Crypto Regulation: The Current State of Play and Where It’s Going Next

Charley Cooper, CEO of R3

Charlie Cooper

The story so far

The size and scope of the crypto industry is growing rapidly. Today, the global market capitalization of the crypto industry is $2.1 trillionwhile a recent NBC poll found that one in five adults in the US have invested, traded, or used cryptocurrency. At the same time, an increasing number of companies have integrated digital assets into their business models, with the likes of PayPal and Facebook expanding their cryptocurrency offerings in the past twelve months.

Cryptocurrencies are no longer on the fringes of financial services, but are poised to play a long-term role in today’s payment and investment infrastructure. In response to this increase, governments around the world have established various approaches to regulate digital assets.

In March, President Biden signed his long-awaited executive order on the responsible development of digital assets, directing federal agencies to begin a meaningful investigation with a view to the ultimate regulation of cryptocurrencies, CBDCs, stablecoins, and finance. decentralized. The UK government recently followed suit in April, announcing plans to make Britain a “global hub” for crypto through a variety of measures, including stablecoin regulation.

Given the concerted nature of the impending regulatory push, now is the time to take stock of the current state of regulation and its potential impact on the advancement of cryptocurrencies. By doing so, the industry can wake up to the fact that regulation, when crafted collaboratively and carefully, will play a vital role in the evolution of cryptocurrencies.

The importance of regulation

The issue of regulation is one that divides the crypto community. Some in the crypto space are adamantly opposed to further oversight. They argue that implementing new rules would stifle innovation and contradict the highly decentralized principles on which cryptocurrencies were built.

While these arguments should be considered carefully, the truth is that, as much as some members of this community may wish for this technology to exist outside of the existing financial system, it is not possible. Government stakeholders, whose job it is to ensure stable and orderly market conditions, simply will not allow the disruption that the original, fully decentralized model seeks to cause.

While the aforementioned efforts by the UK and US treasuries are a step in the right direction, in many ways governments have been slow to realize the need for regulation. The volatility of cryptocurrencies threatens retail investors with huge losses. Decentralized networks undermine the effective functioning of market infrastructure providers, such as clearinghouses and exchanges, which have a critical role to play in ensuring the orderly functioning of markets. Central banks risk losing influence over their own monetary policy as the adoption of cryptocurrencies replaces traditional fiat currencies.

Furthermore, there is some truth to Bank of England Governor Andrew Bailey’s recent warning that cryptocurrencies are emerging as the new “front line” of fraud. In 2021 alone, crypto fraudsters took home a record $14 million. It is these sorts of statistics that have caused cryptocurrencies to strike fear into governments and financial institutions, who have continually viewed the digital asset space with some degree of mistrust.

The implementation of regulation will go a long way towards addressing this lack of trust, helping to unlock the huge potential of digital assets and ensuring that investors are protected, just like in any other financial market.

A careful and collaborative approach is key

As governments like the US and UK begin to embrace digital assets, it is clear that whether we like it or not, cryptocurrencies are here to stay. Regulation is now on the horizon, and it seems increasingly likely that the future of cryptocurrencies will involve some sort of regulatory framework.

It is no longer a matter of regulating or not. Instead, the questions facing policymakers are what form regulation should take and how it should be enforced.

It is vital that governments take a balanced approach to regulating cryptocurrencies. Heavy-handed regulation has the potential to negatively affect many of the core benefits of cryptocurrencies, such as faster and more efficient payments, as well as greater accessibility to finance.

However, the absence of any regulation would be even more damaging. The lack of regulation of cryptocurrencies would harm the ability of the state to control monetary policy and install the necessary safeguards to protect consumers at a basic level. In this scenario, cryptocurrency volatility and fraud would pose a serious risk to consumer protection.

The proper balance can only be struck by the public and private sectors working closely together. Only through a collaborative approach, whereby regulation is designed to fit the unique attributes of the crypto market, will consumers be able to reap the full benefits of cryptocurrencies.

The global financial system has evolved slowly over the millennia, and improvements in the way money and assets flow through it have almost always been achieved through the successful integration of a new technology with the existing infrastructure and institutions within it. she. Responsible and balanced regulation, which protects consumers but at the same time gives cryptocurrencies the freedom to evolve and innovate, can play a central role in ushering in the next era of digital finance.