In a little over ten years, the crypto industry has grown from nothing into a billion-dollar industry, with Bitcoin finishing the 2010s as the decade’s best-performing asset. A lot has changed since anonymous developer Satoshi Nakamoto published an esoteric whitepaper about a “peer-to-peer electronic cash system.” New players have entered the space, with regulators following in their wake, trying to make sense of this new asset class, and the best way to protect investors without stifling innovation.
As the cryptocurrency market prepares to welcome the next wave of entrants, better regulation isn’t just desirable – it’s imperative for the industry to grow.
How Lack of Regulation Hurts the Crypto Industry
As the crypto industry matures, it must capitalize on its momentum while addressing its many shortcomings, of which security and regulatory protections are the most pressing.
To be sure, there are very many factors stymying the growth of cryptocurrency, with regulation undoubtedly at the top of the list. Anti-Money Laundering (AML) and Know Your Customer (KYC) directives, issuance and exchange regulation, the proper treatment of assets for the purposes of taxation – clarity here nurtures confidence among institutional and retail investors, encouraging the influx of capital among those who identify the upside while recognizing protections offered by the involvement of authorities such as the U.S. Securities and Exchange Commission.
For many of these players – particularly those more accustomed to the traditional financial sector – the crypto market is a veritable Wild West characterized by fraud, illegal activity such as wash trading, and exit scams.
Much of this negative perception doubtless stems from an unfamiliarity with cryptocurrency in general, but oftentimes the naysayers make a valid point. At base, crypto trading should be subject to meaningful regulatory oversight to confer investor protections and keep exchanges in line.
Unfortunately, many cryptocurrency trading platforms are registered offshore and subject to little or no regulatory oversight. What’s more, a large number of platforms have been the victims of sophisticated hacks wherein customers have lost funds. In some cases, high-profile crypto investment programs have scammed users of billions of dollars, with the industry as a whole suffering a serious reputational hit.
Debunking the Myth of Regulatory Harm
Although critics of crypto regulation often claim that economic activity would suffer when such measures are put in place, a 2020 research paper produced by the Wharton School of the University of Pennsylvania determined that there has been no “significant shifts in trading activity away from jurisdictions such as the United States where market participants complain about regulatory enforcement and uncertainty, nor toward jurisdictions that have been more welcoming.”
On the contrary, it is highly likely that stricter regulatory oversight will reduce instances of illegality and fraud and help crypto fulfil its promise as an alternative asset class, one that inspires interest among regular venture capitalists and financial institutions.
A proper regulatory framework can put safeguards in place to prevent, for example, exchanges from suffering outages at critical moments that affect the price of cryptocurrencies like bitcoin. Prudent regulation ensures accountability, a much-needed ingredient if any business or industry is to thrive.
Regulator-Friendly Exchanges Breaking the Mold
“Mass adoption, especially from large institutional investors, will be driven by regulation and the top regulated exchanges will be the beneficiaries of this trend,” says Todd Crosland, Founder and CEO of CoinZoom, one of a new wave of regulated exchanges.
Interestingly, the platform’s founding team has deep U.S. and international regulatory experience, having previously run companies regulated by the CFTC, NFA and FINRA. CoinZoom was also the first U.S. crypto exchange to provide a Visa card to its customers.
As well as enabling users to fund their accounts with fiat currency, CoinZoom lets them send crypto and fiat to friends and family for free via a P2P payment system. Professional trading services are also available via an advanced proprietary app on desktop and mobile. By choosing a fully regulated model, CoinZoom is doing its part to drive adoption and encourage state support.
There are a few other regulated exchanges, but it’s fair to say that they are the exception rather than the rule. While Gemini is regulated by the New York State Department of Financial Services (NYDFS), Coinbase is perhaps the best-known regulated exchange, complying with FinCEN, the USA Patriot Act, and the Bank Secrecy Act. Rumors are, it’s also working towards becoming a regulated brokerage.
Kraken, meanwhile, has gone a step further by acquiring a U.S. banking license from the state of Wyoming. In essence, the exchange has become “the first regulated U.S. bank to provide comprehensive deposit-taking, custody and fiduciary services for digital assets.”
There’s no guarantee the crypto industry will warm to regulation as the aforementioned exchanges have. But perhaps the success of fully regulated exchanges, coupled with cautionary tales like BitMEX, whose leaders face numerous criminal charges, will convince the next generation of platforms to follow suit.
If not for themselves, for the good of the industry.
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