The cryptocurrency industry is at a critical juncture. On one hand, the imminent introduction of regulation designed to protect all parties from nefarious activities, facilitating the legitimate businesses that operate in the space. On the other, a retreat into opacity and the implicit confirmation that there is indeed something to hide.
This comes at a time of intense scrutiny from governments, banks and the wider financial services community, which are seeking to understand if cryptocurrencies can benefit society, or whether they are really just the plaything of tech geeks or the preserve of criminals.
During this examination, crypto trading volumes are skyrocketing and crypto exchanges are processing volumes that are rivaling traditional exchanges. Understandably for a sector that has not yet matured, and was created to avoid centralised control, regulation is comparatively lax.
For example, there is currently no formal anti money laundering (AML) legislation that applies to the crypto market as a whole. Domestic markets legislate individually and differently, making it difficult for the cryptocurrency firms to ensure compliance and garner credibility.
Contrary to popular perception, cryptocurrency businesses do want regulation. In February 2018, seven cryptocurrency companies announced the UK’s first crypto trade association, CryptoUK, in a bid to place more legitimacy and transparency into the sector while authorities weigh up a potential clamp down.
Regulation for Growth
If cryptocurrencies are to gain the trust, scale and ubiquity that will see it regarded as equivalent to fiat currencies then regulation is imperative. If implemented thoughtfully, regulation can be a catalyst rather than an inhibitor for crypto growth.
Japan was the first country to adopt a national system to regulate cryptocurrency trading, after falling subject to high profile breaches including the infamous Mt.Gox scandal. Last April, Japan made Bitcoin a form of legal tender and specified it would remain legal if exchanges are registered with the Japanese Financial Services Agency. Japan is now the largest global market for Bitcoin.
In Switzerland, cryptocurrencies are legal, with the provision that exchanges, and companies are registered with the Swiss Financial Market Supervisory Authority. Consequently, Switzerland is a hotbed for crypto businesses, with four in ten of the biggest impending initial coin offerings based there, according to a PwC report.
The fifth Anti-Money Laundering Directive (AMLD5) is already paving the way to making the market safer in Europe. The directive stipulates that custodian crypto wallets and exchanges will now be subject to the same Know your Customer (KYC) and AML regulations as the rest of the financial services industry.
Due to come into force at the end of 2019, AMLD5 also proposes member states create central databases comprised of cryptocurrency users’ identities and wallet addresses – not just those using exchanges and custodian wallets. In addition, AMLD5 directs member states to authorise national competent authorities to access the information in these databases.
Welcoming Regulators with Open Arms
Regulation, if done correctly, can also go a long way towards legitimising cryptocurrencies. It will help curb illegal activity, bring greater transparency to both users and crypto companies, and give the market the framework it needs in order to grow.
Critically, cryptocurrency firms need this regulation, like any other business they need to plan and mitigate risk. Without regulatory certainty, this is impossible. And thousands of legitimate crypto businesses are operating in acute uncertainty, with the spectre of misinformed, negative and protectionist legislation haunting their strategies.
The majority of crypto businesses are pro-regulation, reveals study of crypto market conducted by Mistertango – worlds first crypto-friendly electronic payment provider. The danger is that, thus far, the crypto market has not had a say in how it should be governed and that could lead to regulations being created and enforced by those who may not fully understand the space.
The Right Regulation or Risk Regression
To date there has been limited dialogue between the crypto community, regulators and the wider financial market. The result has been misinformed, and often draconian measures e.g. crypto transactions limited or blocked, banks withdrawing support for crypto businesses. While designed to reduce systemic risk, these measures may in fact have precisely the opposite effect.
If crypto policies are top down and built on fear of the unknown rather than understanding, they will not be adopted and thus will fail to prevent the types of abuse and risk identified.
Furthermore, there is a very real danger the market will regress and revert to the days of silk road. In this scenario, activities will go back underground with reduced oversight from the relevant authorities. Rather than prevent misuse and criminal activity, these policies will push the crypto community back underground rather than towards the light of the formal financial services sector.
By engaging with regulators, moving operations onto platforms that provide regulatory oversight or exploring ways to behave like a regulated entity, crypto companies can help create a regulatory environment that benefits the sector, rather than stifles it.
Until the cryptocurrency space is regulated, it will remain on the outside of the system, viewed with suspicion and its growth inhibited. However, if regulation is embraced cryptocurrencies will become a legitimate, although distinct part of the formal financial system.