The fact that cryptocurrencies are digital is not the only important difference between cryptocurrencies and traditional currencies like U.S. dollars. Many argue that the purpose of crypto, currently, is to AVOID regulation through decentralization.
Cryptocurrencies were around for a decade now. However, the topic stays controversial. There are plenty of people talking about cryptocurrency as a promise of a great future, but there are also lots of people still calling it a scam or a bubble. Also, the reports of the government trying to control or even ban cryptocurrencies altogether can be worrying. But what are the actual reasons behind it? Is cryptocurrency a threat to the government or international market?
From the standpoint of investors, cryptocurrency regulation is quite important. With the right kind of regulations in place, the government can make the cryptocurrency market a safer environment for investors.
Here are 5 reasons why cryptocurrencies need to be regulated:
1) Prevent market manipulation and protect investors: Market manipulation and price volatility are common in cryptocurrencies. Take, for example, Bitcoin, the world’s oldest and most popular cryptocurrency, which rose to all-time highs since the beginning of 2021, before plummeting and losing a huge amount of its value. So, the lack of authorised information on these digital assets and the technological complexities associated with them makes it imperative to put regulations in place for safeguarding investors.
2) Allow select cryptocurrencies: Thousands of cryptocurrencies exist around the world. Most investors, however, are only familiar with a few of those, such as Bitcoin, Ether, Ripple, and Dogecoin among others. They hardly have any knowledge about the thousands of other virtual assets. So, to protect customers, a regulatory authority clearing cryptocurrency is required, which can disclose all information about the performance of the digital assets, their risks, and their potential.
3) Understanding risks associated with technology: Technology is advancing at a breakneck pace. This carries a significant danger, as such changes have the potential to render technology, including blockchain, outdated in the future. Given the rapid rate of technological change, information infrastructure and professional financial advisors skilled in cryptocurrency are required. That way, investors can understand the technological risks of cryptocurrencies and make informed decisions.
4) Online fraud and cyber security risks: Investing in cryptocurrencies comes with another risk — online fraud. Hacking is a major threat worldwide, and cyber-attacks have become common. One cyber-attack could result in losses for investors who have put their savings in cryptocurrencies. Through regulations, the authorities can implement measures to help cryptocurrency investors protect their assets. Also, investors can address concerns or reclaim their investments in case they lose them
5) Money laundering: Any unregulated system has the ability to fund criminal acts. As a result, a client due diligence process akin to that of a bank is required. This can help in keeping track of investors’ real identities and verify their locations when they are buying or selling cryptocurrencies. Any infringement of such norms should be met with severe sanctions.
Governments control currencies, among many other things. It is all to keep up with the world’s economic state, the country’s financial market, the business environment, crime prevention, etc. Thus, fiat currencies such as the euro and dollar have value because governments say so. Their value is defined by the value of our trust in government and the currency.
Crypto assets are entirely out of their Monetary Policy’s control. They were created to remove the middleman and let people have direct financial transactions without worrying about lengthy procedures, complicated policies, taxes, corruption, or limitations. But as the government does not control the digital assets supply, their liquidity, or interest rates, they can be quick to warn people about untrustworthy crypto volatility and wants you to stay above their safety net.
There have been many hacks and crypto-related thefts. There have been millions and billions lost in these hacks, scams, and thefts. Yes, you are responsible for your safety net, protecting your funds and accounts, and checking the transaction history of coins, exchanges, or people you are exchanging with. That being said, the solutions are already here and coming. For example, the smart contract protocol is there to verify and enforce the transaction only if the previously set requirements are met by both parties. They can make transactions smoother and more secure.
However, in this case, we can also talk about security from the side of what comes after the transaction outside the exchange too. Unregulated assets could be used to finance crime intentionally. When operations are not overlooked and not checked by the government, there might be someone funding a terrorist group, the next big scam, or any other illegal and dangerous business.
The government has taxes on everything and everyone. Every person and company pay them this way, making it the most significant source of the country’s income. Yes, cryptocurrencies are not taxed by the government. But it also prevents the government from knowing how much money you have, which they use to calculate your taxes. As they cannot know how much, if at all, you have received or spent in digital currency, the government tries to find ways to encourage you to use the services that do provide this information, so here comes the crypto bans or restrictions.
Without a doubt, one of the positives of introducing bitcoin or any other cryptocurrency was the opening of truly international trade. This way, even countries that are excluded from the trade such as Iran, Cuba, or Venezuela, could join the market. It also opened doors to people from geo-restricted countries to bigger markets and more opportunities to invest in companies or get services from all around the world.
However, some countries prefer controlling trade and putting sanctions on the countries with that they have tense relationships. We all know how quick and strict United States policy can be, when they decide to cut off a country (e.g., North Korea or China) and even threaten to do the same with any other country that does not follow cutting that country off too.
Cryptocurrencies not only help to bypass such bans but can make any international transfer easier. For example, if someone wanted to make a money transfer between China and some EU countries, the AML procedures of the central bank might be lengthy and complicated. The sender might even be required to provide the reason for the transaction. However, a crypto transfer does not go through AML or any other complicated process, thus making it quick and hassle-free.
Though, quite a few financially weaker or financially disconnected countries have already banned crypto. But those restrictions are more of a stop while they still consider crypto to be something unknown, not worth the trust and risk, and while they find a way to control it without it being completely banned.
Personally, I think you only really “need” two regulations in the US.
And that is:
to extend SEC Rule
10b-5 anti-fraud provisions to Bitcoin and
to require sellers and promoters to state who and where they are until the statute of limitations passes.
10b-5 permits a private right to the action.
This means if you omit material information when selling your ICO token, a victim can successfully sue you.
And, because you know who and where they are, you can collect on your judgment if you win.
There are more and more millennials and other folks investing in cryptocurrencies with leverage.
I know multiple people who have their entire net worth invested in one cryptocurrency.
Many people like the idea that, in a way, they control the crypto market. Cryptocurrency supply, rates, and liquidity all depend on the market, which usually responds to financial, political, or social events. While the government regulated currency market can be controlled to stimulate investment, encourage loans, generate jobs, avoid inflation or recession.
Of course, it is only natural that the government will want to control something to protect its status quo. However, what matters is that the innovations should not be banned but analyzed and incorporated in some way that allows them to develop without damaging or endangering people and the country’s economic or political state.