Cryptocurrency regulation can be a controversial topic, but many experts say cryptocurrency investors should welcome it.
For starters, more regulation could mean more stability in a notoriously volatile cryptocurrency market. “Regulations will be introduced and will have to be introduced at some point, which would further stabilize the market,” says Tally Greenberg, head of business development at Allnodes, a platform that provides hosting, monitoring and staking services. “This protects investors, so it’s a good thing. It’s not a bad thing. ”
However, many cryptocurrency enthusiasts are fervently opposing the new regulation. They say it would hinder innovation and go against the spirit of cryptocurrency, which emphasizes decentralization within it.
For these anti-regulatory cryptocurrency enthusiasts, the decentralized nature of digital currencies – which, unlike traditional currencies, are not backed by any government institution or authority – is a big draw. So, from this point of view, any new regulation would pose a threat to decentralization which is a feature rather than a bug.
The new regulation also has the potential to protect long-term investors, prevent fraudulent activity within the crypto ecosystem, and provide clear guidance for enabling companies to innovate in the crypto economy, according to Aaron Klein, a researcher in economic studies at the Brookings Institution, which focuses on technology and financial regulation. But the next regulation will have to find the right balance, he says.
“Actually, you have three options: no regulation, bad regulation, good regulation,” says Klein.
What’s the next step in cryptocurrency regulation?
While an increase in traditional cryptocurrency adoption in 2021 has led to an ongoing debate about the government’s role in this largely unregulated industry, clear rules are still being developed. This has left the industry uncertain as thousands of digital tokens and currencies are introduced and new companies and platforms emerge to help them store and trade them.
“The policies have not yet been devised, because there is no precedent for blockchain and cryptocurrency, so it’s a hell of a chore,” says Greenberg. “I understand why people are getting stuck, but something has to happen soon.”
Recent conversations on Capitol Hill suggest that this is not about more regulations coming, but about when. President Biden signed new cryptocurrency legislation related to taxes in the $ 1.2 trillion bipartisan infrastructure bill late last year. And the Federal Reserve is playing with the idea of issuing a US digital currency.
The Fed released a long-awaited report in January exploring the costs and benefits of a government-issued digital currency. The report ultimately postponed a final decision on whether to move forward, and the Fed is giving the public and other stakeholders until May 20 to share their input before taking further action. Stablecoins are also a hot topic and many experts predict that it will be the first type of cryptocurrency to be regulated.
Although the new regulation has the potential to bring more stability to the cryptocurrency market, it is still a highly volatile and speculative investment. That’s why financial experts advise most investors to keep cryptocurrency holdings at less than 5% of their portfolios and never invest in cryptocurrencies at the expense of saving for emergencies or paying off high-interest debt.
Why cryptocurrency regulation would be beneficial for investors
We asked experts for their opinion on the changing regulatory landscape of cryptocurrencies. That’s why they say more regulation would be a good thing for long-term cryptocurrency investors.
1. Greater stability in the market
Cryptocurrency regulation could be a healthy development for the industry, at least as far as day-to-day investors are concerned. More regulatory guidance, if well targeted, could help reduce speculation among cryptocurrencies. Less speculation can lead to greater investor confidence, which could attract more long-term investors who have so far said no thanks to a highly speculative and volatile cryptocurrency market.
“Even if it no longer attracts people, it could change people’s current behavior,” says Klein. Aficionados say there are many advantages cryptocurrency has over fiat currency and other asset classes, but those benefits can only be realized “if an appropriate regulatory framework is put in place,” according to Klein.
It is difficult to predict how the price-sensitive asset class will react to regulation in the long term, as it will depend on whether the US government takes a more lenient or stricter approach. In the short term, any new regulation could inspire investors’ instinctive reactions to the markets, suppressing the cryptocurrency’s trading values. For example, when China banned cryptocurrency transactions in September 2021, the cryptocurrency markets collapsed. But in the long run, regulation could have the potential to stabilize the market and reduce some risks for cryptocurrency investors, Greenberg says.
To be clear, the new regulation could slow the roll of those looking to get rich quick by predicting the next coin to go “to the moon,” he says. But this is a good thing for long-term investors.
“Slowly but surely, we are not only being massively adopted as an industry, but we are also stabilizing more or less. The regulation will further stabilize the market, “says Greenberg
2. Increased investor protection and confidence
Cryptocurrency investors currently have little or no protection in the market, as there is no regulatory framework in place to ensure asset protection.
Some exchanges maintain compliance with evolving federal and state regulations in the United States. This includes many established high-volume US-based exchanges, such as Coinbase and Gemini, but they are not regulated in a similar way to public stock exchanges or alternative trading systems. This can be problematic, according to Timothy Massad, former president of the Commodity Futures Trading Commission and a researcher at Harvard University’s Kennedy School of Government.
“Most of the trading that takes place in the cryptocurrency world today is not regulated by any federal authority, and that’s a big gap,” says Massad. “This means that investor protection is much, much weaker in these large markets than it is in our securities markets or our futures market.”
That’s why regulation is needed to make the market safer, says Klein. Cryptocurrencies will likely still be a risky investment, like individual stocks, but investor protections could make the market less vulnerable to external manipulation. Safer markets can lead to greater investor confidence, which often means greater value over time.
“[Regulation] it is important for investor confidence. It is important for core equity and ultimately important for the growth of the industry, ”says Klein.
3. More secure cryptographic ecosystem
Crypto has been described as the “Wild West” by SEC President Gary Gensler due to the lack of regulation in the industry. The lack of laws and policies on this thriving area has created an opening for fraud, scams, carpet-pulling and widespread market manipulation.
“Crypto is not subject to requirements to prevent fraud manipulation. It is not subject to conflict of interest standards, ”says Massad. “My point is simply that we don’t have the same kind of standard that we have in other markets. Today, this means that the buyer is essentially careful. “
Crypto crime has grown tremendously over the past couple of years. According to a report by blockchain data company Chainalysis, scammers took $ 14 billion worth of cryptocurrencies last year, a record compared to $ 7.8 billion taken by scammers in 2020. And there are more than 17,000 altcoins, which are in the typically even more volatile and speculative than Bitcoin, and present a greater risk of scams and cryptographic fraud. Even the most advanced and enthusiastic cryptocurrency experts understand that there are many new and evolving risks in the world of cryptocurrencies right now.
But there are several ways to protect your cryptocurrencies. For starters, watch out for some common red flags that are similar to classic money wiring scams and credit card fraud, such as glaring misspellings in emails or social media posts, promises to make you rich, or even large-scale social media encryption schemes known as pulling the carpet.
To protect your digital wallets from hackers, practice good digital security habits like using a hot or cold wallet for added security or keeping your cryptocurrencies in an exchange with solid security. It is also extremely important to keep track of your wallet key and not show it to anyone. Losing your key or seeing it stolen could mean losing your cryptocurrency altogether.
“As much as I like decentralization and the lack of government [involvement]I’m glad they’re paying attention, because unfortunately there are a lot of scams with cryptocurrency, “Kiana Danial, author of” Cryptocurrency Investing for Dummies “recently told NextAdvisor.