Regulating cryptocurrencies: walking the tightrope
| 01-03-2018 | Carlo de Meijer |
Long-time regulators world-wide took a wait-and-see attitude towards the non-regulated markets for Bitcoin and cryptocurrencies. But that is changing rapidly. With the growing popularity of the crypto market, the large number of unregulated cryptocurrencies (more than 1300, greater attention is now being paid by Governments and other stakeholders around the world.
Regulators across the world are looking at whether — and how — to regulate cryptocurrencies. As a reaction last week cryptocurrencies tumbled with the Bitcoin falling even below $6,000 after having reached a high of $20,000 on 17 December for fear of more regulation. The cryptomarket value also fell deeply from $674 billion in December to $315 billion. Also the hack of the Japanese crypto exchange Coincheck, where some hundreds of millions of dollars disappeared caused enough unrest. Up till now there is however no univocal direction in how cryptocurrencies are looked at and how to treat them.
Why intervene in the cryptocurrency market?
It is no surprise that governments and regulators are becoming more vocal and putting together tasks forces on how to deal with it. There are compelling reasons why cryptocurrencies should be under more scrutiny by regulators and supervisors. The threat of price volatility, speculative trading and hack attacks all call for stricter regulation. Main goal of regulators is to create long-term stability afforded by common policies and elimination of fraudulent actions and practices.
To protect the consumer
Firstly, there is the need of tighter oversight of crypto exchanges and trading platforms from the viewpoint of investor protection. These markets are however not transparent for private investors. There are clear risks for private investors associated to price volatility, operational and security failures at crypto exchanges, market manipulation and liability gaps. Many experts worry that the trade in Bitcoin futures, crypto funds and other highly speculative financial products will inflate a speculative bubble, while running the risk of losing all their money. In that case there is – unlike at normal currencies such as euro, dollar and yen – no public institution like governments or central banks behind it.
Fear of criminal activities
According to many, aside from the instability of cryptocurrency prices, these cryptocurrencies must have greater regulatory oversight in order to prevent illegal activity and illegitimate use. Aside from the instability of cryptocurrency prices, regulators are worrying about criminals who are increasingly using cryptocurrencies for activities (trading away from official channels) like fraud and manipulation, tax evasion, hacking, money laundering and funding for terrorist activities.
Systemic risk
There is also the systemic risk that is inherent to the crypto-economy. If it continues to grow uncontrolled there is the danger of destabilising the financial system worldwide. The overheating of the cryptocurrency market with speculative money and the wild price fluctuations have raised alarms and calls for tightening of regulations in many countries from the viewpoint of financial system stability. If the price bubble bursts, it can quickly endanger individual institutions and parts of the financial markets. If big losses would occur this could hurt the reputation of the whole market.
Regulators are stepping in
The advent and subsequent boom of cryptocurrencies on a global scale as well as the heavy fluctuations have left many governments scrambling to find ways to deal with this new phenomenon. Regulators and other official authorities worldwide are stepping in to define how they would oversee this cryptocurrency environment (what had been to date a legally “murky” environment). Governments around the world are now looking at how to regulate Bitcoin and other cryptocurrencies.
What could they actually do: the options
There are various options to deal with cryptocurrencies, ranging from a complete ban to the other extreme of creating an own state digital currency. The options are just warn and further do nothing, complete ban, categorise as financial asset, regulate the exchanges or create a state owned crypto currency.
Read the full article of our expert Carlo de Meijer on LinkedIn
Economist and researcher
