Crypto regulation has been the hottest topic among government watchdogs in 2022. When it comes to regulating trading stocks, investors, to some point, know what to expect. However, regarding cryptos, government regulations have yet to be implemented. The crypto markets carry less certainty, and investors view virtual currency investments as a greater risk than the stock market.
The ‘Unregulated’ Cryptocurrency Market
In the last few years, crypto investors profited a great deal. This was partly because these early investors appeared to find the lack of regulations compelling to join.
Since its 2021 peak, BTC has lost more than 70% of its total value. The crypto markets overall are now worth less than $1 trillion. Not to mention, it now looks like government regulations could be coming for the crypto industry soon.
How Previous Regulations Impacted Crypto Investors
Crypto regulators are dissimilar in different parts of the world. And since the technology behind cryptocurrencies is decentralised, no broker or organization controls the entire crypto ecosystem. Blockchain technology’s nature could be why regulatory bodies differ in opinion when it comes to cryptocurrency. For instance, the United States crypto industry has been a battle between the SEC and CFTC.
To some investors, regulations are a positive aspect of the industry. This is because many institutions and large established groups are waiting on the sidelines. Many analysts believe many of these institutions would like to invest in crypto. However, a lack of regulations makes it impossible.
Transparency is critical for institutional investors, and it cannot be overstated because of the risk-management nature of institutions. Moreover, each investment must have a risk profile. These risk profiles can only be created for transparent assets, which cryptos are not yet.
For example, the lack of transparency for the algorithmic stablecoin TerraUSD (UST) resulted in a massive price drop for it and LUNA. Following the collapse of Terra, several investors filed securities fraud lawsuits against all the entities involved. The tricky part is how centralized entities will get justice for investors in the DeFi ecosystem.
Investors Suffer From a Lack of Effective Crypto Regulation
Terra’s crash was not the first time crypto had caused investors to suffer severe financial losses. 2016 saw the fall of Ethereum’s DAO coin after $60 million in Ether vanished courtesy of a network breach.
The underlying blockchain of Ethereum was forked, and the stolen currency was returned. However, the experience had far-reaching consequences. The Ethereum community’s adoption of two blockchains was not the least of these changes.
The CFTC fined USDT’s issuer $42 million. The fine came in after the company violated the Commodity Exchange Act and other CFTC regulations. The penalty was in addition to the $18.5 million settlement payment. Most of the settlements and fines were related to audit issues for USDT’s existing treasury. The issue is an example of a problem whose solution may come with increased crypto regulation.
Experts believe that until there are regulations governing the reporting and trading of crypto assets, none of these price drops will be the last. This level of uncertainty is unsustainable for a large financial institution.
However, with the help of regulations and resulting transparency, large institutional investors could only stomach more significant investments in crypto.
Pros and Cons of Crypto Regulators
As with establishing any regulatory body, there will be benefits and drawbacks. For example, in the United States, the different regulatory systems at the national and federal levels will create challenges. As a result, regulators must balance protecting investors and performing their duties.
Some companies and businesses want to develop and promote crypto. Before they do anything, they need to figure out if their product will be regulated. If it isn’t regulated, that might not be good because people might not invest. Additionally, they may face criminal charges if they cannot predict correctly.
In the EU, the money laundering directive broadens the scope of European anti-money laundering legislation to include digital currencies. Hence, businesses must plan to comply with this new amendment.
Governments will face many difficulties when regulating digital currencies. This is because they are complex and constantly changing. Additionally, different governments have different laws and regulations.
The regulatory sandbox approach developed by the UK’s Financial Conduct Authority has been endorsed as a perfect model for regulators worldwide.
The best way to address and regulate bitcoin, altcoins, and subsidiaries of DeFi in the future will be determined by how the crypto industry evolves. To project this evolution, regulators need to look at how BTC users use crypto and the economic sector they are a part of.
With this evolution, watchdogs must keep an eye out for regulatory gaps, increasing the risk of fraud. However, long-term crypto regulation will benefit investors and financial services. The regulation will promote the development of new technologies while lowering the risk of crypto use in fraudulent transactions.