You’ve probably read a bunch of articles lately claiming that regulation is a bad thing for the cryptocurrency market. I’m not going to go into detail as to why you should or shouldn’t agree, but I will tell you why I think regulation is a good thing for the market and why you should care.
While Bitcoin and other digital currencies are helping to transform society, some regulators are still struggling to understand how to regulate and monitor cryptocurrencies within their countries. Governments are trying to keep up with the pace of innovation and growth, but some are struggling to do so. The question of how to best regulate cryptocurrencies and digital currencies remains unanswered.
Regulating cryptocurrencies can seem like a daunting task, but it’s important to remember that regulation is not necessarily a bad thing. There are plenty of reasons why it’s better to have a healthy regulatory environment than none at all. Regulation is about allowing people to make safe financial decisions, and that’s something worth having.. Read more about how would the government regulate bitcoin and let us know what you think.Cryptocurrencies are becoming increasingly popular. From the massive entry of traditional financial institutions – mutual funds, banks and insurance companies – to the multi-billion dollar capitalization of the market, cryptocurrencies are truly unprecedented. As such, it is increasingly attracting the attention of regulators around the world, particularly in the United States. How can the industry strike a balance between stability and investor protection on the one hand, and promoting and supporting innovation on the other? There are three ways to regulate cryptocurrencies. The first is to not heavily regulate it, but given its incredible growth and increasing overlap with traditional financial markets, it is unlikely that regulators will find this route acceptable. The other option is to regulate the sector from the top down, without extensive involvement and consultation with bona fide companies in the crypto space. This path could prove disastrous and sacrifice the powerful financial innovation of blockchain, which could be used for good. The third – and we think this is the only really viable option – is regulation that involves an ongoing partnership with the industry itself. Many in the cryptocurrency industry already believe that such proactive, innovation-driven regulation will significantly advance the industry. Related: Blockchain will thrive if innovators and regulators work together.
The regulation of bitcoin in the historical context
Bitcoin (BTC) emerged more than a decade ago as a peaceful protest against the expansionary monetary policies of the great financial crisis of 2008. What began as a niche industry for cyberpunks, libertarians and, frankly, people who want to buy weed more easily and anonymously, has grown into a concentration of brainpower: 46 million Americans own bitcoins. The sheer size of cryptocurrencies as an asset class, with a market capitalization of up to $2 trillion, makes them the focus of all lawmakers and regulators around the world. Expecting cryptocurrencies to develop without oversight, as they did in the early years, is just unrealistic. Key asset classes should not go unnoticed and the inflow of new investors should be protected. Related: Europe awaits regulatory framework for crypto assets As entrepreneurs, we don’t care about regulations because we want to stuff ourselves. If history is to be believed, the regulation of innovative companies is all too often imposed by legislators who are understandably unfamiliar with the complexity of the industry’s processes and lack practical experience. This gap between innovators and regulators arose decades ago with the massive growth of Internet companies and has repeatedly led to overly burdensome regulations that fail to achieve their intended purpose. The alternative is not in favor of developed countries, as nimble companies tend to seek offshore tax havens, where regulatory frictions are low and rules are lax, which ultimately puts pressure on state coffers, especially with the telecommuting companies that emerged after the events of COVID-19. The reality is this: Legislation has lagged behind innovation, which is happening at a rapid pace. The matter becomes even more complicated when we look at the area of decentralised funding (DeFi). These solutions, colloquially called non-depository or non-hosted, meaning that there is no central third party intermediary and that the intermediary is the software itself, pose problems when it comes to integrating them with existing regulations, including financial intermediation and securities laws. Related: Authorities seek to clear backlog of uncovered portfolios
BeCeFi as a bridge between the FFi and thescheme
Our hypothesis is that the most productive legislation will be created by regulators working with bona fide participants in the crypto space who are actively willing to engage with them. What does such participation look like? Part of this process is to work proactively within the existing framework to better identify gaps and frictions. While the DeFi example above creates new regulatory challenges, there are ways to reduce this burden in the first place. Central Financial Companies (CFCs) can provide an intermediary solution and act as a bridge between the traditional financial sector and its regulatory framework on the one hand, and the decentralised financial space on the other. These companies know the sector very well, both in terms of infrastructure and users’ needs. Until we conclude that the current regulatory framework does not apply to blockchain companies or the industry gets specific legislation, CeFi companies are on a licensing crusade, which has resulted in a significant number of licenses from regulators around the world, with more to come. This means that they are in a good position to allow theFiD projects to use our infrastructure, as they are only now beginning to consider allocating funds for legal fees and lobbying. They may also rely on the Financial Action Task Force’s (FATF) prescribed procedures for know-your-customer (KYC) and anti-money laundering (AML), as well as cash inflows and outflows, to improve their offerings and offer them to their users in compliance with applicable regulations. Related: The FATF’s draft guidelines are intended to ensure compliance with the FCD.
Key regulatory issues and how industry can help
Part of working with the regulators is to work within the existing framework, but it is also about having an idea of the key areas of legitimate concern to the regulators so that we can work with the industry, not against it, to develop solutions. Cryptocurrencies are unstable. Despite the downward trend, volatility continues. As a student of Benoit Mandelbrot and the financial markets, I can tell you that volatility tends to cluster, i.e. volatility creates more volatility. That’s what attracts a lot of people to this field – the promise of multiple X’s on their startup capital. Of course, volatility works both ways. Yes, bitcoin can rise 15 times in 12 months, but it can also undergo a 30% correction in a matter of hours. Such rapid and violent corrections occur in every upward cycle. It is true, however, that these corrections are usually preceded by significant increases, as the March 2020 decline demonstrated. The recent correction in May, while not as severe, was still important because it demonstrated the surprising resilience of the DFi market. There was a cascade of sell-offs, but the protocols held up (for the most part) and performed as expected, even as bitcoin fell 35% and Ether (ETH) nearly 40%, futures traded with a sharp pullback, and implied volatility in the options market rose above 250%. In a previous life I was a trader in the futures markets, and I remember very well the flash crash of the S&P 500 on the 6th. of May 2010, when the indexes lost 10% in a matter of minutes and the losses were recouped some time later. Total chaos reigned in the most sophisticated, sophisticated, regulated and controlled markets. It took the Securities and Exchange Commission and the CFTC five months to get a preliminary idea of what was really happening. It is also worth noting that despite the correction in May, bitcoin is up 27.26% in 2021 and 284.58% in the past 12 months. Meanwhile, the S&P 500 is up 11.95% year to date and 34.63% over the past year. Gold has been stable over the year and is up 11% over the past 12 months. In short, much of the concern about bitcoin volatility has to do with timing – and, more importantly, the investment strategies you use. There is one aspect of this general volatility structure that deserves further discussion: leverage. Bitcoin, the most successful asset of the past decade, is unique in many ways, and investing in it requires a certain mindset and time horizon. Day trading in any asset – but even more so in cryptocurrencies – is a one-way ticket to destruction of your trading account. Leverage of 100x, 135x and 500x means you will be liquidated if the underlying asset moves less than 1%, which for cryptocurrencies can mean seconds. Here’s a great thread about volatility and liquidation stunts. Spoiler alert: While it is unbiased and informative, it comes from someone making huge profits with excessive leverage. Bitcoin and other crypto assets are a great addition to any well-diversified portfolio and should be bought and held for a long period of time. History shows that bitcoin has outperformed all other assets, with the possible exception of the US dollar against the Zimbabwean dollar. Is it worth investing in your child’s education now that cryptocurrencies have risen 15 times in 12 months? Probably not. And certainly not with leverage, because even with 2x leverage you can be liquidated in the March 2020 correction, when prices fell more than 50% intraday. Related: Risk management for cryptocurrencies: Or the art of not losing all your money. In our industry, we have a low tolerance for leverage and have advised our broad client base to be cautious, at least since January. A customer who deposits $100,000 in bitcoin will immediately receive a $50,000 line of credit in cryptocurrency from us. Compare that to a trading platform that allows traders to execute trades with a leverage of 100x. In other words, to buy a $100,000 position in BTC, the margin must be $1,000. The remaining $99,000 is borrowed at an interest rate favorable to the lender. In addition, exchanges and prop shops profile their clients – they quickly identify the big players who engage in 100x leverage trades, and then gladly take the other side of the trade, as everything these clients bet can be immediately credited as a profit. In our opinion, leverage in the crypto space would be an appropriate place for regulators to look when analyzing who is targeting investor protection. The legitimate goal of protecting investors in emerging industries is a difficult balancing act because it sometimes verges on stifling innovation. But the reverse is also true: Innovation cannot be used as an excuse for predatory behavior, because leverage of 100x is not innovation. Forex had him before Satoshi, and no, he’s not doing anything to improve the company. Companies should cooperate with the relevant national authorities to ensure that the right kind of investor protection legislation is applied. This approach is far more constructive than the alternative of stubbornly saying that the existing regulatory framework is outdated and does not reflect the latest developments in cryptocurrencies and fintechs.
Cryptocurrencies and money laundering
When it comes to money laundering, most in the cryptocurrency industry agree: On the one hand, we’re happy to play by the rules. On the other hand, cryptocurrencies have been unfairly targeted, while the US dollar was and is the currency of choice for money laundering. Any widely accepted currency is vulnerable to money laundering, and it is a fact that the current financial system and the US dollar are the preferred vehicles for illicit purposes. It’s not just the medium of exchange itself. Does the reward for facilitating the financing of illegal activities outweigh the consequences? Type the name of a major bank and the word money laundering into a search engine to see the extent of the problem. Then try to determine how many of these lawsuits were civil, how many were criminal, and what percentage of them ended in a settlement without an admission of guilt. As long as the punishment remains a slap on the wrist and a few percentage points of the profits from facilitating illegal activities, there is little hope that money laundering will take a big hit. There is no evidence that bitcoin plays a significant role in cross-border money laundering. Cryptocurrencies are also not nearly as anonymous as they seem. The fact that the system can be abused does not mean that it should be banned; otherwise we would have abolished banks, cash, fiat currencies, the Internet, and virtually all forms of human ingenuity long ago. Yet we hear the fears and do our best to keep them only temporarily in the history books as FUD (fear, uncertainty and doubt). There is another important point in relation to money laundering. We use many tools – such as advanced Chainalysis, CypherTrace and Coinfirm algorithms – to trace the origin of cryptocurrencies and show the detailed movement of funds. This allows us to draw definitive conclusions about the status of a particular cryptographic deposit and apply the FATF’s risk-based approach to AML/CFT. Of course, there are obfuscation tools and techniques across channels that make detection more difficult, but nothing beyond what already exists in the banking sector – cross-border remittances, offshore jurisdictions, etc. – that would make it more difficult to detect the presence of a bank. As someone who has generated a significant portion of their net worth from cryptocurrencies, let me say: Bringing Fiat currency into the banking system from cryptocurrency sales is not an easy task, so it is far from a dream of money launderers. Major Tier 1 banks require significant monetary proof from early bitcoin investors, including cryptographically signed messages from the very first wallets. So I don’t see how a darknet dealer could convert cryptocurrencies into US dollars or euros in significant volume. Your best hope is to stay in cryptocurrencies and pay for goods and services with cryptocurrencies. It sounds like a method the drug cartels have been using since the days of Pablo Escobar.
Why protect cryptocurrencies? It is the only truly free market
Regulators really have something unique with the cryptocurrency markets. The crypto currency market is the only free market without a central bank to intervene and control interest rates and the money supply. There is no lender of last resort here, which in traditional markets has led to some moral hazard and encouraged aggressive long positions. There’s no Fed, no fall protection, no rescue. In cryptocurrencies, the market forces of supply and demand, leverage and deleveraging operate without a referee. While this can sometimes be dramatic, it contributes to the anti-fragility of the space and allows for rapid adaptation to new conditions. While this is painful for novice investors who came late to the party and especially with leverage, none of the cryptocurrency’s corrections were worth the government’s tax dollars. This means that cryptocurrencies cannot pose a systemic risk and no company can be too big to fail, which is positive for innovation. Unlike traditional finance, those who develop good products and services survive in cryptocurrencies. If cryptocurrencies have been a bubble for a few years – which they very well may be – then stocks have been in a bubble for most of the past decade. Tesla’s normalized price-to-earnings ratio is 676.35, and according to Lin Alden: The S&P 500 may be the second most expensive of all time in absolute terms, which does not bode well for long-term returns. But the cryptocurrency bubble should be seen as a by-product of the aggressive monetary policies of the world’s central banks and the fear of 1970s-style inflation that Paul Tudor Jones, the man who coined the word hedge fund, spoke so eloquently about. Related: Predicting the price of bitcoin with quantitative models, part 2
Future of the plan
There is no doubt that the next Google, Amazon, Facebook or Apple will leave the cryptocurrency space. But for the cryptocurrency market to maintain and surpass its current capitalization of $2 trillion, it must continue its path to maturity. Therefore, as innovators and accredited institutions, we are in favour of a constructive dialogue with all the key players in the regulatory process, which should ideally lead to clear rules on how to structure the business. It is in the interest of all stakeholders – regulators, industry and end users – to have clear guidance and legal certainty. This will lead to sustainability, innovation, safety of funds, consumer protection, robust anti-money laundering procedures, and ultimately more revenue for jurisdictions that choose to embrace cryptocurrencies, just as the United States embraced the Internet in the early 2000s. This article contains no investment advice or recommendations. Any investment or business transaction involves risk, and readers should do their own research before making a decision. The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent those of Cointelegraph. Antony Trenchev is co-founder and managing partner of Nexo, a company that lends cryptocurrencies directly. He studied financial law at King’s College London and at Humboldt University Berlin. As a member of the Bulgarian parliament, Trenchev has advocated for progressive legislation that would allow the use of blockchain solutions for various electronic government services, such as e-voting and database storage in a distributed ledger.When Australia announced plans to regulate cryptocurrency, many on the cryptocurrency community cried foul. Naturally, the media took up the call, pontificating on how it was all a heated debate, and how regulators should just leave everyone alone. The problem with this line of thinking is that it is completely illogical.. Read more about crypto regulations 2021 and let us know what you think.
Frequently Asked Questions
How do you regulate Cryptocurrency?
Cryptocurrency is getting a lot of attention lately, as many new investors are entering the space. But what are they doing? Are they buying Bitcoin, Ethereum, or other cryptocurrencies? Or are they just buying a top 10 coin on CoinMarketCap? No, they are buying cryptocurrencies for the long term, specifically to hold. They are buying into the technology, and they are buying into the blockchain ecosystem. Cryptocurrency is a new form of currency that is digital, decentralized, and encrypted. It’s a new system of exchanging and storing value, and unlike traditional currency, it’s not controlled by any bank or government. The idea of cryptocurrency was created back in 2008 by an anonymous programmer or group of programmers, and the concept has become widespread over the past decade.
What happens if Crypto gets regulated?
Increasingly, governments around the world are exploring how to regulate bitcoin and other digital currencies. And, since this is a relatively new technology, there is no established rule book to follow when it comes to regulating the digital currency market. So, what are the factors that should be considered? Issues that should be considered include whether the platform is decentralized, whether it generates a lot of value or is merely a speculative investment, and whether the digital currency is used mainly for speculation or it stands a chance of being used in the real world. Bitcoin and other cryptocurrencies are in the news a lot these days. Does this mean that they are a good investment? How does this compare to other investment instruments? How can you be sure that you are not being scammed? We have all heard the horror stories about investors losing their money in some Bitcoin scam or other. So, what can you do to minimize the risk of losing your hard-earned cash?
Is Cryptocurrency regulated in the UK?
A lot of people are thinking about investing in cryptocurrencies, and a lot of people are thinking about investing in ICOs, but many of those people are wondering: where is the line between cryptocurrency and fraud? Everyone seems to be talking about cryptocurrency, and more specifically Bitcoin. The value of Bitcoin in the past week has risen to over $6000. There are also a lot of people buying up one Bitcoin to exchange it for a different cryptocurrency. Should you do that? If you bought $100 worth of Bitcoin last week, you could have $1500 worth of Bitcoin today. That is an incredible amount of money. However, if you bought a different cryptocurrency, like Bitcoin Cash or Ethereum, you would have $500 today. The value of cryptocurrencies can be incredibly volatile, so it is very important to do your research on the exchanges you put your money in.
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