Effective Regulation is Critical to Making Crypto Mainstream

For years, there has been talk of bringing greater regulatory oversight to cryptocurrencies. Despite growing scrutiny, digital assets continue – for the most part – to function outside of centralised rules.

However, Biden’s recent executive order directing federal agencies to co-ordinate efforts to regulate digital currencies could mark a turning point for the market and its participants – but its effects remain to be seen. Against this backdrop, now is the time to assess the ramifications that regulation would have on this ever-evolving industry – and how investors can safeguard themselves in the meantime.

An industry seeking stability

The demise of cash, combined with the onset of new digital banking tools, has undoubtedly accelerated the rate of crypto usage. The past twelve months have seen the likes of PayPal, Revolut and Facebook expand their crypto offerings, and in the case of El-Salvador, an entire nation has begun accepting Bitcoin as legal tender. The result is that in 2021 alone, crypto usage rocketed by 881%, with cryptocurrencies becoming an increasingly viable payment option for consumers.

Despite this explosion in retail trading activity, the price of tokens remains extremely volatile. Bitcoin, for example, reached an all-time high of $68,000 in November 2021, but has since fallen significantly. Macroeconomic factors such as inflation and geo-political tensions mean that it has dropped to almost half that value at times in 2022.

The notoriously volatile nature of cryptocurrencies has led the crypto market to become the subject of intense scrutiny from authorities. Official bodies such as the Federal Reserve, Financial Conduct Authority (FCA) and Bank of England have repeatedly warned consumers that they should be prepared to lose money if they invest in cryptocurrencies. While digital assets have undoubtedly grown in mainstream popularity, scepticism from policy makers continues to hamper their widespread adoption.

What next for crypto regulation?

Some in the crypto space virulently oppose regulation, arguing that it would hinder innovation and contradict the very decentralised foundations upon which cryptocurrencies were built. In this scenario, financial task forces would take a hands-off approach, leaving the industry to self-regulate.

However, rather than a barrier to innovation, the implementation of a clear and well-developed set of rules will be vital towards integrating cryptocurrencies into the broader financial system. For the industry to continue to grow and become mainstream, customers must have trust in the infrastructure and framework underpinning it – and it starts with regulation.

This trust cannot be founded in an unregulated environment that permits bad actors to roam freely. The UK’s Financial Conduct Authority recently reported a double in the number of alleged crypto-related scams in 2021 compared to the previous year, while the cost of cryptocurrency fraud over the past decade now stands at $19.2bn globally. This, if anything, should serve as an impetus for introducing the regulation needed to tackle this crisis of trust.

Clear accounting rules are critical to achieving this, not only helping companies shape their crypto strategies, but also providing them with the tools they need to make crypto a safe and orderly marketplace for investors.

Key considerations for investors

Despite the clear need for rules, the reality is that some regulators have been slow to respond, and a lack of clarity continues to act as a barrier towards truly widespread adoption.

While Biden’s recent executive order on cryptocurrencies is undoubtedly a step in the right direction, it is short on policy detail, lacking any new rules for the players and platforms in the crypto space. It remains unclear as to what form regulation would take and how it would be enforced.

With wide-reaching regulation unlikely to be implemented in the near-future, individual traders and institutions alike should seek out exchanges that are reputable and properly regulated in order to ensure their money is protected.

Many exchanges are domiciled in countries that have little or no regulatory requirements related to crypto. The U.S., on the other hand, has the highest standards and highest capital requirements for any country in the world. While these high regulatory standards can be a deterrent, the implementation of these requirements is nonetheless a necessity as more of the world’s largest financial institutions begin to enter the crypto space.

It’s clear that cryptocurrencies are here to stay as a viable investment and alternative payment option for consumers. The question is therefore not whether crypto will become mainstream, but rather how can the financial sector evolve and adapt to this transition? For governments looking to embrace the benefits of digital assets, the implementation of a regulatory framework will be key towards bridging this gap. Only this way will cryptocurrencies be given the legitimacy and trust needed to reach mainstream adoption.

About the author: Todd Crosland is the CEO of CoinZoom, a global digital currencies brokerage firm. He has assembled a world-class team that brings decades of financial trading and regulatory experience to the growing digital currency trading marketplace.