, the world’s currencies have been tied to the US dollar rather than to gold, on the grounds that the latter was also tied to gold. The US dollar continues to be the world’s reserve currency despite President Nixon’s decoupling of the dollar and gold and the emergence of the system of fiat money currencies in use today. This is unlikely to change given the stability and liquidity of US Treasuries supporting the dollar as the globe’s most redeemable currency.
This situation could of course change if a sufficiently strong digital contender emerges, with the most obvious contender a CBDC backed by the Chinese government. Even though this risk might not materialize for several decades, establishing a US CBDC would be one of the best strategies to prevent it. The US government has taken the first step in this approach with a recent discussion paper from the Federal Reserve that examines the potential advantages and hazards of a CBDC.