The World Wide Web, as its name suggests, is borderless, and so are cryptocurrencies. The common ethos of the internet and cryptocurrency is one of wide-open communication and exchange, unfettered by national borders. In practice, however, cryptocurrencies have become a more significant player in the financial system and nations have begun to consider issues of sovereignty and regulation. While many countries have so far remained open to cryptocurrencies, others have restricted their use or banned them outright. The same reason some have championed crypto and blockchain technology — as a means to revolutionize the international financial system — has worried many world leaders.
For example, Hillary Clinton, who highlights the risks of cryptocurrencies and the need for regulation, he said at the 2021 Bloomberg conference in Singapore: “Another area that I hope nation states will begin to pay more attention to is the rise of cryptocurrencies because [it] it has the potential to undermine currencies, to undermine the dollar’s role as a reserve currency, to destabilize nations, perhaps starting with the small ones, but much larger ones. These are strong words, and governments have begun to take such claims seriously. Despite the decentralization of cryptocurrencies, regulation seems inevitable and could fundamentally change its development and adoption worldwide.
Regulatory environment
In general, financial regulations oversee the world of finance, setting limits, requirements and guidelines for its institutions in order to keep financial systems stable and to create and maintain their integrity. For traditional financial institutions around the world, these rules have been evolving for decades. As a relatively new area of finance, the cryptocurrency market does not have this greater history, and due to its rapid growth and maturity, it now faces the prospect of regulation.
As the crypto market grew, governments and international organizations such as International Monetary Fundthey took note of its potential disrupt established economic systems – both in the prudent sense of the word from the technological world, and in the more problematic sense of creating problems, such as the problems associated with the collapse of the crypto exchange FTX in November 2022. In other words, the cryptocurrency industry is now so large that financial analysts fear that if will not be properly regulated, it may have adverse macroeconomic consequences, although it also has potentially positive effects. The increased risk has led to calls for more regulation. For example, the World Economic Forum has said of cryptocurrency regulation that – as with other financial regulations – the aim is to “promote financial stability, transparency, consumer and investor protection and a level playing field for different market participants”.
Related: Gary Gensler’s SEC plays the game, but not the game you think
Until now, most regulatory activity in this space has been at the national level. However, the use of cryptocurrency is neither limited nor intended to be limited to national borders, making international regulatory cooperation something of an ideal – and one whose realization still seems distant. But regulatory agencies have reason to pursue it: As of this writing, one in five Americans say they do has already engaged in cryptocurrency trading on some level. In Singapore, these numbers are even higher. And as the market grows, everyone will want to avoid a repeat of the financial collapse of 2008. In general, the bigger the market, the more likely it is to be regulated; this is based on the assumption that as a market grows, it is more likely to affect the general welfare.
On the other hand, cryptocurrency advocates point to the possibility that crypto itself is inherently trying to avoid a 2008-style crash. It represents an alternative financial structure that is not dominated by large financial institutions that are more urgently in need of regulatory scrutiny. There is some tension between the underlying independent ethos of cryptocurrencies and the nature of regulation. Will it be a creative tension or a destructive one? It may be too early to speculate, but be that as it may, governments have begun to assert their authority.
Cryptocurrency Regulation in the US
The history of cryptocurrency regulation in the United States mirrors that of most Western countries. Initially, the US government’s perspective was that Bitcoin (BTC) and other cryptocurrencies were fascinating innovations but required little attention from federal agencies. This frictionless system may have pleased early adopters, but the more skeptical felt that cryptocurrencies were doomed.
However, to many people’s surprise, cryptocurrencies not only did not disappear, but continued to grow in both value and popularity. But US regulatory agencies such as the Securities and Exchange Commission, which are tasked with overseeing markets and protecting investors, have taken a wait-and-see attitude for some time. Finally, the crypto market has become too prominent to be ignored: Problems with initial coin offerings prompted their regulation in 2017. Further regulation seems inevitable, for example in the wake of Sam Bankman-Fried’s FTX collapse in November 2022. , it happens which regulations will be introduced and what areas they will cover.
The government’s concerns actually first focused on fraud and the use of cryptocurrencies for illegal activities on the dark web, but existing laws cover such cases. Until Congress passes more laws directly related to cryptocurrencies, the SEC’s approach will continue to be what it calls “regulation by enforcement” of existing statutes. Current regulations include anti-money laundering and anti-terrorist financing provisions – these could apply to crypto-related cases, but are not regulations written with crypto-currencies in mind.
The Future of Cryptocurrency Regulation
It should be clear that the crypto-regulatory landscape is tumultuous. There are so many different approaches that shift so often – sometimes by 180 degrees – that it is difficult to determine what the position of individual governments will be from year to year or even month to month.
Predictions are always risky, especially in situations as volatile as cryptocurrency is. You can probably expect increasingly loud calls for regulatory clarity and cross-border coherence, with little chance that governments will be able to heed such calls in time.
Related: The SEC rattled Kraken for $30 million, but that doesn’t mean it had a case
Such a lack of clear direction may inhibit some cryptocurrency trading in the short to medium term from those who feel such trading is too risky. But one thing that is virtually certain is that crypto and other digital currencies, and the blockchain technology that supports them, will continue to be a force for governments to reckon with.
Crypto, and by extension blockchain, are part of a much larger technology-driven global movement known as the Fourth Industrial Revolution. As part of this revolution, the world is undergoing a digital transformation, and digital currency just makes sense as every aspect of our lives evolves from analog to digital. How important is the digitization of money and its underlying distributed ledger in this revolution? Klaus Schwab, founder of the World Economic Forum – best known for its annual conference in Davos, Switzerland – said: “Blockchains are at the heart of the fourth industrial revolution.
Just as concerns over the potential impacts of artificial intelligence and genetic engineering are managed by some level of regulation rather than halting these advances altogether, national concerns over the potentially destabilizing impact of cryptocurrency are unlikely to halt its growing use. Regulation, if properly applied, can bring some desirable order to the often chaotic proliferation of cryptocurrencies, but finding the right approach to regulating this emerging phenomenon is proving challenging.
This column is an excerpt adapted from A Quick Guide to Cryptocurrencieswhich is scheduled for release on February 27.
Dr. Jonathan Reichental is the founder of Human Future, a global business and technology consulting, investment and education firm. He holds a Ph.D. in information systems from Nova Southeastern University and is an adjunct professor in the School of Management at the University of San Francisco.
This article is for general informational purposes and is not intended and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
