Change is ahead for random crypto regulation

The World Wide Web, as its name implies, is borderless, and so is crypto. The common ethos of the Internet and cryptocurrency is wide-open communication and exchange, unfettered by national borders. On the ground, however, as crypto has become a more significant player in the financial system, nations have begun to consider issues of sovereignty and regulation. While many countries have so far been open to crypto, others have restricted its use or outright banned it. The same reason some have advocated crypto and blockchain technology – as a means to revolutionize the international financial system – has alarmed many world leaders.

For example, Hillary Clinton, who pointed out the risks of crypto and the need for regulation, said at a Bloomberg conference in Singapore in 2021: “Another area that I hope nation states start paying more attention to is the rise of cryptocurrency because [it] has the potential to undermine currencies, to undermine the dollar’s role as a reserve currency, to destabilize nations, maybe start small but get much bigger.” These are strong words, and governments have begun to take claims like these seriously. Despite crypto’s decentralization, regulation seems inevitable and could greatly alter its development and adoption worldwide.

The regulatory environment

In general, financial regulations oversee the financial world, setting up restrictions, requirements and guidelines for the institutions, with the aim of keeping financial systems stable and establishing and maintaining their integrity. For traditional financial institutions around the world, these rules have been evolving for decades. The cryptocurrency market, as a comparably new area of ​​finance, does not have this larger history and, given its rapid growth and maturity, now faces the prospect of regulation.

As the crypto market has grown, governments and international organizations, such as the International Monetary Fund, have noticed the potential to interrupt the established economic systems — both in the forward-looking, technological sense of the word and the more troubling sense of creating problems, such as those associated with the collapse of the crypto exchange FTX in November 2022. In other words, the cryptocurrency industry is now large enough that financial analysts worry that it could have adverse macroeconomic consequences if not properly regulated, although it also has potentially positive effects. The increased risk has led to a demand for more regulation. The World Economic Forum, for example, has said regarding cryptocurrency regulation that—as with other financial regulations—the goal is to “support financial stability, transparency, protection for consumers and investors, and a level playing field for different market participants.”

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So far, most of the regulatory activity in this area has been at national level. But cryptocurrency use is not limited, or intended to be limited, to national borders, making international regulatory cooperation something of an ideal — and one whose realization still seems far off. But regulatory agencies have reason to pursue it: As of this writing, one in five Americans claim to have already been involved in cryptocurrency trading at some level. In Singapore, these figures are even higher. And as the market grows, everyone will be eager to avoid a repeat of the financial crisis of 2008. In general, the larger the market, the more likely it is to be regulated; this is based on the assumption that as the market grows, it is more likely to impact the community.

On the other hand, crypto advocates point to the possibility that crypto itself is trying to avoid a 2008-style meltdown by its very nature. It constitutes an alternative financial structure that is not dominated by large financial institutions that more urgently need to be controlled by regulations. There is a clear tension between crypto’s underlying independent ethos and the nature of regulation. Will this be a creative tension or a destructive one? It may even be too early to speculate, but in any case governments have begun to assert their authority.

Regulation of cryptocurrency in the United States

The history of cryptocurrency regulation in the United States mirrors that of most Western nations. Early on, the US government’s perspective was that Bitcoin (BTC) and other cryptocurrencies were fascinating innovations but required little attention from federal agencies. This frictionless system may have encouraged early adopters, but the more skeptical sentiment of crypto was doomed to failure.

However, to the surprise of many, crypto not only did not disappear, but continued to grow in both value and popularity. Still, US regulatory agencies such as the Securities and Exchange Commission, whose function is to monitor markets and protect investors, maintained a wait-and-see attitude for some time. Eventually, the crypto market became too prominent to ignore: problems with initial coin offerings led to their regulation in 2017. Further regulation seems inevitable, for example in the wake of the collapse of Sam Bankman-Fried’s FTX in November 2022. The question, then, becomes what regulations must be put in place, and which areas they will cover.

The government’s concern was actually initially about fraud and the use of cryptocurrencies for illegal activities on the dark web, but existing laws cover such cases. Until Congress passes additional laws directly related to crypto, the SEC’s approach will continue to be what it calls “regulation by enforcement” of existing statutes. Current regulations include anti-money laundering and anti-terrorist financing provisions – these may apply to crypto-related matters, but are not regulations written with crypto in mind.

The future of crypto regulation

What should be obvious is that the crypto regulatory landscape is troubled. There are so many different approaches that shift so often – sometimes by 180 degrees – that it is difficult to determine what an individual government’s position will be from year to year, or even from month to month.

Predictions are always risky, especially in situations as volatile as cryptocurrency. You can likely expect increasingly loud calls for regulatory clarity and cross-border consistency, along with little chance of governments complying with such calls in time.

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Such a lack of clear direction may inhibit some crypto trading in the short to medium term from those who feel such trading is too risky. But one thing that is virtually certain is that crypto and other digital currencies, and the blockchain technology that underpins them, will continue to be a force for governments to reckon with.

Crypto and, by extension, blockchain are part of the much larger technology-driven global movement known as the Fourth Industrial Revolution. Within this revolution, the world is undergoing a digital transformation, and digital currency simply makes sense as all aspects of our lives evolve from analog to digital. How important is the digitization of money and its underlying distributed ledger in this revolution? Klaus Schwab, founder of the World Economic Forum – best known for its annual conference in Davos, Switzerland – has said: “Blockchains are at the heart of the fourth industrial revolution.”

Just as fears about the possible consequences of artificial intelligence and genetic engineering are managed with some level of regulation, rather than stopping these advances altogether, national concerns about the potentially destabilizing impact of cryptocurrency are unlikely to stop its growing use. Regulation, if used correctly, can bring some order to the often chaotic proliferation of cryptocurrencies, but finding the right approach to regulating this new phenomenon is proving challenging.

This column is an excerpt adapted from Cryptocurrency Quick Start Guidescheduled for release on February 27.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.