The cryptocurrency market has been rocked in the past couple of months amid a string of negative developments that have spooked investors. Recent bans of crypto-related ads by Facebook and Google, revelations about a major Bitcoin holder selling large amounts of the cryptocurrency and controversy surrounding the Tether token have all contribute to the shaky performance of digital currencies.
However, the biggest factor behind the cryptocurrency struggles seems to be the increased pressure from regulators around the world. South Korea’s January decision to end anonymous cryptocurrency trading in the country provided the initial spark for the massive drop experienced by the market in early February. Also in February, the US Senate Banking Committee held a major hearing on cryptocurrency that saw the heads of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) both acknowledging the need for better regulation of the sector.
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The first couple of weeks of this month have brought us more regulatory action. Japan unveiled a wave of punitive measures against a number of cryptocurrency exchanges operating in the country, while the SEC announced that trading platforms offering digital assets that are considered securities must register with the agency. In addition, China has reportedly made moves to extend its ban on cryptocurrency trading, and in the UK, Bank of England governor Mark Carney called for better regulation on the sector.
In light of these events, the fact that many investors are exiting the market is hardly surprising, isn’t it? After all, this is the big bad watchdog coming to spoil the party! Well, that’s certainly one way to look at it. But I believe that this growing attention from regulators should be welcomed, rather than feared by the industry. Let me elaborate.
2017 was, in my view, the year in which cryptocurrencies truly arrived. Bitcoin and its younger sibling Litecoin finally snapped out of their multi-year-long lulls. Ethereum established itself as the second most important crypto project and introduced the concept of initial coin offerings, which in turn led to the inception of a myriad of digital assets. The digital currency market grew more than 20 times to top $800 billion in December. Cryptocurrencies had a breakout year in 2017. Now they need to grow up.
Cryptocurrencies burst onto the scene promising great things: to revolutionise finance; decentralise computing; be the backbone of a future machine economy. However, in order for cryptocurrencies to accomplish those goals, both the technology and the markets behind them need to mature.
So, when can we truly say that a child has become an adult? Well, the answer is simple – when they start having responsibilities.
“The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system. Being part of the financial system brings enormous privileges, but with them great responsibilities,” Mark Carney said in a recent speech that focused on the future of money.
In the same speech, Carney said that cryptocurrencies have failed as a form of money, pointing to their extreme volatility. At the same time, the BoE governor acknowledged the potential value of their underlying technology and argued that an outright cryptocurrency ban cannot be the right approach to regulation of the sector.
“A better path would be to regulate elements of the crypto-asset ecosystem to combat illicit activities, promote market integrity, and protect the safety and soundness of the financial system,” he said.
A similar view has been expressed others, including some of cryptocurrencies’ harshest critics. JP Morgan’s chief executive officer Jamie Dimon last year infamously called Bitcoin a “fraud”, while admitting blockchain itself could be useful.
Regulators around the world seems to be recognising that these new technologies could bring significant benefits to various industries. The European Commission’s recently unveiled FinTech action plan, for example, regards blockchain as a potential game changer for “financial services and beyond”.
Regulators are seemingly placing a greater emphasis on the blockchain and distributed ledger technology, making it seem like cryptocurrencies are a less desirable by-product of DLT. However, that’s not always the case.
“[I]f there were no bitcoin, there would be no distributed ledger technology,” CFTC chairman Christopher Giancarlo said at the hearing before the US Senate Banking Committee.
The hearing sent encouraging signals that the US regulators are willing to engage in a mature and informed discussion about the crypto space. Not surprisingly, it was celebrated as a success by many cryptocurrency supporters and helped the market to rebound from its February lows. Well, it always feels great to be taken seriously.
The growing regulatory scrutiny is an acknowledgement of the progress the sector has made in recent years and that it can no longer remain overlooked by the authorities. But it is also a reminder that being a grown-up comes with a lot of responsibilities.
Some within the industry have already recognised that the sector needs better standards in order to succeed. Last month a group of crypto companies operating in the UK, including eToro and Coinbase, formed a self-regulating body aimed at improving industry standards and raising awareness of cryptocurrencies among regulators and the general public in the UK. But the body also aims to be at the forefront of the effort to provide Europe with a solid framework for the nascent cryptocurrency industry.
A similar initiative in Japan aims to unite the country’s 16 registered crypto exchanges in a trade organisation that will work with the country’s Financial Services Agency (FSA) to establish investor safety standards. The new body will also set guidelines for ICOs.
Such initiatives indicate that some of the industry’s more prominent players are stepping up their game and are seeking to work with regulators for the betterment of the entire sector. Realising that regulation is integral part of industry’s maturation will only bring the sector closer to achieving its lofty goals.
The cryptocurrency space has already shown the world that it is a gifted child. Now it needs to prove that it can also be a responsible adult.
Disclaimer: I own small amounts of Bitcoin and Ether.