How investors can navigate growing crypto regulation

A year of negative press and scandalous headlines has put the cryptocurrency market on the radar of many governments around the world.

The spectacular FTX collapse, the Coinbase insider trading scandal, and the $40 billion collapse of TerraUSD and its sister token Luna, among others, made 2022 quite a year for the crypto market.

These events, and the fact that cryptocurrencies and the underlying blockchain technology are becoming a pervasive force in the global economy, make a compelling case for greater regulation of the market.

A report from the World Economic Forum shows the growing acceptance and decentralized nature of digital currencies pose unprecedented challenges for capital markets, investors, financial regulators and tax authorities globally.

Concerned about the high risk investors face, authorities have stepped up regulation of cryptocurrency. Watchdogs warn that stricter crypto regulation could be just around the corner.

For crypto investors, it has become important to understand what regulation might look like and how to navigate a more regulated cryptosphere.

But first, let’s dive into why the market needs regulation.

Does crypto need regulation?

Crypto experts insist that digital is the future of finance. The industry must therefore be regulated in the same way as the traditional financial system.

“In crypto, regulation can play a critical role in protecting customer assets, protecting investor interests and significantly limiting instances of fraud,” says Joseph Dallago, co-founder and CEO of Rain Financial, which operates the Rain cryptocurrency exchange licensed by the Central Bank of Bahrain.

The decisions of governments to regulate crypto must be championed, says Nigel Green, CEO and founder of the deVere Group.

Digital currencies should be held to the same standards as the rest of the financial system, he adds.

Crypto has come of age and there is no greater evidence of mainstreaming than “the news that digital currencies are being brought into the regulatory tent of one of the world’s largest economies and most regulated markets”, says Mr Green, citing the UK. the government’s recent decision to regulate the industry.

As cryptocurrencies are set to have a greater impact on the global financial system, “a strong regulatory framework will help protect investors, tackle crime and reduce the potential opportunity to disrupt financial stability”, he says.

Greater transparency and regulation of crypto will also “help attract the businesses of tomorrow – and the jobs they create – as effective regulation gives them the confidence they need to think and invest long-term”, adds Mr Green.

Last March, Dubai adopted the Dubai Virtual Asset Regulation Law, which aims to create an advanced legal framework to protect investors and provide international standards for the management of virtual assets that promote responsible business growth in the emirate.

It also established the Virtual Asset Regulatory Authority (Vara) as an independent body to regulate the sector throughout the emirate, including special development zones and free zones, but excluding the Dubai International Financial Centre.

Last September, the Financial Services Regulatory Authority (FSRA), the regulator of Abu Dhabi’s financial hub, the Abu Dhabi Global Market (ADGM), published guiding principles for its approach to virtual asset regulation and supervision to outline expectations for the asset class and service providers in the sector.

The principles will complement ADGM’s regulatory framework for locating virtual asset activities, the Norwegian Financial Supervisory Authority said at the time.

The face of crypto regulation

Investors are eager to know whether cryptocurrency should be regulated like securities or with new rules specific to digital currencies.

There is a way for cryptocurrency regulation through either central banks or capital market authorities, says Dallago.

“This model could create a regulatory umbrella for crypto use cases that go beyond asset securitization, investments or technological advancements,” he says.

“We see great potential for synergies also between crypto asset regulations and capital market regulations.”

This model works in the GCC, especially in Bahrain through the Central Bank of Bahrain and in the UAE’s ADGM through the FSRA, says Dallago.

Mr Green says new rules need to be written and implemented for the crypto market, a relatively new asset class built on rapidly changing technology.

“Legacy regulations, designed for other asset classes in the last century, are probably not sufficient,” he says.

He also singles out meme coins, such as Dogecoin and Shiba Inu, for regulatory action.

“Regulation will also help crack down on useless meme tokens, which undermine the credibility of the crypto sector,” he says.

“More robust, enforceable regulation is the answer for crypto.”

He places particular emphasis on the importance of regulating crypto exchanges.

It is argued that if crypto transactions flowed through regulated exchanges, it would be much easier to prevent and prevent potential wrongdoing, such as money laundering, crypto hacking and tax evasion.

Regulation should first address concerns around anti-money laundering and combating terrorist financing, says Dallago.

Crypto analysts also stress the need for regulators to join hands with leading industry participants to ensure that new rules do not stifle innovation.

Navigation in the crypto regulation

Regulation of crypto is a matter of when, not if. The sooner investors accept that, the better.

Many fraudulent activities in the crypto space last year could have been avoided if there was regulatory oversight of crypto asset platforms in unregulated markets, says Dallago.

“Greater crypto regulation will not hinder investment in this space, but rather encourage it as there are regulatory mechanisms in place to safeguard investor interests and protect their capital,” he adds.

After a year of crypto collapses, top-level fraud allegations and prison sentences for wrongdoing, there is no doubt that greater scrutiny will help protect investors, Green says.

“Regulation could provide a potentially long-term, sustainable economic boost to those countries that introduce it, as crypto is widely regarded as the future of finance,” he adds.

However, crypto watchers warn of increased market volatility as new rules are rolled out.

A shake-up of the market, as a result, would see many unproven coins with little utility fall to the ground.

Investors should also expect large-scale industry consolidation as crypto regulation becomes a reality.

Therefore, cryptoassets that have strong developer communities, security measures and infrastructure are the safest bets.

Is regulation bad for crypto prices?

Many investors mistakenly believe that greater regulatory scrutiny is detrimental to crypto prices.

Dallago says increasing regulation is a positive sign for crypto.

“As the industry grows, we see more and more regulators jumping on board to regulate it,” he says.

“This means, beneath the rhetoric, that governments recognize the value of this technology and the benefits it can unlock for their constituents,” he adds.

But for regulation to be a positive force for the industry, it should focus on key risks without limiting customer access or adoption.

Increasing regulatory oversight is the hallmark of a growing industry.

“Regulation will further strengthen the crypto sector and create trust and confidence among investors,” says Mr Green.

Cryptocurrencies — in pictures

A regulated crypto industry will attract more institutional investors – including pension funds, mutual funds, investment banks, commercial trusts and hedge funds – as well as individual investors.

“This will have a beneficial impact on the price path in the longer term,” says Mr Green.

Regulation is key to creating an environment for crypto that adheres to robust standards, safeguards customers’ interests, and creates a platform for the private sector to grow.

“All of this will ultimately reflect upward on the price as adoption increases and use cases for crypto materialize,” Dallago adds.

Updated: 23 February 2023 at 05.00