Following the 2008 global financial crisis, to prevent market abuse from occurring again, the global financial sector underwent nothing short of a revolution. Across the world, changes were made to regulatory systems, and additional measures were put in place to offer protection for consumers, and to enforce greater transparency from banks.
Today, we can see a somewhat similar revolution fermenting in the world of cryptocurrencies. But, much like the reaction of world economies back in ‘08, nations are so far refusing to take a uniform approach.
THE CURRENT STATE OF REGULATION
Many governments have taken extreme steps to curb what they view as a dangerous movement. China, at one point a global hub for cryptocurrency trading, is now notorious for such an approach. It has banned exchanges and Initial Coin Offerings (ICOs), obstructed internet access to overseas platforms, and cut the power-lines for Bitcoin miners.
Other countries, such as Switzerland, have adopted a more ‘open’ attitude. The small canton of Zug, near Zurich, has become something of a “Crypto Valley”, and the country’s financial supervisor has put in place guidelines that support local ICOs.
But many influential countries are adopting a wait-and-see approach to see how regulations function before acting. South Korea, a thriving source of much of last year’s cryptocurrency activity has allowed exchanges to keep operating for now, but as things currently stand, there are no laws on the books for regulation.
In the US, in a similar vein, most cryptocurrency trading still takes place in a legal grey area. Its Securities and Exchange Commission has actively been engaged in oversight and punishment of various nefarious ICOs and trading platforms, but with no federal directive on cryptocurrencies, some states have taken matters into their own hands. The UK is another undecided party. With parliamentary enquiries ongoing, nothing is set in stone.
THE FUTURE OF THE SPACE
While the future of cryptocurrency and ICO regulation still hangs in the balance, we do have some indication of what the future may hold. We know, for example, that many key regulators consider cryptocurrencies to be assets. At the very least, this is the view of Christine Lagarde, managing director of the International Monetary Fund (IMF).
Lagarde has further emphasized that since crypto-assets are global entities, the framework to regulate them should correspondingly be a global one. In practice, that might prove difficult. Some of the most crypto-friendly nations, such as Switzerland and Singapore, are not members of the G20 – a severe mitigating factor for future cooperation.
In general, while regulators can see the benefits of crypto-assets, they are concerned about its anonymous nature – the capacity for transactions to be to be practically untraceable, and its potential as a new vehicle for money laundering and the financing of terrorism. Other critical factors include the presence of fraudulent exchanges, scam ICOs, the lack of protection for consumers, and the possible currency instability posed by bypassed central banks.
But despite the burning pressure to regulate, most countries are still in the midst of a consultative period. The G20 is currently gathering data and, according to Argentina’s central bank chief Frederico Sturzenegger, the group will offer “very concrete, very specific recommendations” in July, to precede their November 2018 summit in Argentina.
CREATING POSITIVE REGULATION
In the ideal world, what might this limbo-period look like?
For the benefit of investors, regulation is an absolute necessity, but it has to be done in a precise, thoughtful way. The temptation to put out legislation quickly shouldn’t come at the expense of the quality of the legislation itself. Nor should it stifle opportunities offered by such an exciting new market. Heavy-handed approaches will only serve to drive activity underground or overseas.
Regulators cannot be technology or cryptocurrency agnostics. While there are parallels to past events – such as the regulation of the FOREX space – this is a financial sea-change and calls for specific expertise. At the very least, bodies shouldn’t be drafting rules in isolation from the very industry they intend to regulate. If left solely in the hands of potentially misguided legislators, regulation is likely to undermine growth.
This period also demands that policy-makers look intently at how secondary markets are regulated. Legalese – including property, identity, title, personality, and contract – must all be carefully defined, and, beyond all that, legal enforcement procedures must be made clear.
If done correctly, regulation should balance the need for greater legal boundaries with the commercial opportunities this industry offers in its infancy.