5 Myths About Crypto Regulations Debunked

Crypto-assets have been around for over a decade, but are still considered new technologies. Despite several attempts to regulate the industry, there is still no clear framework for crypto operations. This has led to many misconceptions about how cryptoassets are regulated.

However, it is important to be clear about the facts surrounding crypto regulations and how they may affect your crypto investments, especially as the industry grows. So, here are five common misconceptions, along with the truth.

1. Crypto regulations stifle innovation and growth

Several people argue that crypto regulations stifle innovation and growth, especially since the fundamental tenet of cryptocurrency is a lack of centralized oversight. While this may have been true in the early days of digital assets, it is not true now that crypto has advanced and achieved massive adoption. Hardly any invention can succeed without clear and consistent operational frameworks.

Regulations can ensure that businesses are held accountable. This can lead to a more stable investment environment, reduce risk and uncertainty, guarantee consumer protection, promote trust and confidence in the industry, and lead to further adoption. While new technologies bring great benefits, they often pose great risks. Appropriate crypto guidelines can make investing in and developing crypto assets easier for ordinary businesses and individuals, leading to more innovation and growth in the industry.

Certainly, there is the potential for stifling and overtly burdensome policies, especially with the continued linking of crypto-assets to illicit financial activities. After all, we have heard several reports of criminals using Bitcoin to launder money. However, this is not the goal of crypto regulation. With appropriate cryptopolicies, especially anti-money laundering, digital assets can become more viable for widespread use.

Crypto regulations should protect end consumers while allowing new products and processes to grow and develop. Regulators can take advantage of the capabilities of cryptocurrencies, using blockchain-based tools to create and enforce policies. Policies that ignore the uniqueness of cryptocurrencies are simply short-sighted and stifling.

2. Crypto regulations are similar to traditional financial systems

A common misconception is that the laws that govern traditional financial systems work well for cryptocurrencies. Coindesk even reported that SEC Chairman Gary Gensler has attested to this. However, this is not true. Crypto and blockchain technology are far removed from traditional assets and financial systems, so regulating them in the same way is out of the question.

For example, blockchains are usually decentralized, while traditional financial systems are centralized.

In the conventional banking sector, a central governing body – the state or a private state-affiliated institution – creates and enforces requirements, restrictions and guidelines. In contrast, cryptocurrencies were created to eliminate centralization. So copying regulations from the traditional financial space and pasting them into the crypto space is bound to be a failed process.

Although crypto and conventional financial regulations seek to protect people from fraudulent financial activities, their requirements, restrictions, processes and policies should be different. Traditional financial guidelines were never created with the idiosyncrasies of blockchain technology in mind. While the conventional financial industry is largely static, the crypto industry is evolving rapidly, with many rapidly changing activities, products and services.

So new regulations that consider and address the unique characteristics of cryptoassets are to be created.

3. Crypto regulations are impossible to enforce

Because blockchain technology is decentralized and crypto transactions can be conducted privately, many believe that crypto regulations are impossible to enforce. But this is not true.

You can track crypto transactions even though they are the most secure payment methods, as they still leave audit trails associated with public keys. These public keys are usually linked to real data, especially when you want to convert crypto to fiat. This has enabled many law enforcement agencies to track and prosecute cybercriminals using cryptocurrencies for criminal activities with blockchain analysis and other relevant tools.

Furthermore, several crypto organizations are mandated to comply with anti-money laundering, know-your-customer guidelines and their country’s crypto regulators.

Nevertheless, the enforcement of the crypto regulations has been fraught with various challenges. Because countries develop and enforce different crypto regulations, there is no global crypto framework, and each country’s different laws and regulations do not adequately cover all elements of cryptocurrencies. The regulations must also be updated continuously due to the many new trends and technologies.

4. Crypto regulations are unnecessary because blockchain technology is self-regulating

Another common misconception is that crypto regulations are redundant because blockchain technology and smart contracts are transparent, decentralized, secure and tamper-proof. However, blockchain technology does not protect against criminal financial activities and other risks. And because cryptocurrencies are still new, several uncertainties and unknowns exist.

Blockchains can and have been hacked, and these hacks are somewhat permanent due to the immutable nature of the blockchain. Additionally, some blockchains are not as secure, transparent, or immutable, meaning vulnerabilities can abound, identities can be hidden, and transactions can be reversed.

As a result, crypto regulations are critical to protecting consumers and businesses from criminal financial activities and malicious actors. For example, if crypto service providers are licensed and authorized, the risks associated with crypto storage, investment, transfer and others will be well addressed.

In addition, regulated crypto firms will have clear requirements for their involvement with cryptocurrencies, leading to a more stable and safe environment for investors to engage with digital assets.

5. Cryptos are not currently regulated

Although there is no globally accepted crypto regulatory framework, it is not true that crypto is currently unregulated. Governments and regulatory agencies initiated cryptocurrency compliance due to the rise in crypto-cybercrime and fraudulent digital asset transactions – with elements such as know-your-customer (KYC), customer due diligence (CDD) and anti-money laundering (AML).

Several countries have implemented crypto regulations (positive and negative), and many others are still studying the crypto terrain to develop regulations. Even in countries without clear crypto regulations, crypto assets are usually subject to general financial laws.

For example, countries such as China, Nepal and Nigeria have banned cryptocurrencies, while Switzerland and Japan have implemented legislation for cryptocurrencies and crypto service providers. Meanwhile, the United States, the United Arab Emirates and the European Union, despite having crypto regulatory bodies and myriad guidance documents, are still drafting crypto legislation. Similarly, the Australian government released a paper on token mapping – its strategy for classifying digital assets to identify the best regulatory framework.

Countries have taken different approaches to regulating crypto assets, leading to a disorganized global response to crypto regulations. However, the Financial Action Task Force (FATF) issued instructions for countries to regulate digital assets and crypto service providers. FATF is an international agency that creates regulations to combat criminal financial activities, so they know the importance of having effective crypto regulation.

Similarly, the International Organization of Securities Commissions (IOSCO) has issued guidelines (PDF) for countries to regulate crypto exchanges. The International Monetary Fund (IMF) has also called for a coordinated, consistent, comprehensive global crypto regulatory framework to stabilize markets and promote consumer confidence.

Knowing your country’s stance on crypto before trading or investing would be best, as regulations can significantly affect your investment decisions.

Crypto regulation is not always what it is made out to be

Because the crypto climate is still emerging without any globally accepted framework governing their operations, it can be easy to have the wrong ideas about crypto regulations. However, you need to have the right information about crypto regulations to ensure compliance and avoid making the wrong investment decision.

Stay up to date with regulatory changes and remember that it is possible to build a secure, innovative and thriving crypto ecosystem with crypto regulation.