Crypto Regulation: The Opportunities And Challenges That Lie Ahead

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Since its inception in 2008, the cryptocurrency market has expanded and become an integral part of the global financial system. It has altered economic structures as they penetrate the capital market and day-to-day financial transactions. 

However, they have also raised concerns about potential risks to investors, businesses, consumers, and the environment. As such, policymakers and government leaders worldwide have become keen on writing, creating, and amending cryptocurrency regulations. 

Data from the Atlantic Council’s Cryptocurrency Regulation Tracker shows nearly two-thirds of the countries reviewed are exploring changes to their crypto regulatory framework. The research focused on 60 countries, particularly the G20 and those with the highest crypto adoption rates. 

India, for instance, has made crypto regulation a primary goal of its G20 presidency. Meanwhile, the US has become stricter after the collapse of FTX,  the former third-largest crypto exchange by volume. 

Policymakers highlighted the need to improve crypto-asset regulations at the Spring Meetings of the World Bank (WB) and the IMF. Central bank governors in many countries and G20 finance ministers also discussed the future of cryptocurrencies. 

The sessions made two things clear. First, there is a visible need for robust and globally coordinated cryptocurrency regulations. Second,  policymakers are facing several obstructions from their goals. 

Given all these, many opportunities are present to enhance and expand the capabilities of cryptocurrencies to boost investments, remittances, and government spending. 

Yet, we must address primary challenges to revise crypto regulatory frameworks. This article will discuss the state of crypto regulation globally. We will also delve into the opportunities and challenges ahead of the changes. 

How Crypto Regulatory Framework Varies Around the World 

Countries around the world have differing views on regulating and legalizing cryptocurrency activities. Cryptocurrencies are widely accepted as volatile investments, although they strongly correlate with inflation, particularly Bitcoin (BTC) and Ethereum (ETH). The data below shows how the price of a single BTC and ETH varied with inflation in the past year. 

In 2022, the US inflation accelerated, exacerbated by skyrocketing home prices and the Russo-Ukrainian War. The labor market rebound also contributed to it as higher employment and wages raised purchasing power. 

As early as 4Q21, we already saw how the rate of increase in the US general price level sped up and how it affected BTC and ETH prices after they peaked in November. They plunged to their rock bottom in 3Q22 as inflation set a record high of 9.1% and the Fed implemented a series of interest rate hikes. 

In 2023, their value rebounded amid the decelerating inflation and interest rate hike pause. They had a temporary pullback in 3Q23 as inflation bounced back to 3.2–3.7%, exceeding consensus and prompting a hawkish view of policy rate hikes. But as inflation eased again in October, BTC and ETH prices bounced back. 

Cryptocurrencies are often viewed as volatile assets. Yet, some countries gave them a higher importance. For example, El Salvador allowed BTC to become a legal tender within the country. 

Meanwhile, government agencies in Singapore accept ETH contracts as payments for their services. Many business establishments in other countries, like the US, accept cryptocurrency payments. Of course, criticisms and questions from crypto skeptics still surround the market. Hence, the extent of legality in every country is a more effective way to observe crypto regulations. 

The Atlantic Council’s Cryptocurrency Regulation Tracker released a global database of regulations. Among the G20 member countries, 60% have already legalized cryptocurrency transactions. 

Non-G20 countries like Georgia, Chile, Israel, Malaysia, Egypt, the Philippines, Kenya, and Belarus are also lenient with cryptocurrencies. Overall, cryptocurrencies are legal in 32 out of 60 observed countries—meanwhile, 19 partially banned cryptocurrencies. The remaining countries implemented a general ban on cryptocurrencies. 

However, only 25% of the countries observed apply taxation, anti-money laundering/combating the financing of terrorism (AML/CFT), consumer protection, and licensing regulations. Also, only 16% of emerging economies apply all regulations. Additionally, consumer protection is still lagging. 

Even more noticeable is that the correlation between crypto adoption rates and regulatory restrictiveness stays weak. It is logical, though, since scrutiny arose after the FTX fall. Policymakers have become more cautious with cryptocurrencies, affecting the development of their legislation process. 

Even so, crypto regulations have started changing rapidly. Many countries have developed and tested regulatory sandboxes to cooperate with the private sector. For instance, Japan has associations for cryptocurrency exchanges and issuers to encourage self-regulation. 

Meanwhile, Singapore has begun exploring Project Ubin, Project Orchid, and Project Guardian for blockchain technology and DeFi. In 2022, DBS and the Open Government Products (OGP) adopted smart contracts technology for programmable digital payments in Singapore. 

Most importantly, 90% of the countries observed have active central bank digital currency or CBDC projects. It means that they are updating crypto regulations as they explore CBDCs. This update may take some time, but the increasing adoption and changing regulatory framework can provide opportunities for the global economy. 

Why Cryptocurrencies Should Be Regulated, Questions To Address 

The benefits and risks of cryptocurrencies compared to traditional assets, such as cash and stocks, is a topic that continues to rouse fierce debate. Its decentralized nature remains the center of the discussion, particularly its value proposition. 

Blockchain networks remove intervention from external parties, such as banks, governments, and other financial institutions. In turn, the crypto market eliminates dependence on intermediaries for various transactions. Hence, more individuals are drawn to it, prompting policymakers to regulate the crypto ecosystem. 

But a more interesting thought is whether there is a need to regulate crypto. Indeed, its rise has inspired a lot of innovative possibilities in the financial system. However, it is still plagued by risks that have left many investors with nil. 

Fraud and hacking activities are the primary threats to them. In 2022, the market lost $3.8 billion from crypto hacking. They dubbed it as the biggest year ever for cryptocurrency hacking. 

In addition, it experienced the biggest crash in the same year when FTX collapsed and erased over $2 trillion. It led to a “bank run” response, where investors and users made a series of quick and massive withdrawals but found their accounts frozen. 

With all the unfortunate events, regulators scrutinized this digital asset more closely. Although the value of cryptocurrency may remain highly volatile, proper regulation may reduce or even prevent manipulation and fraudulent activities. 

This move can offer some level of investor protection and issuer accountability. It can also trace potential risks of terrorism funding as the crypto market maintains anonymity. Additionally, it can minimize the hazardous impact on the environment, given its substantial contribution to electricity usage and carbon emissions. 

Before deciding whether we should regulate crypto, it is essential to identify the persons or groups responsible. Policymakers cite anti-money laundering (AML),  monetary policy issues, and Know Your Customer (KYC) as their primary reasons for regulating cryptocurrencies. However, the answer to who has the authority to do so remains quite ambiguous. 

Currently, many central bank governors adhere to some form of global cooperation. They also agree that no single country can totally ban cryptocurrencies. That is why leaders affirm that regulation for something in the virtual space cannot only be done in one place, state, or country. 

Crypto regulation must be done globally, and this is not just about who implements it. Policymakers must identify and assess their objectives, tools to use, and the nature of assets to be regulated. That is the first step they must take. 

Another question to clarify is whether or not the US should be the one to spearhead crypto regulation efforts. It should not be surprising since most private crypto capital efforts are made in the country. Yet, given the pace at which the crypto ecosystem is expanding and affecting the world now, global cooperation may be the effective response. 

Opportunities in Crypto Regulation 

Over the past decade, the crypto market has captured the financial world by storm and cemented its place in the mainstream. But its drastic growth and popularity have also raised questions about security and the need for a regulatory framework. 

While it may be discouraging for investors and businesses who wish to retain anonymity, regulation offers promising opportunities. These are several examples. 

Higher labor demand 

As the crypto regulatory framework becomes more stringent, there may be a greater demand for professionals with specialized knowledge in the market. These include finance professionals, accountants, IT specialists, computer programmers, and risk analysts. Finance and accounting jobs may concentrate on risk management, accounting compliance, and auditing. 

Meanwhile, IT specialists and programmers may see a higher demand for blockchain creation and management. Lastly, there may also be a greater need for legal counsel and people with expertise in regulatory affairs. 

With that, the labor market may become more stable, which is crucial to boost the economy after a series of steep crests and troughs in the past three years. For instance, higher employment enhances resilient spending and benefits non-discretionary item producers. 

It will also enable many households to pay their loans and help credit monitoring service providers. It can protect banks and other financial institutions from delinquent loans. Lastly, higher employment may lead to higher wages and purchasing power. 

Higher tax collection 

Almost everything is taxed, and many cryptocurrency transactions may not be exempt. Capital gains tax and sales tax may apply to investors buying and selling cryptocurrencies and businesses accepting cryptocurrency payments. While this may be discouraging for many, tax generated from crypto regulation can promote general welfare. 

Higher tax collection means higher government revenues. In turn, the government will have more means to finance projects to boost the country's macroeconomic performance. It may also invest in technologies to improve investor protection and the crypto ecosystem. 

Consumer and business protection 

The market is notorious for security risks, data breaches, hacking, and fraudulent transactions. A lot of effort was made to retrieve lost data, and money went down the drain. But with crypto regulation, the job may become much easier. With reduced anonymity, leaders can track crypto transactions and improve investor and business protection. 

It also increases investor and business confidence. In turn, more investors and business owners may be encouraged to enter the crypto market while ensuring security. It will have positive spillovers to the capital market and the economy, such as public-private partnerships and higher government revenue. All these will be used to improve the quality of the crypto market. 

Enhanced global cooperation 

Crypto regulation entails global cooperation. If all the countries agree and implement with fairness and transparency, the move may be successful. There may be better international relations and joint efforts to eradicate cyber hacking and fraud worldwide. 

Even better, they can track and prevent terrorism funding and wars. They can work hand-in-hand to combat malicious intents. They can also help emerging economies, which still need to catch up in cryptocurrency adoption. It is a massive step for a successful digital world. 

Environmental protection 

Crypto regulation means crypto activities in moderation. It may also reduce electric usage and carbon emissions. Blackouts in crypto mining hubs may also be reduced and even avoided. Lastly, lower electricity usage and carbon emissions can help lower the atmosphere's temperature. 

Challenges in Crypto Regulation

Policymakers are aware of the need for immediate action to improve the market. But, they must address several challenges regulating the crypto market. They face several policy dilemmas that may hinder them from making their first move. These are several noteworthy examples. 

Lagging consumer protection 

While the crypto market is promising, consumers' risk remains high and visible. In fact, many crypto users are already aware of crypto fraud and hacking. Yet, they still fall victim to these malicious actions. These are common knowledge but remain unavoidable. 

Moreover, speculative mania remains prevalent in the market. This, combined with macroeconomic changes, further drives price volatility. However, speculative mania is deeply rooted in asymmetric information due to deceptive advertising and misinformation. 

Despite these risks, only one-third of the countries allowing cryptocurrency transactions have rules to protect consumers. Other countries also have legal protection, but the law remains untested and ambiguous. 

Thankfully, many countries have started to explore tools to enhance their regulatory efforts. Aside from Japan, Singapore, and India, other countries are doing the same. 

France, for example, requires advertisers to disclose all risks associated with cryptocurrency investing. In South Korea, crypto exchanges and wallets must obtain an information security certificate from the Internet and Security Agency, which can reduce the risk of theft. 

Limited cryptocurrency regulatory development in low and middle-income countries 

Nearly two-thirds of advanced economies have regulations in taxation, anti-money laundering, licensing, and consumer protection. However, only 11% of middle-income countries have rules in all categories. 

And for low-middle income countries, none have complete legal rules. These show that low and middle-income countries have much slower crypto-regulation adoptions. Also, the risks associated with cryptocurrencies are higher. 

Despite this, crypto adoption did not decelerate. In fact, there are high crypto adoption rates in Southeast Asia and Africa. This is a double-edged sword since it can help improve digitized transactions in the region, but it can expose more individuals and businesses to cyber hacking and theft. 

Low regulations to avoid another FTX-like collapse 

Cryptocurrency exchanges like Binance, FTX, and Coinbase have been integral in the cryptocurrency ecosystem. These giants allowed millions of individuals to participate in off-chain transactions. 

They lowered the entry barrier and added trillions in market capitalization. However, the collapse of FTX became a wake-up call for policymakers, business owners, and investors. 

Centralized crypto exchanges with multiple functions pose risks that must be addressed. For one, multiple functions lessen transparency about their business operations. 

They can cause distortions, leaving investors almost clueless about key matters like finance and governance. Because many of these centralized crypto exchanges are already massive, regulating them may be challenging. 

On a lighter note, some companies have taken steps to address it. One is their proof of reserves disclosure. This is a transparent accounting that shows the company’s assets and liabilities. Binance is only one of the few examples. But of course, it may be a long journey before policymakers can regulate exchanges to require their transparency. 

Takeaways 

The expansion of the cryptocurrency market from speculative investments to new asset classes has prompted policymakers all over the world to regulate it. 

The ups and downs have become comparable to a typical capital market, but the volatility and privacy risks may require more intervention. 

Today, their promise of enhancing market quality and protecting consumers has not been fulfilled. Countries can seize opportunities, but there are primary challenges to address before they can begin. 

This post was authored by an external contributor and does not represent Benzinga's opinions and has not been edited for content. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice. Benzinga does not make any recommendation to buy or sell any security or any representation about the financial condition of any company.