Benefits, challenges and risks of regulating cryptocurrency.

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31 Jan 2024

Hello investors,
Cryptocurrency regulation have become one of the question and arguments being talked about on how best to secure cryptocurrency investment. It could be said that cryptocurrency regulation will help, but also affect the growth of crypto in the long run. So with this in mind let us look at the benefits, challenges and risk of regulating cryptocurrency.

Benefits of regulating cryptocurrency

1. Making crypto a future-fit investment solution:
As crypto becomes a part of such investment strategies, traditional custodians must find new ways to help their clients embrace this change and make crypto investments a reality. Digital asset custody requires a watchful eye on how custodians currently handle asset wallets, KYC and KYT operations, exchange connections and real-time trade settlement. Eviden’s Digital Asset Custodyservices can help you determine the impact of digital assets on your organization, whether you are a custodian, investor or asset manager. The early mover advantage is very real for digital assets, so the time to act is now!

Interested to learn more? Please feel free to reach out if you would like to exchange thoughts on the future of crypto and new ways to incorporate it into your investment strategy.

2. security and traceability:
In June 2022, the United Nations Conference on Trade and Development issued recommendations on how their member nations should handle crypto assets due to the economic uncertainty. In short, they have called for registration, high fees, and in some places, even outright bans. Luckily, most regulations currently being considered or implemented are not as strict.

Opinions on these measures aside, it is clear that with regulation comes added security and traceability, which in turn is opening the crypto asset market to institutional investors. With the question of legality and the specter of financial crime out of the way, it is safe for investors like insurance companies and pension funds to include crypto assets in their investment strategies. The increased volume will likely do much to legitimize and stabilize the crypto exchange markets. Hopefully, this will benefit all investors – retail and institutional – in developed and developing regions.

3. Market stability:
Aside from the immediate dangers of fraud and displacement of digital currency, investors have concerns about the general stability of the crypto market. Throughout the years, even the flagship Bitcoin has experienced sizable fluctuations. Naturally, these frequent price variances discourage investors across the globe.

Price, liquidity, and market distribution regulations could stabilize the crypto market tremendously. As of this point, the blockchain algorithm is the only moderator with numerous crypto exchange markets, which leads to unfortunate loopholes and speculative investment.

Without proper regulations, human manipulation can overpower the crypto exchange algorithm, leading to even more volatility than usual. Appropriate legislation in this department could prevent manipulative practices and increase overall market stability.

4. Increased trading activity and liquidity:
Well-implemented laws and regulations could also warrant crypto market growth in the long run. As the general public gradually eradicates their concerns about crypto asset safety and price stability, additional investors will enter the market, resulting in increased cryptocurrency transactions and improved liquidity.

It is important to remember that average traders do not have the time to investigate and examine new markets. So, a healthy dose of regulations can be a vital green flag to invite newcomers. Even in the short period of six months in 2023, the crypto laws presented by the Security and exchange commission (SEC) have positively shifted the public view on crypto.

Regulatory Challenges

Regulatory frameworks, like in any industry, present both advantages and disadvantages within the crypto assets industry. Regulators face the delicate task of fostering industry growth while safeguarding the interests of investors and consumers. Striking a balance between these two objectives poses numerous challenges.

1. Classification:
Among the foremost challenges for regulators is accurately classifying existing cryptocurrencies. Crypto assets have emerged as a direct consequence of recent advancements in digital technology, offering novel possibilities for barter, investment, and financial transactions. The intricate and transformative nature inherent in cryptocurrencies poses a challenge when attempting to categorize them. Market developments and the rapid pace of innovation further complicate regulators' efforts, leaving room for potential gaps.
Achieving a comprehensive classification in the market is a complex endeavor. One approach commonly employed is comparing crypto assets to traditional currencies. Extensive research conducted by the European Parliament has revealed that crypto assets have yet to be universally accepted as a general payment instrument.
Many analysts believe that cryptocurrencies constitute an entirely new asset class, a classification that holds true for tokens that function similarly to securities. Generally, crypto assets are recognized as investments due to their inherent value and other associated benefits.

2. Over-Regulation
Over-regulation poses another challenge, potentially stifling innovation within the crypto assets industry. Excessive regulation can impede the growth of this burgeoning sector. The significant surge in the value of assets such as Bitcoin has democratized fundraising capabilities for newcomers. This highlights the need for purposefully crafted regulatory measures that enable cash-strapped small companies to secure funds from a diverse range of investors.

Risks of regulating cryptocurrency

After recounting the plentiful benefits of cryptocurrency laws regarding security, price stability, and other essential matters, we must mention the possible downsides. While numerous regulations will objectively improve the crypto market, this process might turn into a chain of increasingly demanding and limiting laws.
Sometimes, it is difficult to determine a silver lining between essential regulations that support the free market and those that constrain its free-flowing nature.

1. Limiting the growth of cryptocurrencies:
With regid regulating laws and sanctions, many known cryptocurrencies and new developing cryptocurrencies will not have the chance to cope which will limit the chances to only large bodies and companies with large funds and wider range of heavily paid programmers and builders who are supposed to be independently creating a strong competition in the crypto world.

2. Corrupting the process:
The crypto world is a free space at the moment with limited control from government and banking institutions world wide. If regulated, the crypto world might be easily manipulated by the regulating body. Rules and regulations might be writing to favour a party or some party, region, company, cryptocurrency or cryptocurrencies.

3. Taxation:
Heavy taxing of blockchains and cryptocurrencies will make small time cryptocurrencies to be eliminated from the markets leaving only the big names who can pay up. This will not only reduce the amount of crypto to choose from but will also increase the amount of high level individuals and governments attempting to monopolise and control the system. If cryptocurrencies have been regulated from the start we will have just a small body of cryptocurrencies around.