Three Questions for Cryptocurrency Regulators

Three Questions for the Overseers of Digital Assets

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  • Cryptocurrency realm is currently characterized by wild wings and uncertainties.
  • Regulators must, therefore, find answers to these 3 questions to achieve the right balance.

Crypto World: It seems the craze in the crypto realm has gone down. The price of Bitcoin has dropped by almost half from its last year all-time high as a result of speculations. However, the force driving cryptocurrency remains powerful, with the current price of Bitcoin still seven times higher than what it was just a year ago. Big reason regulators want to gain control of the crypto realm. The possibility of making quick money through ICOs has attracted lots of fraudsters as well as genuine entrepreneurs. Crypto investors think regulating cryptocurrency would help legitimize it. Yet crypto-enthusiasts are also scared that overzealous regulation, just like China’s ban on crypto-exchanges and ICOs, could throttle the promising technology. In order to achieve the right balance, regulators must find the right answers to these three questions: what is cryptocurrency? How should day-to-day risks be managed? And what threat do they pose to financial stability?

Till now, there has not been a consensus on what a cryptocurrency is. Even within countries, authorities still disagree on how to classify cryptocurrency. Is cryptocurrency a commodity, a currency, a security or a peculiar asset class? The US SEC claimed it will treat most tokens issued via ICOs as securities. The Swiss regulator, FINMA, stated in February that it would base crypto treatment on their actual function i.e. whether they are used for payments; as a utility token that gives its holder access to a specific service; or as an investment. This means a token’s classification can change over time.

In relation to how to manage the daily cryptocurrency risks, from money-laundering to consumer protection. Though criminals were among the earliest adopters of cryptocurrency. Regulations can help fish them out by simply extending the present anti-money-laundering rules into the crypto realm. The main targets should be exchanges where fiat currency is changed into cryptocurrency and vice versa. Similar standards to those applied on banks must be applied to exchanges by Regulators. These standards include demanding KYC identification from all customers and keeping records of unusual transactions. A number of nations, which include Australia and South Korea, have already done this; earlier this month the European Union passed a directive stipulating the same thing. There is, therefore, a need for a harmonized approach, so as to prevent illegal flows of money into the crypto realm.

As for the threat cryptocurrency pose to financial stability, and how much protection a crypto investor should enjoy, some regulators advocated restricting the crypto market only to accredited investors, who are deemed better at handling risks than novice and ordinary investors and are definitely more cushioned against any loss. However, the opposition to imposing bans on how people can risk their own money seems to be on the high side. Regulators in many countries issued clear warnings about the risks associated with cryptocurrency – most of which fell on deaf ears; while several others are clamping down on crypto-related ads.

Presently, cryptocurrency does not pose any risk to the global financial stability; report showed that cumulatively, cryptos are worth less than 3 percent of the combined balance-sheets of the central banks in the US, Britain, Japan, and Germany. However, the wild rides of bitcoin are warnings that things can change quickly. Hence, regulators must keep an eye on any factor that can heighten systemic risk, like the amount of borrowing done by crypto investors.

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