Cryptocurrencies have been on a wild ride for over a decade, gaining more popularity and acceptance with every passing year. The total market cap of the crypto industry has surpassed $2 trillion in 2021 and is projected to double by 2030. So digital currencies have gone from a mere financial experiment – that many believed wouldn’t stand any chance of success – to a worldwide phenomenon in what seems like a blink of an eye.
Having garnered a massive following and is used by an increasing number of companies from all over the globe for a variety of purposes, it has become clear that cryptocurrencies are no longer on the fringes of the financial system. With new use cases continuously expanding the crypto ecosystem, the value provided by virtual money can’t be denied.
But the rise to stardom also means that the crypto sector faces tighter scrutiny than ever before. Digital assets are now on lawmakers’ radar, and governments in various countries are already looking for ways to create a regulatory framework for this sector. The message is clear: if cryptocurrencies want to compete with the big players and enjoy broader adoption into the mainstream financial industry, they have to move further away from the outskirts of the digital Wild West they have created and learn to play by the rules. Obviously, the push for crypto regulation is a very controversial topic attracting conflicting views, so let’s take a look at both sides of the coin.
The advantages of crypto regulation
Those who are in favor of regulating the crypto landscape cite a number of advantages that institutions, investors and users might benefit from.
The crypto market has been characterized by high volatility since the very beginning, with sudden price fluctuations being the norm for all coins, old and new. It’s virtually impossible to make predictions about how Ethereum price will evolve or the next token that will explode in the near future. Therefore, most investors base their decisions on pure speculation, which can lead to both outstanding and disastrous outcomes.
Introducing regulations in the crypto space could reduce these erratic movements and ensure greater stability in the market. A lower-risk environment is more likely to attract a larger number of investors willing to include digital currencies in their portfolios. And even if this doesn’t increase the number of investors, at least it will enhance the experience for existing ones, making them feel a lot more confident about crypto-related decisions. This may hamper the activity of traders looking for quick gains, but greater stability can increase the market’s appeal and lead to better long-term results.
Another issue that regulations may be able to address is the lack of protection for investors. The current environment has no defence mechanism that can guarantee the safety of their digital assets. Although major crypto exchange platforms comply with local laws, they are not regulated in the same way traditional assets are, and that leaves many gaps that can be exploited to investors’ disadvantage. A regulatory framework would place the crypto market on equal footing with already established markets like stocks, bonds or commodities.
Similarly, the absence of laws has made the crypto sphere vulnerable to all sorts of threats from the outside, such as frauds, scams or rug pulls. While digital assets are praised for their high level of security due to the innovative technology underpinning them, they’re far from being completely hack-proof. And when hacks or scams do happen, there’s little the victims can do to recoup their losses. These stories could unfold differently if there the crypto industry had clear standards and regulations.
Speaking of scams, not so long ago, cryptos themselves were regarded as a con, and that’s partly because there were no rules to govern the ecosystem. Digital assets were associated with illegal activities, and not many people dared to venture into crypto trading. Perceptions may have changed with time, but regulations are definitely necessary for the crypto market to increase its legitimacy and reach its full potential. That’s also a requirement for larger institutional adoption and healthy development of the industry. Therefore, a regulated crypto ecosystem would provide benefits for all parties involved, from companies to regular traders.
The challenges and drawbacks of regulating crypto
As expected, there are also voices that strongly disagree with crypto regulation, given the potential drawbacks it may entail.
The main reason many crypto enthusiasts oppose the transition to a regulated crypto landscape is the fact that it contradicts the very nature of digital assets. Decentralization is one of crypto’s key attributes, liberating users of the constraints of traditional finance and allowing for more freedom and experimentation. Digital currencies have completely removed the need for a central authority to oversee transactions, placing all power and control in the hands of the user. When regulations enter the scene, decentralization walks out the door. If things were to change and rules would be imposed, anti-regulation advocates worry that innovative capabilities will be irremediably hampered and digital currencies will lose their greatest advantage.
Also, not everyone is interested in reducing the risks associated with crypto trading. For certain investors, that’s the main selling point. High volatility means that prices can move in any direction, and if someone makes the right move at the right time, it can result in massive gains.
Apart from that, creating regulations for a class of assets that has only been around for a little over a decade is not exactly an easy feat. The complexity and the constant evolution of the crypto market make it extremely challenging for lawmakers to come up with a viable set of rules that can be enforced in all situations.
Many people wonder where crypto goes from here. While no one can tell for sure what the future holds, the regulatory route seems to be the most logical step in the development of cryptocurrency, so we can only wait and see how things will progress.